Could Microfinance Be the End of Poverty?
Lending money to a small business or individual that may or may not be able to repay the debt can be complex and lead to banks having to make difficult decisions. Lenders are known for acting with caution and avoiding a risky investment, yet millions of people worldwide are gaining access to capital. These small corporations or family owned start-ups are using microfinance institutions to supply them with the necessary loans they need for various business or personal expenses. The ability of these applicants, who otherwise would have never been approved, to gain the funding through microcredit loans has had a remarkable impact globally. Heads are turned, and many ask the question “Could microfinance be the solution to help end poverty?”
Historically, many businesses have faced difficulty with applying for a loan. Bankers are renowned for requiring a huge amount of paperwork and proof of income, insurance, etc. This can be a time consuming and stressful process. Some investors expect that the company asking for the loan will be unable to provide the documents that are required and therefore will be denied. While lenders are able to adjust such details as interest rates and length terms for their own benefit, they are hesitant to take an applicant that will put the repayment at risk.
The economic shifts have had an impact on the lives of people worldwide. Small companies are unable to support the cost of staying open and many eventually go out of business. It is quite expensive in this current time to keep the lights on, much less pay employees a fair wage and provide benefits. It takes money to make money. The problem is, many people do not have access to money.
The microfinance movement began with the work of Dr. Muhammad Yunus in Bangladesh in the late 1970s, spreading rapidly to other developing countries. Most early microfinance institutions (MFIs), including Yunus’s own iconic Grameen Bank, relied on funding from government and international donors, justified by MFI claims that they were reducing poverty, unemployment, and deprivation. However, the environment changed when it gaining political and economic recognition and the new expanding ideology put emphasis on self sustainability. This concept meant that companies would have to wean themselves away from accepting donations. It was felt that the poor should pay the full cost of any support received, rather than impose an additional tax burden on others.
This led to a push for microfinance institutions to cover their own costs through greater commercialization, private-ownership, and profit-driven incentives with market-based interest rates. This was to help ensure a cost-free path to generate a steady supply of microfinance to the poor. This proved to some extent to be correct. By the early 2000s, a number of developing countries – such as Bangladesh – had achieved the microfinance movement’s “holy grail”: virtually every poor person had easy access to a microloan if they wanted one. With so many of the poor able to establish or expand simple income-generating projects, there were hopes that poor communities the world over would soon escape poverty on an unprecedented scale (Bennett).
The historical performance of microfinance institutions has been generally excellent (average solvency rate are higher than 90 percent) but heterogeneous depending on: i) the different capacity of local microfinance institutions in monitoring groups of lenders, ii) differences in competitive and geographic scenarios which may affect alternative credit choices and the incentive to repay, iii) different levels of “peer pressure” and “social capital” which fix the amount of social sanctions and the level of deterrence for borrowers violating their debt obligations. Microfinance offers, additionally, the key benefit that it would help to detach the poor from local loan sharks charging higher interest rates – a claim made by Muhammad Yunus when promoting microfinance to international donors. In fact, by conferring social legitimacy upon microfinance, rather than loan sharks, the stage was set for the poor to become open to the idea of going into debt (Bennett).
There are now many opportunities available to the poor communities all around the world that make it possible to start and maintain a company or even a project. By basing the philosophy of microlending on offering small loans, the access is granted to more people, even those with no assets. The empowerment of women is also a focus for many microfinance institutions. Women are statistically less likely to default on their loans than men. Therefore, these loans help women with financing projects and planning new ideas. Families are given new avenues and offered opportunities that they would not have been able to obtain.
Microfinance has had a positive impact on the overall lives of the people in poor countries every day. By helping to create a more stable and driven society, the individuals who eat, sleep, and play in these locations now have more available to them. For example, by funding the projects of a family who wishes to build a grocery store, the community is able to gain access to fresher foods and cleaner water. Jobs are created by having a need to hire staff to help build and maintain the projects. Many positive and life changing events are made possible because of the availability to capital using microcredit.
Even with the changing economy, it is a relief to know that the people who need money to live and to work can get it. Through microfinance institutions, new and precious opportunities are granted to poor and down on their luck individuals. These people, who want desperately to earn a living and create their dreams, are able to build a future. So many lives are impacted, whether or not they are even aware of the concept of microlending. It touches countries worldwide and is one of the most influential advancements of our generation. Having an open mind to approving a risky applicant can do more than give money, it can offer peace of mind and hope to that person. Hope that though times are hard, there are still ways to make dreams possible.
My early life was spent in my father’s office and listening to him on the phone discussing finance. He is a small business owner and because of the experiences I gained through working for him and spending time going through his investment paperwork, I have come to appreciate financial management.
Works Cited
Bennett, Drake. "Small Change Does Microlending Actually Fight Poverty." Boston.com. The New York Times, 20 Sept. 2009. Web. 30 Apr. 2014. <http://www.boston.com/bostonglobe/ideas
"Microfinance: a little goes a long way." Six benefits of microfinance. N.p., n.d. Web. 30 Apr. 2014. <http://plancanada.ca/microfinance-benefits>.
"What Does Microborrower Behavior Tell Us About Impact?." CGAP. N.p., n.d. Web. 30 Apr. 2014. <http://www.cgap.org/blog/what-does-microborrower-behavior-tell-us-about-impact>.