Microfinance (or microcredit) is defined as a program that extends small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families, characterized by:
- The size of the loans (micro, or very small size), beginning as low as $25 to as much as $750 (WAF estimates loan facilities between $25-$200 per beneficiary)
- The target users (microentrepeneurs from low-income households, a majority of them female-headed households)
- Their utilization (income generation, community use [health/education])
- Flexible terms and conditions (simple, little paperwork, fit to local conditions/culture). As an example, many peer groups are formed from existing, familiar relationships
Many microfinance institutions follow a basic, common process that can be summarized as follows:
- Clients are identified and chosen by a microfinance lender as a good risk and candidate for microfinance lending
- Clients are coached in simple entrepreneurial practices, and then given a loan to invest in a business.
- The businesses, typically thrive and earn a profit whereby recipients begin to generate income.
- The recipient demonstrates self-sufficiency and the loan is repaid, usually within a short period (weekly, bi-weekly payments).
- The loan is recycled for use in another small business and the steps repeat, in what is commonly referred to as a revolving fund.