Microfinance is a term for the practice of providing financial services, such as small loans, savings and insurance to poor people.

Access to financial services forms a fundamental basis on which many of the other essential development interventions depend. Improvements in health care, nutritional advice, and education can be sustained only when households have increased earnings and greater control over financial resources.

Improved earnings means that families can save money, which reduces their vulnerability when a business slows, a child gets sick or a crisis hits.

Microfinance gives families options for the future and enables them to give their children the best start in life.

The formal financial sector does not extend credit to poor enterpreneurs due to the small loan amounts required, the absence of any credit history and the lack of collateral assets. A money lender in the community often loans money at high rates of interest to enable the villlagers to buy seed, fertiliser and basic implements for cropping, or for purchasing other materials for producing handicrafts. Because of the exorbitant interest rates, nearly all the entrepreneurs´ profits are applied to the payment of exorbitant interest to the "loan shark", which leaves them in a position of grinding poverty. Unscrupulous purchasers of the products contribute to keep them poor. This is the cycle that needs to be broken through microfinance ministry.

Since 1993, World Vision has steadily grown the economic development component of its' strategy through a microfinance network that has expanded to 47 separate countries. These Microfinance Institutions (MFIs) are designed to be separate, specialized, and sustainable entities capable of achieving significant size and impact. To manage these MFI’s, in 2003 World Vision set up a subsidiary called VisionFund International (VFI). A global microfinance capital fund, VFI was established to allow World Vision to considerably expand micro lending to poor people who have good business ideas but no capital.

VisionFund was created to provide small loans to the world’s enterprising poor so they can improve their lives and their children’s futures by building small businesses.

As of June 2007, VFl year-to-date had a loan portfolio of US $249 million serving nearly 500,000 active borrowers, and impacting 1.2 million children—two thirds of whom are in World Vision development programs. With clients repaying at a rate of over 98%, we see continual proof that VisionFund is a sustainable, effective model for reducing poverty and creating lasting change.

World Vision incorporates MFIs into its development work, for a wholistic approach that can maximize the impact of aid in helping the poor make sustainable improvements for their families and communities.

World Vision’s community development programs lay a secure foundation on which small businesses can flourish. Access to clean water, health care, stable food sources and education strengthens communities and allows the hardworking poor to focus their energies on entrepreneurial ventures.

When donated goods and services are no longer appropriate in disaster zones or development programming, small loans can provide funding that will be leveraged and recycled to impact family after family, eventually having 10-25 times the impact of one donation. Microenterprise then acts as an economic engine, increasing families’ incomes and creating enough jobs so that the community can permanently sustain these developmental improvements.

This unique, integrated approach not only empowers a community to solve its own problems, but also leads to spiritual transformation as the community experiences tangible hope and God’s love through the World Vision staff.

Testimonies and studies show households of microfinance clients have better nutrition, health practices, health outcomes and living conditions. Children are more likely to go to school and finish their studies and more children go on to further education.

VisionFund is registered as a not-for-profit 501(c) 3 subsidiary of World Vision International. All funding for the Microfinance ministry is donated through the World Vision support offices to VisionFund International. The specialized VFI management team creates lending structures to leverage the donated funds, and then distributes them to the MFIs, in conjunction with solid reporting guidelines.

When loans are repaid, the loan capital is recycled to provide another loan to a poor entrepreneur. The interest paid is used towards operating costs. The goal is for each MFI to become a sustainable microfinance operation.

Microfinance clients pay interest on loans each month as part of a strategy to shift people from an aid to development mentality. Instead of a 'hand-out' they get a 'hand-up'. A solid business model encourages responsibility, accountability and ownership. People take control of their businesses and their lives.

Microfinance programmes become self-sustaining institutions as their capital funds grow, enabling loans to more and more poor clients. Loan size and interest charges are determined by the local economy.

Providing loans to the rural poor is expensive in relation to the size of the loan, and is one of the reasons the rural poor have not been an attractive market to the formal financial sector. A $300 dollar loan from a community bank, for example, requires the same management resources as a $2500 individual loan, thus increasing the transaction cost per dollar loaned.

A reasonable interest rate is charged for three reasons:

• To cover the cost of running a microfinance programme;
  
• To help people become financially independent and competitive under normal market conditions;
  
• To avoid destabilising the local economy and distorting the development of the microfinance sector in-country
  

Though we are making good progress, the need for microfinance services is still huge. Within World Vision's community development programs, we are currently only meeting 15% of the need, and it is estimated that 2.55 million households still need access to financial services.

VisionFund is poised to help meet that demand by projecting a global average growth rate of 43.5% per year. In essence, then, VFI will quadruple the number of people we reach in the next five years.

By 2011, we hope to see:

• Eight million children’s lives positively changed
  
• Four million jobs impacted
  
• Two million active clients
  
• MFIs operating in 58 of the 97 countries World Vision serves.