PHIL 2050-006
4/21/2011

MicroFinance

Microfinancing is a system that provides small loans to some of the poorest communities in underdeveloped countries all over the world. The ultimate goal of microfinancing is to help the poor pull themselves out of poverty. In America, people typically use loan money to increase their assets. These assets could consist of a starting a business or making an investment with the expectation of gaining a return; they do not typically use the money to purchase the basic necessities of life. However, in underdeveloped countries, residents take out loans through the concept of microfinancing to get through their everyday life. My thesis states that there is a common misconception that Microfinancing Institutions (MFIs) only loan money to poor people in order for them to start a micro enterprise (also known as a small business). With this misconception, people do not acknowledge the fact that they live a significantly different lifestyle than those in underdeveloped countries. In this paper, I argue that despite the lack of increased income that an investment may bring, (to someone in a developed country), microfinance is very beneficial to the poor by providing the ability to maintain financial stability. MFI’s are beneficial to those in underdeveloped countries in three ways: maintaining basic needs, paying for health and family emergencies, and empowering women. A major problem in understanding the financial impact of these MFIs is that the ‘benefits’ are extremely difficult to measure. The problem may lie in ones perspective of how the poor live and use the loaned money in these countries. Most people, when thinking of microfinancing, think of it as a way to raise poor people’s income and consumption levels through microenterprises. People believe that because loans are used to start businesses in their native country, that is what should be happening in underdeveloped countries as well. However, microfinancing does not necessarily raise a person’s income and consumption abilities; it simply helps them supply their family with the basic necessities of life in order for them to survive. “An estimate of 100-200 million poor people are receiving microfinanced loans from thousands of microfinancial intuitions (MFIs)”. (Brau, 16-3). It is with this number that I make my argument that not all of these people are able to start businesses from the ground up. People in these countries must be able to survive before they can grow into a microenterprise. It is with sustainability in mind that we are able to see the benefits that do not always involve microenterprising. First, MFIs help the poor maintain a basic standard of living, although much simpler than that of a developed country, (such as America), that gives them the opportunity to eat daily. Unlike developed countries, there is not a regular income (or a regular job to provide an income) coming in every few weeks to pay for the family or individual’s financial needs. As a result, the poor must constantly be borrowing, saving, and working extra hours/jobs in order to meet their minimal financial and consumption needs. Without MFIs there is uncertainty as to how these people will pay for their next meal. The poor have used many informal ways to save and loan money before microfinancing was available. In regards to finances, the poor would rely on family, friends, and local money lenders. In addition to this the poor also raised livestock and grew crops to feed their family. The problem with these resources is they are not always reliable. For example, you might loan money to a friend to help feed his family and two weeks later you need the money back to feed your own family. Unfortunately when the time comes for your friend to repay his debt he does not have the money to pay you back. This creates an unstable society full of resentment towards ones friends or family. In addition to this, livestock and crops can also be unreliable. For example: if your livestock gets a disease that is not curable or drought may occur that year and the majority of your crops do not grow. This could create a devastating situation for the poor where they are left with very little to survive on. In these situations Microfinancing becomes great tool for the poor because it is a reliable source to loan and save money for basic needs. In developed countries, such as America, young people are encouraged to get an education or develop some type of skill in order to be able to sustain their future life (with or without a family). Paralleled to this, in underdeveloped countries, the families have no way to pay for school and so there is little hope for future success in the area of fulfilling financial needs. Microcredits aid families in paying for their children’s education that will significantly benefit both the individual (and his or her family) in the future. With an education, that person is able to get a job to pay the microcredit back and also save money for the future. Second, MFI’s help the poor pay for unexpected family emergencies. These emergencies could consist of payment for health care (for treatment of diseases) or the need to pay for a funeral of someone who has already suffered from the lack of health care and died. There is a large difference between the medical needs in undeveloped countries and our medical needs in America. There are so many diseases in underdeveloped countries that are not contained and spread freely without knowledge of the residents of that area. The poor may never know when they might get sick or need to pay for immediate medical attention. Microfinance is also used to help pay for the treatment of any health issues that might occur. In regards to the funerals, there is a stark difference between America and these less fortunate countries. In America, it is close to $500 for the flowers and anywhere from $900 to $2,200 for a casket from Costco. Although in underdeveloped countries the flowers are not a necessity, at times, they may not even have the luxury of burying their family member in a casket. It is with the help of MFI’s that families are able to give their family member a proper burial. One might argue that in an underdeveloped country the need for a casket is non-existent, but in a culture where the dead are honored at their burial, it is considered it a necessity. Lastly, MFI’s have great social impacts when loans are made to women. In a society that treats women as the ‘lesser’ sex, microcredit gives these women the opportunity to sustain themselves and/or their families when their situation is less than ideal. When MFI’s lend to the poor they focus the majority of their loans toward women. Dr. Mohammad Yunus, a professor of economics at Chittagong University in the 1970’s is credited to be the first to experiment with microfinancing. His first experiment was in the village of Jobra, Bangladesh were he loaned money to poor women. Because of the impact that it had on these women who borrowed money Dr Yunus Later founded the Grameen bank in 1983 this was the start of Micro Financing institutions (MFI’s) and won the Nobel Peace Prize in 2006. The “Grameen Bank lends 95-100% of their loans toward women” (principles of financing 16-5) due to the fact that women invest their money into their family and if possible into the development of a business. Whereas men do not invest the money they are loaned rather they consume it through other means, mostly on material items that do not benefit their family. Another major reason why MFI’s focus their loans toward women is the belief that it will help to empower them in women societies that otherwise degrade them. Although many people argue that MFI’s do not always bring a substantial increase in finances to the poor. However, they are still very beneficial to the poor through helping them supply for their basic needs, paying for health and family emergencies, and empowering women. Therefore we see that the people in these underdeveloped countries immensely benefit from these microcredits. The hope is that someday the poor who are not financially stable will become financially stable through microcredit. In addition to this be able to invest in a micro enterprise and become self-sufficient.

Works Cited
Brau, James. "Microfinance." Principles of Finance: Intuition and Analysis 5th Edition. Provo: BYU Academic Publishing , 2011. 16-1 thru 16-8. Print.
"Does Microfinances Help Poor People?." CGAP. N.p., n.d. Web. 13 Apr. 2011. . participation, supporting women's economic, thus promoting gender-equity, and improving household well-being;. "Kiva - About Microfinance." Kiva - Loans that change lives. N.p., n.d. Web. 13 Apr. 2011. .