|
Microfinance involves the provision of very small or “micro” loans and
other financial services to the world’s poor. Viewed by many as having
great potential to alleviate poverty worldwide, microfinance is based
on the principle that the greatest weapon against poverty is the poor
themselves. Microfinance is not about handouts. It involves providing
credit and other financial services to poor entrepreneurs so that they
can work their own way out of poverty, thereby creating self-esteem
rather than dependence. Microfinance leverages the energy, passion and
entrepreneurial spirit of the poor to allow them to help themselves
and their families.
Poverty in the Developing World
Three billion people — half the world’s population — live on less than
$2 per day, unable to meet their basic human needs. A subset,
approximately 1.2 billion people, or 240 million families, live in
“absolute poverty”, on less than the equivalent of US $1 per day.
Malnutrition, lack of health care, substandard housing and illiteracy
breed desperation, disease and daily suffering. Poverty traps future
generations in a vicious cycle without hope or opportunity. In an
increasingly globalized world, no one is immune to these problems.
Most of the world’s poor are self-employed. Each day, without the
security of formal jobs, they eke out livings, whether it is by
raising chickens, selling produce in markets or weaving baskets.
Despite working from dawn to dusk, there is no money left over to
improve their quality of life or expand their businesses. All they
earn goes toward basic survival.
Focusing on income-producing solutions for the working poor is a
powerful way to alleviate the pain of poverty for an entire family.
Historical Perspective
Over thirty years ago, social innovators in developing countries
realized that providing credit to the poor, who do not have
collateral, are typically not literate, and are living in rural areas
where banks seldom exist, would revolutionize the struggle to lift
families out of poverty. Initially, governments, multilateral
organizations and non-profit organizations began to experiment with
credit programs for the poor. Based on the success of the
“microcredit” programs, the first microfinance institutions (MFIs)
were set up in the 1970s to lend money at fair market interest rates
to poor people who could offer no collateral. Not only did the
borrowers expand their businesses and increase their incomes, but
their high repayment rates demonstrated that the working poor are
capable of transforming their own lives given the chance. This model
of lending disproved all conventional thinking. Microfinance was born.
Though most MFIs were originally organized as non-profit or
non-governmental organizations, some began to transform into
for-profit entities or regulated financial institutions. Today, MFIs
serve over 80 million poor clients in developing countries, of whom 55
million live on less than $1 a day.
How Microfinance Works
Microfinance products such as savings accounts, microcredit loans
(usually $50 to $150), and health insurance empower the poor to lift
themselves out of poverty. Through microfinance, they can secure
better nutrition, education, healthcare and housing for their
families. Microfinance has helped millions in developing countries
raise their standards of living and protect themselves from economic
setbacks. The tragedy is that the vast majority of the world’s poorest
people still lack access to these basic financial services.
Many microfinance institutions (MFIs) utilize social collateral in the
form of peer groups to ensure loan repayment. Borrowers take out loans
in groups of five to eight individuals. If a borrower defaults on her
loan, the entire group typically is penalized and sometimes barred
altogether from taking further loans. This peer pressure encourages
borrowers to repay loans in full and on time, resulting in the higher
than 95 percent repayment rates among well run programs. Among the few
who default, the most common reason is an illness in the family, which
disrupts their lives, rendering them unable to continue their business
and repay their loans. The second most frequent reason is natural
disaster or unanticipated crisis.
Microcredit loan cycles are usually shorter than traditional
commercial loans – typically six months to a year with payments plus
interest, due weekly. Shorter loan cycles and weekly payments help the
borrowers stay current and not become overwhelmed by large payments.
Clearly the transaction-intense nature of weekly payment collections,
often in rural areas, is more expensive than running a bank branch
that provides large loans to economically secure borrowers in a
metropolitan area. As a result, MFIs must charge interest rates that
may sound high – often 30 percent to 70 percent annually - in order to
cover their costs. These interest rates are still significantly lower
than the 300 percent to 3,000 percent annual rates the borrowers were
previously paying money lenders and are typical of the local credit
card interest rates.
Uses of MFI Loans
Borrowers tend to use funds for basic industries such as agribusiness
(e.g. buying a cow or chicken); cottage industry (e.g. basket
weaving); basic services (e.g. opening a hair salon); or commerce
(e.g. opening a small store). Funds from micro-loans are used as an
initial investment or working capital for the microenterprise. Two
examples help illustrate typical entrepreneurs who borrow from MFIs:
1. For a woman living in rural villages, a trip to the market for
necessities can be a major undertaking. She must walk several miles to
the bus, go into a city, buy her products and carry them home. This
often takes a half day or more. A microfinance entrepreneur can use
her loan to buy inventory and set up a local village store: now all of
the villagers benefit because they can buy products locally.
2. Pasteurized cheese commands twice the price of unpasteurized
cheese. A woman making cheese for a living can use her microfinance
loan to buy a $35 thermometer. With a thermometer she can pasteurize
her cheese and double her profits.
As the microenterprise is often the largest source of income and
employment for a poor family, the ability to borrow at a better
interest rate than that offered by money-lenders allows the
entrepreneur to generate greater profit to invest in her family and
business.
Impact on Women
Of the 55 million poorest clients serviced by MFIs today, 83% are
women. MFIs generally lend primarily to women for many reasons. Men
often have access to other work, whether a steady job or
migrant/seasonal labor. More importantly, many MFIs have found that
women are more likely to repay their loans on time, and that women
tend to use the profits from their entrepreneurial ventures to support
of their families by securing healthcare, food, clothing, education
and housing.
It is also important to understand that the women of the world
represent a vastly disproportionate percentage of the world’s poorest
individuals. In most families in these countries, the men eat first,
the children eat next, and the women eat whatever is left. In many
countries women are treated as second class citizens. Women are often
not allowed to handle money, or leave the house without a male escort.
The social impacts of microfinance on women are significant. Many find
themselves for the first time earning more money than their husbands,
which allows the women a level of equality within the family and
community previously unavailable to them. Giving women a chance to be
entrepreneurs creates a powerful catalyst towards greater social
equality. Studies show poor women who secure micro-loans experience
significantly lower domestic violence rates.
Impact of Microfinance
It is difficult to quantify the success of microfinance and its impact
on people’s lives. Studies have shown that among the poorest in
Bangladesh, those with credit from MFIs have a higher likelihood of
rising above the poverty line than those without access to credit.
Studies also show that households involved with microfinance are able
to provide their families with improved nutrition, to afford solid
roofs over their heads, and to allow children to attend school. Loan
officers holding weekly borrower meetings provide information about
healthcare, family planning, and self esteem in addition to
entrepreneurship training.
The microfinance industry is having a powerful impact on the lives of
those living in poverty. In addition to helping families emerge from
poverty, it is helping them reach balance in gender equality, garner
better education for themselves and their children, and move towards a
better life for the next generation.
|
