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How does micro-finance work?

Economic development

Micro-enterprise development is based on sound economic theory, made possible through community banks called micro-finance institutions.

Micro-finance institutions work through the same principles as credit unions.  They are designed to bring maximum benefits to their customers, with their profits recycled into further loans.

Cambodia: VisonFund facts and figures A detailed explanation of one of World Vision's successful micro-finance institutions. Read more...

Learn More: > Micro-enterprise development > Economic justice

World Vision monitors micro-finance institutions in 11 countries throughout Asia.  It’s important that they are run separately from World Vision, with staff who specialise in banking and economics.

Each institution has an independent board who understands the needs and challenges of the community they’re working in.

World Vision provides the funds to get micro-enterprise development started in a community.  Then, as loans are paid back with interest, the bank begins to use its own money for further loans.

A successful micro-finance institution will see both the funds and the demands for loans grow quickly, so that the benefits are felt by the entire community.

Why charge interest?

Micro-enterprise loans are not designed for the ‘poorest of the poor’, with whom World Vision works closely in many other ways.

But in communities with high unemployment or very low wages, many families struggle on tiny incomes to provide the basics for their children

For these people, handouts and gifts would benefit only themselves.  Some might even refuse them out of pride.

It is better to consider them clients, whose strong will to succeed helps them to learn new skills, work hard and pay back their loan for long-term business security. 

By paying interest, they’re increasing the value of their community bank and making it possible to provide further loans for themselves and others.

Loans are usually small and short-term. An initial loan might be for around US$50 and the timeframe for paying it back 6 to 12 months.  Subsequent funds may be a little higher to help the established business expand.

The success of the business continues long after the loan is repaid, meaning greater family income for education, healthcare and a better life.

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