Thursday, November 21, 2013

Microfinance 101

What is microfinance? The answer is never simple or concrete. As an economic development student I've studied many theories behind microfinance, worked with a student-run microfinance institution, La Ceiba, and am currently working at a micro-lending institution. I've wanted to write this post for many weeks now but I never know where to begin. With so many different theories and ideas of microfinance out there how do I write about it in layman's terms in less than 500 words?

Well, here is what I came up with and I hope it provides insight into my passion and what I’m doing. Please realize there is much more information and resources available if you want to learn more. This is only a brief introduction.

Me interviewing a potential microfinance client

Many of you have heard the statistic that 1.1 billion people live on less than $1 a day. When I first heard that statistic years ago, I imagined a poor person being handed $1 every day. That’s not the case. Income of the poor is highly unpredictable and uncertain. They could receive $20 one day, $5 the next, and $0 for the following week. With such vulnerability and uncertainty how do the poor budget for short term needs such as sickness, food, and emergencies or long term needs such as children’s education, housing, and starting a business for the future?

That’s where microfinance comes in. “Microfinance is the supply of loans, savings, and other basic financial services to the poor.” ( Microfinance Institutions (MFIs) serve the poorest of the poor. Without access to formal institutions such as banks, the poor sometimes have to turn to borrowing from neighbors, family members, or loan sharks who charge high interest rates. MFIs provide a safe, reliable alternative with lower interest rates.

The founding of microfinance is credited to Dr. Muhammad Yunus, the “Banker to the Poor.” He formed Grameen Bank in Bangladesh, which now has branches all over the world including Grameen America. MFIs focus on giving small loans to women entrepreneurs specifically. While there are MFIs who do loan to men, the majority of clients are women. Research has found women are more likely to invest in the family, household and their business. By putting the money in the woman’s hands has empowered her to make her own decisions about how to bring herself and her family out of poverty.

No matter how many success stories you hear about microfinance from Kiva, Opportunity International, Grameen or other MFIs, it is not a silver bullet. It does not reach all the poorest of the poor especially those in the most remote areas. Not all are able to pay back their loans. There are many factors - government regulation, education and health services - that go into breaking the cycle of poverty. While it’s a step in the right direction, microfinance needs to partner with social enterprises that are creating innovative technology and businesses to revolutionize the fight against global poverty.

Just because there is no one simple solution, doesn’t mean we should ever give up on helping bring those billions who are living on $1 a day out of poverty.

If you would like to find out more, check out the list of resources below: 

I also have to give a shout out to some inspiring twenty-somethings who are behind Living on One. I had the opportunity to meet these brilliant minds last year. After spending 56 days in rural Guatemala to experience firsthand what it's like to live on $1 a day, they've made an amazing documentary! They've traveled across the country inspiring people to be a part of the fight against global poverty. The documentary is now available on DVD! Watch the trailer below:

Thanks for reading!

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