Can Microfinance Create Sustainable Businesses?

Lendwithcare.org's Microfinance Advisor, Dr Ajaz Ahmed Khan, answers one lenders very pertinent question

Banking on Change in Uganda

© CARE/Tine Frank

A business owner and lendwithcare lender raised a very important question in an email to the lendwithcare team recently. Attracted to the lendwithcare model due to its emphasis on sustainable development and providing the working poor with a hand up instead of a hand out, he asked how, with loans alone, micro-entrepreneurs were able to create truly sustainable businesses that could benefit whole communities. We thought we would share Ajaz's answer with you all ...


In our experience low income people face many obstacles, lack of capital is just one. Thus, lack of appropriate skills, lack of markets, lack of mobility (particularly important for women in certain contexts), lack of rural infrastructure, etc. all impact upon their ability to develop their businesses - poverty is multi-faceted. As an organisation, CARE International works in addressing many of the aforementioned obstacles and many others (such as health and education), not just providing microfinance.

There are a wide range of institutions that provide microfinance, some tend to be very commercially minded providing nothing but loans, while others have a strong social development mission and provide a range of other services including savings (so that low income people do not always need to seek loans), insurance and training. We are very careful in selecting our microfinance partners and work with the latter rather than the former. Some of our partners provide extensive training to borrowers. For example, our microfinance partner in Bosnia & Herzegovina, Zene za Zene International has a sister organisation that focuses exclusively on providing women with training in basic bookkeeping and financial planning, new skills, marketing and presentation and even helps them to export products overseas. Once women complete the training courses (that can last several months) they then qualify for a loan providing they present a viable business plan from the microcredit foundation. However, in practice funding training programmes is a challenge and it is one of the reasons why they are not more widespread.

Our microfinance partners also lend to small and medium enterprises (SMEs) who typically require larger loans than those featured on lendwithcare. For example, around 10% of the loans given by our partner in the Philippines, SEEDFINANCE, are to SMEs. These are enterprises who typically employ several staff. We have not generally featured these loans on lendwithcare though as yet because they might take too long for us to fund, although as lendwithcare grows and we have more lenders we will support more SMEs.

Our partners are all experienced microfinance providers, often with a close understanding of the communities where they work and take the view that providing one loan to a microentrepreneur may not generate a cycle of sustainable development, rather that they require access to loans (supported by a range of other services and training) over an extended period of time to develop their businesses. However, since they also need to ensure their own organisational sustainability (despite sometimes being non-profit or member owned organisations) our microfinance partners tend to slowly increase the size of loans over several years as they see a business develop - certainly there are many instances of borrowers beginning with very small enterprises that have developed into much larger businesses that employ several staff. However, there are certain limitations also as I have explained in a recent blog http://lendwithcare.blogspot.co.uk/2012/09/ecuador-microfinance-and-women.html#more that are often more difficult to overcome.

By Lendwithcare.org Microfinance Advisor, Dr Ajaz Ahmed Khan