What Are Microloans and Why Are They So Important?

Microfinance is incredibly important to small businesses around the world, helping entrepreneurs access the funding they need to get their venture off the ground. In this article, we take a detailed look at microloans and learn how they create opportunities for people in the developing world.

Microfinance enables small business owners to access capital.

Funding is key to the success of any new business. Nearly every small business owner experiences challenges obtaining funding. When a business is in its early stages, it can be difficult to persuade traditional financial institutions such as banks to invest. Microfinance, also referred to as microcredit, provides credit, loans, savings account access, money transfers, and insurance policies to entrepreneurs and small business owners, mostly in the developing world.

The term “microfinance” includes microinsurance and micro-savings as well as microloans. Microfinance organizations provide small loans, as well as various other financial resources, to small business owners to help them build and expand their enterprises. Microloans enable borrowers with no collateral to obtain the financing they need to get their companies up and running.

Microfinance provides essential capital to marginalized entrepreneurs, enabling them to build their businesses and achieve financial independence. Microloans are particularly popular in developing countries, where many entrepreneurs otherwise could not obtain the necessary funding to establish their businesses. Unfortunately, due to a perceived higher risk of default, microloans often carry significantly higher interest rates.

Microloans are especially important in the developing world.

In developing nations, securing funding to start a new business venture is not merely difficult. It is often impossible. Entrepreneurs in developing countries face this stark reality every day.

Female entrepreneurs are disproportionately affected by these challenges. If women are provided with the financial resources they need, they can seek higher education. This increases their earning potential, which has a variety of positive effects and creates a virtuous cycle. For example, it lowers infant mortality rates, improves child nutrition and health, and increases agricultural productivity.

Kiva has been providing microloans to women around the world since 2005.

This international nonprofit organization's vision is to build a world where all people, even those in the remotest regions, have the power to create opportunity, both for themselves and for others. Kiva aims to alleviate poverty by promoting autonomy, enabling individuals to loan as little as $25 to entrepreneurs in the developing world.

Unlike other microfinance companies, 100 percent of every dollar lent via Kiva goes to loans administered by its 300 field partners, who each undergo extensive financial due diligence and credit risk checks. Additionally, as a non-profit organization, Kiva does not charge field partners interest.

Since Kiva was founded in 2005 by Matt[A1]  Flannery, Jessica Jackley, Premal Shah and Chelsa Bocci, the organization has raised more than $690 million in financing from 1.3 million investors, providing funding to over 1.6 million borrowers in 86 countries worldwide. The repayment rate is an astonishing 98 percent.

Approximately $500 million of this funding, representing 70 percent of all Kiva loans, has been awarded to female-led ventures. As Giovanna Masci, Kiva’s Vice President of Global Partnerships explains, women in many developing nations are structurally removed and unable to participate in the financial system.

Women in the developing world are often unable to build up collateral like property and homes, since such assets are typically held in men's names. This substantially limits women’s opportunities to obtain loans, since they have no assets against which the loan can be guaranteed. Kiva aims to fight this financial disparity through a combination of increased awareness and targeted initiatives.

Kiva's "Dreams Are Created Equal" campaign helps spread its message.

Kiva launched the “Dreams Are Created Equal” campaign on International Women’s Day 2015. The goal of the initiative was to show potential investors that women throughout the developing world have dreams and ideas with vast business potential.

The campaign highlighted stories of female entrepreneurs who used Kiva loans to create successful businesses, increasing opportunities for their families and communities as well as themselves. Each story makes the impact of these seemingly inconsequential microloans much more relatable on a personal level.

Take for example Lourdes, a single mother from Paraguay. She used her first $60 Kiva loan to start a business selling empanadas. Lourdes repaid the loan, subsequently taking out several more. Finally, she took out a loan for $975, funded by multiple investors from all over the world. This enabled her to purchase a refrigerator and increase her inventory. As a result, her business grew significantly. She moved to a bigger shop with increased security and moved her family into the home annexed to the premises.

Based in San Francisco, Kiva began as a pioneer of crowdfunding. The organization strives to find innovative solutions to meet its customers’ diverse lending needs. It offers life-changing business funding to entrepreneurs in the developing world, thereby driving innovation in these regions. Kiva facilitates upward mobilization for women business owners, their families, and indeed whole communities.