Why microfinance works

SYPO gives small loans to poor women in rural areas, for them to start businesses with. They repay in weekly installments, over the course of max a year. Sometimes we get asked why this is a good model to help the poor. If they can repay the loan, why couldn’t they just save money, not have to borrow, and avoid paying the interest we charge to pay for the operational costs? It gets even more confusing, because many – if not most – of the women in our project take out multiple subsequent loans: as soon as they finish repaying the first microcredit, they apply for a new one, typically larger than the last.

The women we help are not just poor – they’re extremely poor. The difference between the two is that extreme poverty forces you to consume everything; there is no continuous surplus to invest. We know from our own work in Uganda (and from the better documented research of Portfolios of the Poor) that the extreme poor do save small amounts for short periods of time – for example to pay for the kids’ school fees – but not enough for any meaningful investments. And yet those investment opportunities are plentiful.

Where we work, in Central Uganda, the soil is fertile, and rain is abundant through extended periods of the year. The capital of Kampala is not all that far, and neither is Kenya, a big regional market. That means that both agriculture and trade can thrive. A coffee farmer, for example, could sell all the coffee she could grow. And although land availability is limited, most of the women in our project have a small farm; in most cases 0.5-5 acres. Productivity of those farms however is far from what it should be.


$ 7,682,180

Disbursed since start


Repayment percentage


Microcredits since start

The World Economic Forum estimated in its 2015 Africa Competitiveness Report that the average African farm can increase productivity by 90% through irrigation. Another 61% productivity can be gained by increasing the use of natural fertilizers, and another 68% by planting higher yield crops. Interestingly, 10-30% productivity increases can be gained simply through better access to information, such as weather forecasts and current pricing reports. Yet instead of investing surplus profits in irrigation systems, fertilizers, or high yield crops, the poverty trap forces the poor to consume their profits. There simply isn’t a surplus to invest. Loans can create that surplus.

The impact of those small investments, even if only a few hundred dollars, can be enormous, because if you start out in a very inefficient environment, there are a lot of opportunities to invest in high yield assets. We have had hundreds of women take out microcredits for inexpensive ‘drip irrigation‘ systems, disease resistant crop seeds, or bags of fertilizer. We even had farmers invest in inexpensive mobile phones, so that they can get realtime weather forecasts and can call around to know what local market will offer them the best price for their harvest.

Having these high yield investment opportunities allows the women to repay the microcredit and interest, and still be left with a good profit. They typically reinvest part of the profits, and invest the rest in better schooling for their kids – a more long term investment. But even if they do reinvest their profits in their farm, the opportunities for high yield investments are not exhausted; that’s why they also apply for another microcredit. Because we know that they repaid the first microcredit well, we allow them to borrow a little more; typically 1.5 times the previous maximum amount.

The result is a permanently more productive farm, and higher profits to the farmer and her family. The farm has been lifted one level up, and now creates a permanent surplus, available for reinvestment and growth. The starting point is so dire that even after four microcredits the opportunities for meaningful investments still exist. However, as you can imagine, the return on investment on the first irrigation system, or the first bit of added fertilizer, is higher than when you start optimizing it a couple of years in.

That’s why we typically give a maximum of four subsequent microcredits to a woman. We then let the newly created surplus do its work, while we redirect the repayments to a farmer who has not even received the first microcredit yet.That’s the beauty of microfinance: it creates a temporary surplus that can be transformed into permanent growth. And after it’s done its work for one farmer, it can be reinvested – the same dollar helps women again, and again.