What is Microfinance?
Microfinance is the provision of small loans to low-income populations who would otherwise lack access to formal financial services. Microfinance has lasting economic and social effects beyond the extension of a loan, because it also provides training in savings practices and business education.
Given the gender-biased nature of market economies in traditional societies, microfinance clients are generally women. Research shows that availability of finance to women better ensures that generated profits are ploughed back into the development of the household and family. By creating a means for women to build profitable businesses, microfinance not only supports women, but creates life-changing opportunities for their families, as well.
VEI-Ghana employs a group-based lending approach, that has proven to be successful across different cultures around the world, to give microloans to young people, mainly young women under 26 years old.
After analyzing potential borrowers’ businesses and assessing their repayment capacity, successful loan applicants form groups of 15 – 30 individuals. Each borrower is required to make a small weekly savings deposit for 4 weeks before the loan is disbursed. During the entire period the loan is outstanding, each borrower deposits weekly savings until they hold 20% of the total loan amount in savings. This serves as collateral for VEG in case of default. The loan cycle lasts for 6 months and borrowers make equal weekly repayments. In case a borrower is not able to repay the loan, the group is expected to cover for the given individual. This creates both peer pressure for everyone to repay their loans, and acts as an incentive for the partners to support each other in business and personal matters to ensure the sustainability of the group. In addition to the mandatory savings, VEG offers all partners the opportunity to deposit voluntary savings during the weekly meetings and the freedom to withdraw these savings when they want.
VEG’s poverty alleviation strategies also include Microinsurance, offering each borrower the opportunity to sign a life insurance product.