Photo by Seth Hughes

What it is

Put simply, microfinance is the business of providing financial services to the poor, with the goal of empowering them to build profitable, sustainable local economies. The most common service is microcredit — small, low- to no-interest loans that don't require collateral and allow artisans, farmers, fishermen, and other hard-working entrepreneurs to get their businesses rolling. Once they receive the money for an initial investment — a new boat, livestock feed, looms — they can make enough revenue to pay back the loan and start to build a profitable venture. Microcredit helps poor women in particular: Often faced with running a household yet denied access to financial benefits, they represent the majority of microcredit loan applicants.

How it works

In the past, microentrepreneurs couldn't get loans because it just doesn't make financial sense for regular banks to deal in small amounts. (It is far more expensive to manage hundreds of $100 loans than it is to manage just one $20,000 loan.) Microcredit overcomes this problem by providing group loans. Each group member receives the small loan amount she needs, and the bank can turn a profit. And because a whole community is involved, there is more pressure to repay the loan.

An important distinction: Lenders are not giving money to poor people. The system follows the maxim “give a man a fish and he eats for a day; teach him how to fish and he eats for a lifetime.” A microloan is meant to be repaid. In that way it allows borrowers to access the financial services they need to start a business and maintain a sense of dignity. And it works — Grameen Bank, operating in Bangladesh, claims a stunning 99 percent repayment rate on its loans.

THE BIG LENDERS

• Grameen Bank

  WHAT YOU CAN DO

  Founded by Nobel Peace Prize winner Muhammad Yunus, PhD, Grameen has inspired microfinance projects such as Grameenphone, which brings cell phone service to the poor. Grameen America opened in the United States in April. grameenfoundation.org

• Foundation for International Community Assistance (FINCA)

  Operating in Latin America, Africa, Central Asia, and Eurasia, FINCA recently developed programs that work in accordance with Islamic law to benefit war-torn Middle Eastern nations. villagebanking.org

• Birima

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  A project spearheaded by African music superstar Youssou N'Dour, Birima is named after a Senegalese king known for keeping his word. In February, Birima received a huge boost when $3 billion apparel giant Benetton decided to back the program. Download N'Dour's song “Birima” on iTunes. birima.org

KIVA is a nonprofit that allows you to choose a specific entrepreneur online and then loan him or her money (through an approved local institution) to help meet the business goals. kiva.org

With MICROPLACE, owned by eBay, you choose the applicant directly, much like Kiva, but your investment actually yields return profits while aiding the needy. microplace.com

Consider gifts that do good. Alternative Gifts International (alternativegifts.org) lets you donate in a loved-one's name to various humanitarian causes.