News & Stories Questions & Answers
What is microfinance?
Who takes out small loans?
Families living in poverty in developing countries use small loans to start their own small businesses, earn regular incomes and provide for their children. These loans and other microfinance services assist people who are excluded from the mainstream banking sector because they have no collateral, formal identification or steady income, giving them new tools to transform their lives.
Why mothers? Are the majority of loan recipients female?
At present, 95% of loan clients are women. In the countries where we work, mothers have fewer options for employment and are therefore more likely to be involved in running their own small businesses. Men are often employed in contract work as labourers or overseas workers, leaving mothers to support their children or supplement their husband’s income using any skills they possess.
Small loans empower mothers to build successful small businesses, helping families earn regular incomes to give their children a brighter future.
With the earnings from their small business, mothers and fathers invest in nutritious food, proper shelter, medicine and an education for their children.
Can $70 help? What is the average loan size?
$70 dollars can most certainly help – any amount can help! Opportunity receives a range of donations from our incredible supporters and we see time and again how these donations can make an significant difference in the lives of families living in poverty.
In a developing country, $70 can buy a lot more than it can in a country like Australia. In many cases, it is enough to start a small business as our program partners leverage the funds they receive. The funds you provide are used as an indication of financial strength, enabling our program partners to borrow more money from other lenders. These combined funds are then available to distribute to a larger number of families, maximising the impact of your initial donation. Typically, the average loan size is $200.
How do loan officers identify people in need of small loans?
Loan officers are often local people who can easily build a rapport with communities. Usually, loan officers will hold information sessions in village halls, churches or other meeting places to let families know the opportunities available to them. Here, locals can ask questions, learn more and express their interest in applying for a loan. Where our work is well known in an area, potential loan recipients often approach us.
What kinds of businesses are started with small loans?
The businesses established with small loans vary and often demonstrate incredible ingenuity on behalf of the loan recipient! While the more original businesses we’ve seen include furniture made out of tyres and rope made out of coconut coir, common businesses include:
- small farms
- grocery stores
- second-hand clothes stores
- kiosks and cooking stalls
- fruit and vegetable stalls
- carpentry businesses
- taxi services.
What guarantee is there that a loan will be paid back?
99% of loans are repaid – a higher repayment rate than in the developed world. Defaulting on a loan is an unusual occurrence – loan officers walk alongside families throughout the loan term, helping them deal with any problems they may be facing in their businesses and offering support in order to overcome them.
A major incentive for loans to be repaid is the desire to secure subsequent, larger loans once initial loans are repaid. This enables families to grow their businesses more and more with each loan – increasing productivity, income and living standards.
Borrowers can also often form guaranteeing groups, particularly in early loan cycles. This community approach offers support when someone is unable to make a loan repayment, possibly due to illness or some other hardship.
What are common reasons for loan default?
In the rare instance that a loan is defaulted on, a range of factors can be at play:
- Environmental – natural disasters, adverse weather and drought can disrupt a small business in the short and long term, particularly if it involves growing or selling food.
- Social – religious festivals, political elections and social unrest can disrupt normal business operations and cause incomes to fluctuate. Major events in a person’s life, like the birth of a child or the death of a family member can also affect their ability to operate their business.
What happens to people who cannot repay their loan?
99% of all loans are repaid – in business terms, people living in poverty are a reliable credit risk. For the other 1% who are not able to repay their loans, part of the role of the loan officer is to understand the reasons why and address them where possible. If a loan is not repaid, the loss can sometimes be recovered through compulsory savings. If there has been no effort on behalf of the loan recipient to repay the loan, some is written off as bad debt and the borrower may then be excluded from access to future loans.
In rare cases where a person cannot repay their loan and there is no alternative, loans are forgiven – after all, our aim is to make things better in the lives of families living in poverty, not worse.
Is interest charged on loans?
Like nearly all microfinance organisations, Opportunity’s program partners charge interest in order to cover costs and ensure sustainability – the size of loans needed by families living in poverty is very small, making transaction costs relatively high. As the Consultative Group to Assist the Poor (CGAP) explains, “Administrative costs are inevitably higher for tiny microlending than for normal bank lending. For instance, lending $100,000 in 1,000 loans of $100 each will obviously require a lot more in staff salaries than making a single loan of $100,000.”
Interest rates depend on the region and also the size of the loan. We make sure we only partner with organisations that are there to serve the poor, not make a profit.
For people living in poverty, the alternative source of funds to microfinance is a loan from an informal money lender – loan shark – who charges upward of 10% per month. Rates are always substantially cheaper than those charged by loan sharks.
Opportunity seeks to help create sustainable organisations that do not depend on external subsidies (other than for growth). We do not want them to make super profits, and they don’t want to either. In some cases where sustainability allows, those profits are returned to families through reduced interest rates.
How can people living in poverty afford to pay interest?
In deciding whether to take a small loan, potential borrowers compare interest costs to their overall business and household costs. People living in poverty are often accustomed to managing their money carefully and will take into account the impact of the loan capital on their business income. They’ll also investigate other alternatives, such as borrowing money from a family member or a local moneylender (loan shark).
Interest rates charged by moneylenders are much higher than microfinance organisations. The standard moneylender loan in the Philippines is the ‘5/6 loan’: for every five pesos loaned in the morning, six must be repaid by evening. This amounts to a daily interest rate of 20%. Microfinance offers a much more affordable option.
By paying interest rates, people living in poverty also prove that they would be able to manage a larger loan, and by doing so, they can eventually move on and become members of the formal banking sector.
How do you know that microfinance is effective?
Various studies of the impact of microfinance have been carried out over the past few decades. These studies have established that microfinance can improve the living standards of poor households and the communities in which they live. Benefits include:
- higher and more reliable income and savings
- better nutrition
- improved access to healthcare
- reduced vulnerability
- greater self empowerment – especially for women
- better housing, and
- more children in school.
Opportunity International Australia is committed to ensuring that all of our programs are effective and that we are maximising the impact of your donations. For this reason, we assess social impact through our Social Performance Management program, an initiative that helps us continually measure and refine programs, ensuring your support reaches those most in need with tools to help them transform their lives.
How does microfinance help the economy?
With a small loan to grow their small business – often to the point where the business needs to employ other people – microfinance has flow-on effects for local economies: decreasing unemployment and providing incomes for other poor families in the community.
With an increased income and therefore more money to spend on items such as food and transport, families who used to live in poverty become active participants in their local economies, benefiting the providers of those products and services, who, positively, are often microentrepreneurs themselves. By boosting local economies, microfinance benefits developing communities beyond the aid of a one-time hand-out.
How do you ensure your microfinance partners are socially focused and efficient?
Opportunity International Australia works through local program partners to ensure that we’re understanding and meeting the needs of the families we’re reaching. Local to the communities they’re serving, loan officers and staff at these partner organisations speak local languages, understand community challenges and concerns and, in doing so, enable you to have a greater impact.
Committed to helping families transform their lives, we only partner with capable local organisations that share our mission.
As part of our governance mandate, we participate in decision making at the microfinance partner level and always influence our partners to go for healthy growth, efficient and transparent operations, the adoption of social performance management systems, fair pricing and product diversity. A testimony to this is that some of our partners have reduced their effective interest rates since our investment and are committed to do so as they become more sustainable over time.
Transparency is key and we often travel with donors to visit our partners so that they can see the impact of our microfinance programs – and their donations – for themselves.
Does Opportunity do more than microfinance?
While microfinance is at the core of what we do, Opportunity also supports other development initiatives that empower families and whole communities. See more of our work in action here.
What is edufinance (Education Finance) and how does this fit in with Opportunity’s work?
Education unlocks and fuels a child’s potential and is a proven path out of poverty. Opportunity is committed to putting and keeping more children in quality classrooms around the world using the financial products and services that we already deliver.
Our Education Finance program has supported school proprietors in expanding classrooms, hiring more teachers, serving more than 2.0 million students since its start. We have also enabled families to pay for school tuition, uniforms and supplies with the help of School Fee loans. When children and schools thrive, it spurs economic growth in the entire community that breaks the cycle of poverty and transforms lives for generations to come.
What do you mean by ‘inspired by Christ’?
In the gospel of Luke, Jesus tells a crowd the story of the ‘good Samaritan’. The parable talks of a man who was mugged by some robbers, beaten and left to die on the side of a road. Three people come across the man, but only one stops – the Samaritan. On such a dangerous road, all three had their reasons to keep going, but only the Samaritan pushed his reasons aside to help.
Opportunity aims to be like the Samaritan. Moved with compassion, he pushes aside cross-cultural boundaries to show real and costly love to someone in desperate need. In the stories of Jesus’ life, we see the same character displayed. Jesus mixed with some of the most despised people of his time – prostitutes, tax collectors and other outcasts. He helps and believes in all people regardless of race, faith, ethnicity or gender.
Throughout all our work, we deeply value relationships and as we work with people living in poverty, we come across a number of people who demonstrate ‘Christ-like’ behaviour every day. Some of these people are Christians, some are not. Some are the leaders and staff of our partner microfinance institutions who work in the most isolated, difficult areas imaginable; some are our staff who labour tirelessly to give a voice to the voiceless. Some are our clients who, despite their own circumstances, walk alongside others in their neighbourhoods to help them grow successful businesses, too. Together, we work to reach out to people in need – religion, race and gender don’t come into it.
Rather than focusing on evangelism, discipleship or church planting (roles that other organisations are fulfilling), we see our role as responding to one of Jesus’ main messages – to love our neighbour as ourselves. 1 John 3:16 says this: “This is how we know what love is – Jesus Christ laid down his life for us. So, we also ought to lay down our lives for others.” Opportunity is trying to answer this call.
Can we link with a community that we support through Opportunity?
Opportunity provides a range of reporting on its programs in order to keep all supporters up-to-date with the communities that we serve. This includes detailed reports, Magazines, Annual Reviews, videos, events and so on.
We also offer Insight Trips for certain groups of supporters who wish to visit our work firsthand. This includes attending loan group meetings (not necessarily those funded by the supporters) and visiting client businesses.
Additionally, each year we provide supporters with the opportunity to connect directly to a select number of communities by fundraising $10,000 as an individual or as part of a giving circle. To find out more about these, email firstname.lastname@example.org.
Apart from these opportunities, direct contact between Opportunity supporters and individual loan recipients is not encouraged for a number of reasons:
- Many loan recipients are illiterate and language barriers can prevent meaningful interaction
- One-to-one interaction requires significant time and program resources to manage, and in order to remain good stewards of donated funds, we know it is preferable to our supporters for us to use donations to help more people out of poverty
- It can be challenging for families living in poverty to relate to supporters from wealthier countries like Australia on an ongoing basis – like you, we want to remain sensitive to this.
How much of my dollar goes to programs? What are your costs?
In 2016, Opportunity’s fundraising and administrative ratio was 22%. This is the ratio of the sum of expenses associated with fundraising appeals and administration to total revenue. Opportunity continually endeavours to reduce costs wherever possible and we are pleased with this illustration of sound stewardship of your donations.
In addition, the nature of microfinance means that donations to Opportunity are continually at work. The recycling of loans means that the one-off costs it takes Opportunity to support fundraising can be amortised over a number of years. There are no more costs, but your donation remains at work, increasing your impact. In addition – through leverage – your donation can attract local finance to be invest into our programs, further increasing your impact.
Opportunity places an importance on being transparent in all aspects of its operations to ensure that supporters know they can trust us with their donations. In 2012, Opportunity was named the winner of the prestigious PwC Transparency Award 2011 (revenue $5m to $30m category) for the quality and transparency of our reporting. In 2013 and 2014, we were again a finalist in the awards.
How much funding do you get from the government as opposed individuals and corporates?
We are grateful of the government’s support of our programs and their accreditation of our work. In 2014, we received $2.1 million through grants from the Australian government, representing 10% of the total cash Opportunity received throughout the year.
Donations, gifts and bequests from individuals and corporates totalled $5.8 million. This generosity enables our work to continue to grow and reach those who need us most.
Do you have microfinance programs in Australia?
Opportunity focuses on international development – we support families living in poverty in developing countries. Here, poverty levels are much more extreme than we experience in Australia, and it is here we believe we can have the greatest impact.
Microfinance works differently in Australia – for example, loan amounts are much higher. David Bussau, Opportunity’s founder, is a founding director of Many Rivers Microfinance, an enterprise development initiative based in Australia. Many Rivers’ program is separate and different from Opportunity’s. It provides credit-based financial services to indigenous and other marginalised Australians to help them own and manage their own businesses. For further information on Many Rivers, visit www.manyrivers.org.au
I feel like I should be looking after my own backyard in Australia. Why should people support international development?
On Australia’s doorstep, women, children and men are dying. Our region has some of the highest rates of child malnutrition and deaths during childbirth in the world. These are problems that can be solved through support for development initiatives like microfinance.
Charity might begin within your own neighbourhood, but it doesn’t stop there. The idea that charity should stay within Australia sets up a false contest between helping those suffering at home and helping those suffering overseas. Every person deserves to live with the ability to access food,clean water, education and medical facilities – not just Australians.
There is massive and urgent need in the developing world – each year, millions of people in developing countries die from preventable causes and more than a billion people around the world go to bed hungry each night. In many cases, supporting international development is literally a life and death decision. People living in poverty can’t afford to wait and miss out on their next meal, the right vaccination to survive or education to thrive.
In 2014, Australian Government aid built 9,000 new classrooms and enabled over 1.3 million more children to enrol in school. It vaccinated more than 2.3 million children; gave access to critical services to 66,000 survivors of violence against women and gave 2.9 million people access to safe drinking water. It responded to emergencies in 24 countries including the devastating Typhoon Haiyan in the Philippines.
Supporting international development initiatives benefits Australians. It makes a more secure, stable region and a safer world. It can work to lessen refugee flows and opens up new, stable markets for economic growth.
If we, as members of wealthier countries, don’t support developing countries, who will? The cycle will continue and the need will get worse. We want to introduce sustainable poverty alleviation interventions to empower individuals, communities and countries to work their way out of poverty so they no longer need our help. It’s not about a hand-out but a hand up, through interventions like microfinance.