People from the poorest sections of society, who need simple financial instruments to run their business, find themselves denied access to banking or financial services for want of collateral or guarantees. Banks’ lack of cooperation with this sector of society is understandable to some extent, considering the difficulty of recovering the loan amounts in the event of default.
This creates an almost insurmountable hurdle for micro entrepreneurs who want to set up and run their own business in order to provide a living for themselves and their families. Offering small loans or microloans to poor borrowers through specialist microfinance institutions (MFIs) is the one of the best solutions to this problem.
But, having said that, microfinance institutions still struggle to find sufficient financial backing. This can only be achieved if private individuals are prepared to extend a microloan guarantee to the bank that is willing to offer the funding.
UnitedProsperity.org (UP) an internet-based non-profit organization has come up with the clever idea of creating “social guarantors” to provide a compassionate and impactful microloan guarantee service. This service is aimed at helping the poorest would-be entrepreneurs, who are mostly women, to start or grow their own business and use the earnings to live life with dignity and self-reliance.
The innovative idea of creating social guarantors to guarantee the loans was intended to address extreme poverty. Today, the concept has gained tremendous support from many individuals across the world. In May 2009, United Prosperity launched the scheme together with a large bank in India and Ajiwika, a MFI that works with the poor in one of the poorest states in India. To date, UP has raised over US$90,000 in loan guarantees from individuals in more than 20 countries. This has resulted in US$170,000 worth of loans being made to micro entrepreneurs.
Under the scheme, for every US$1 received as guarantee through UP, a partner bank will lend around US$2 in microloans to poor entrepreneurs through a microfinance institution. When the loan is repaid to the bank, the guarantee is released. The money is then returned to the social guarantor, who may renew the guarantee for other loans to other poor entrepreneurs.
Download the complete Cases study at the link below
United Prosperity Case Study on Online Lending