Microfinance: An Answer to Global Poverty?

By Mandy Boyle
Advertising Sales Manager/Entertainment Editor

When Bangladeshi economist Muhammad Yunus and his Grameen Bank were honored with the 2006 Nobel Peace Prize, the world was introduced to a new way of thinking when it came to financing the entrepreneurial spirit. Grameen Bank in Bangladesh was formed out of a project providing small loans to women in the village of Jobra so that the community could flourish. Not only did this program support women’s economic participation, but Yunus’ idea, microfinancing, has changed the way the world does business.

According to the Consultative Group to Assist the Poor (CGAP), microfinance is the allowance of small loans, savings, and other basic financial services to assist the needs of the poor, usually with funds coming from private individuals or non-profit organizations. Or, to put it more simply, people like you or I can help others stricken by poverty by providing funds to lend to a microfinance institution.

So why smaller amounts of money? Shouldn’t we want to provide larger loans to those facing economic difficulty? Kiva.org, a microfinance organization, does a great job of simplifying the reasons behind smaller loans and savings: “Someone who doesn’t have a lot of money isn’t likely to want to take out a $5,000 loan, or be able to open a savings account with an opening balance of $1,000. Hence – ‘micro’.” Having smaller amounts to work with makes it easier for loans to be dispensed through microfinance, not to mention, it encourages a higher repayment rate.

Prior to the invention of microfinance, many poor people addressed their financial needs through a variety of relationships, usually informal. Credit and financial access was mostly granted through informal moneylenders, many of which would exploit borrowers with incredibly high interest costs or other forms of abuse via unfair trades or even in some cases, violence.

For those looking to obtain financial support that was more affordable, there were some savings programs available, however, in many cases, these associations would be somewhat erratic and insecure, putting any money traded at risk of being lost. Factor in the belief of most banks that poor people are not a viable market and you had a toxic financial environment for anyone living in an area of poverty. There seemed to be no way for entrepreneurs to start businesses to furnish jobs and support the local economy, not to mention care for families and survive.

Picture this: you don’t have any money to open a savings account with. You don’t have a record of credit on paper. You have never been formally employed. You don’t have any collateral to use in the negotiation of securing a loan. The most your family has to trade is some livestock. You’re also mostly illiterate. No bank or formal financial institution is going to want to do business with you.

Microfinance gives you another option to get funds for your sewing business, to send your child to school, or to treat a family member’s illness. It also allows for you to pay the loan back easily, without all of the insecurities and risk associated with informal dealings through a moneylender in your village or community. All you have to do is work with a microfinance institution to secure a loan. From there, you work with the institution to pay back the loan at a specific rate, as one would do in any other banking situation.

However, less risk isn’t the only benefit to microfinance. From the perspective of the lender, this form of financial assistance to the poor can also prove to be very reliable.

The World Bank Group reports that as of July 2008, Adhikar, a microfinance institution in India, had about 40,000 borrowers with a 100% repayment rate. A 100% repayment rate is almost unheard of in most traditional banks, both here and in other parts of the world. This high repayment rate is characteristic of nearly all microfinance programs and can be backed by empirical data. This builds a strong case for enabling these types of financial services to be expanded both in the United States and throughout the rest of the world.

According to the United Nations Capital Development Fund (UNCDF), microfinance also allows for a variety of positive effects. Firstly, microfinance helps very poor households meet basic needs and protect against risks, such as natural disaster, illness, or other forms of hardship. This can mean life or death in certain parts of the world as impoverished nations already struggle with the survival rates of their peoples. Moreover, the use of financial services by low-income or poverty-stricken households is often associated with improvements in both community and household economic welfare, according to UNCDF. Finally, the positive impact of microfinancing continues to perpetuate itself as many microfinance institutions find that the successes and benefits of various programs relate closely to how long people have been utilizing such services.

As reported by the CGAP, data on the programs shows that, among the poor, those participating in microfinance programs who had access to financial services were able to improve their well-being—both at the individual and household level—much more than those who did not have access to financial services.

The CGAP reports, in Bangladesh, Grameen Bank members had incomes 43% higher than others in non-program villages. In El Salvador, the weekly income of clients who participated in FINCA, another microfinance program, increased on average by 145%. In India, half of SHARE clients graduated out of poverty. In Ghana, 80% of clients of Freedom from Hunger had secondary income, compared to 50% for non-clients. In Lombok, Indonesia, the average income of Bank Rakyat Indonesia borrowers increased by 112%, and 90% of households graduated out of poverty. In Vietnam, Save the Children clients greatly reduced food deficits.

Clearly, as demonstrated by the data from CGAP, microfinance is incredibly successful in all areas throughout the world and could be an invaluable tool for the overcoming and prevention of poverty within the United States, as well as the rest of the world. However, microfinance isn’t the only solution. Many institutions still emphasize that access to financial services is a step in the right direction, however, it’s only one small help in a much larger, global problem.

To find a microfinance organization to work with or to learn more about microfinance, visit MicrofinanceGateway.org and MixMarket.org.