How Does It Work

How_does_it_work

Microfinance refers to the provision of financial services, such as credit, savings, and insurance, to the poor. Regulated banks, NGOs like Adelante, or cooperatives, operate as microfinance institutions (MFIs). Each MFI has a range of products and services, but the common idea is that offering the poor financial services is viable. Lending methodology varies across different MFIs. Adelante adopted a character-based lending methodology developed by the Grameen Bank of Bangladesh over thirty years ago. Clients of MFIs worldwide have high repayment rates, averaging between 95 and 98%[1].

Costs & Interest Rates

Microcredit interest rates are high at first glance. However, compared to the options normally available to the poor, they are very reasonable. Interest rates must cover the costs of administering the loans. Loaning small amounts of money incurs higher costs than offering larger sums. For example, one loan for $100 000 is much easier to administer than 1000 loans for $100[2]. Also consider that most people who are eligible for traditional loans go to the bank, which is usually in an urban area, whereas MFIs reach out directly to their clients, often in rural areas. Interest rates reflect the logistical costs incurred to an institution that offers microcredit. Adelante maintains interest rates between 3.5% and 2.5% monthly for its small business loans.

MFI Self-Sustainability

Covering costs allow MFIs to achieve self-sustainability. Self-sustainability is important for MFIs because it helps them to expand and reach more borrowers.   After only 10 years of operations, Adelante achieved self-sustainability in 2010, but funds are still needed to expand geographically, meet our clients’ demand for larger loans, amplify our education program, and develop new loan products.



[1] ¨Microfinance Basics¨ Grameen Bank. http://www.grameenfoundation.org

¨Microfinance Gateway¨ CGAP http://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#10

Share Adelante

Join our Secondary Education Campaign

Online fundraising for Secondary Education for Honduran Youth