Microfinance – providing small-scale financial products (typically micro-loans, but also others) to clients who are not being served by traditional banks. Loans can range from a few hundred euros to up to EUR 50 000.

You might know that microfinance is basically giving small loans to the most vulnerable people. You may also have heard about Muhammad Yunus, the Bangladeshi economist who was awarded the Nobel Peace Prize in 2006 for establishing the modern approach to microfinance. He talked a lot about how business should solve problems, and should be used for our collective interest.

If so, you may be surprised at hearing how much microcredit can cost. An annualized interest rate of 25%?! High time governments put a cap on that… Or is it?

In this episode of ‘A Dictionary of Finance’ podcast we invited Per-Erik Eriksson, head of inclusive finance at the European Investment Fund, and Hannah Siedek, impact microfinance investment officer at the European Investment Bank, to explain to us what microfinance is. We hear stories from sub-Saharan Africa, where Hannah used to work, about borrowers who, barefoot, would be intimidated by the freezing cold, air-conditioned buildings of traditional banks, and wouldn’t dare to go in. But who then go to a microloan provider, buy a few cases of beer and start a bar, and in the end take a loan worth several-thousand euros to expand to a second bar, already creating a couple of jobs. Stories about how microfinance is making a difference.

We also hear about how costly it is to provide microcredit – due to loan officers having to draw up profit and loss statements and balance sheets on behalf of the client, counting the cartons of milk the borrower has in her store, and what her repayment capacity is likely to be after her kids’ school fees, her own groceries and other obligations. Due to the limited size of the loan on which to spread out the operating cost. Due to the risks microcredit providers take in providing loans to people whom traditional banks overlook, such as refugees, for example, and many other factors.

And, finally, we consider the alternatives to microcredit (loan sharks, anyone?), and find out that – despite the relatively high cost of financing – the percentage of microcredit borrowers who are able to pay back the loan is incredibly high. All-in-all, microcredit is macro-interesting, as our host Matt so elegantly sums it up in the end.

Please connect with us on Twitter (@EIBMatt and/or @AllarTankler) to suggest terms for future shows, provide feedback and snide remarks. We will soon have episodes on financial engineering and impact investing, so subscribe to ‘A Dictionary of Finance’ in the iTunes podcast app, Stitcher or other platforms. Also: rate us!