Inflammation and stories on Microfinance

Microfinance in Mexico
Microfinance is a form of banking that provides financial support to those who would not normally have access to conventional types of financial services, due to reasons such as unemployment and poverty. Microfinance also provides access to important financial tools such as insurance, funds and savings. According to a 2016 research article by Subhabrata Bobby Banerjee and others, microfinance “aims to alleviate poverty by providing the poor new opportunities for entrepreneurship. It also aims to promote empowerment (especially among women) while enhancing social capital in poor communities.” Although microfinancing has also led to negative outcomes for communities, when implemented responsibly, microfinance has significant poverty reduction potential. In particular, microfinance in Mexico has the potential to empower women and reduce gender inequality.

Microfinance in Mexico

As it stands, Mexico falls behind in relation to financial inclusion. In Mexico, only 37% of adult citizens have bank accounts and only 32% have engaged in digital payment transactions. Access to a bank account provides individuals with the opportunity to use microfinance services. The World Bank outlines how Mexico’s current microfinance system is lagging behind countries at a similar level of development: “credit to the private nonfinancial sector was just 42% of GDP, far below the 143% average for emerging markets worldwide” in 2019.

Poverty and Gender Inequality in Mexico

According to the World Bank, almost 42% of people in Mexico lived under the national poverty line in 2018, equating to 52.4 million people. In some areas of Mexico, poverty is significantly high — in 2018, Chiapas, home to large numbers of Indigenous people, noted a poverty rate of almost 80%.

Gender equality also plays a role in poverty. Unemployment rates for women in Mexico are greater than those of men and pay for the same work is on average 22% less for women than men, according to a 2018 article by The Conversation.

Microfinance in Mexico can reduce poverty among women by providing the financial support required to decrease the gender inequality gap. Providing more access to microfinance for women and educating women on how to use microfinance most effectively is important. For example, a survey utilizing a hypothetical microcredit situation found that Mexican women would only invest about 6% of the money received through microfinance. To promote long-term growth in Mexico, this investment rate would need to increase considerably. This highlights the importance of providing more financial education.

Mexico’s Urban-Rural Divide

Poverty in Mexico is amplified by the government’s poor provision of infrastructure and education. This has resulted in a large urban-rural inequality gap in education and wealth, especially for women in these rural areas.

There is an 8% difference in access to bank accounts by men and women in Mexico. This exacerbates the gender inequality gap as men have higher rates of access to financial institutions than women do. On top of this, 90% of the credit goes to urban areas despite more than 20% of adult Mexicans residing in rural parts of Mexico. Without aiming for financial inclusion among marginalized groups, these new financial institutions may exacerbate poverty in Mexico.

How Microcredit Can Help

Banco Compartamos is leading the way in expanding microfinance in Mexico. More importantly, Banco Compartamos is making its financial services accessible to all regions and populations, including low-income groups and women. Women account for as much as 88% of the institute’s clients in Mexico. Banco Compartamos empowers women with the financial tools necessary to achieve financial independence and explore female entrepreneurship opportunities. Not only does Banco Compartamos strive for financial inclusion but it also promotes financial literacy through initiatives to empower communities to make better financial decisions.

Banco Compartamos currently has 180 branches in 29 Mexican states. This demonstrates the bank’s goal of being accessible to all in Mexico. The institution noted 2.6 million clients in Mexico by July 2020.

To accelerate the financial inclusion of marginalized populations, such as women and people in rural areas, the Mexican government launched the 2020–2024 National Financial Inclusion Policy (PNIF). One of the goals of this policy is for 77% of Mexican adults to have “at least one financial product” by 2024 and for more than 90% of Mexican municipalities to have “at least one financial access point” by 2024, the World Bank reported.

By expanding access to microfinance in Mexico, marginalized groups, such as women, can access financial resources to help them rise out of poverty. In turn, this will reduce the gender inequality gap and help expand the Mexican economy through the economic contributions of women in the form of entrepreneurship, increased consumption rates and more.

– Reuben Cochrane
Photo: Flickr

Step-by-Step ProgramIn the battle against poverty, health care stands as an important factor in improving the lives of individuals. One aspect of health that people often overlook due to the precedence of immediate needs, lack of resources or social stigma is mental health. With the onset of the COVID-19 pandemic, which forced society to increasingly interact virtually, and unstable situations in countries where long-term access to trained professionals may not be an option, communities welcome a virtual service that offers mental health support. The program called Step-by-Step is making a difference to mental health in Lebanon.

Step-by-Step Program

In recent years, the World Health Organization (WHO) has prioritized mental health services. It extended its Mental Health Action Plan (2013-2020) to the year 2030  in hopes to increase coverage and services related to mental health.

The WHO created Step-by-Step in 2015 with numerous partners such as the Ministry of Public Health Lebanon and Fondation d’Harcourt. The program serves Lebanon, particularly Syrian refugees.

The goal of the program is to address disparities in treatments in low and middle-income countries. A virtual option for seeking mental health support offers a private self-guided space without societal judgment and potentially reaches larger groups in areas with internet connection but no professional treatment facilities.

A program called the WHO’s Problem Management Plus preceded the current version of Step-by-Step. This initial system targeted a range of mental health issues and provided treatment using a facilitator. The current Step-by-Step program utilized the feedback from the Problem Management Plus program. Step-by-Step now mainly targets depression and focuses on simple, adaptive “behavioral activation” as a means of treatment.

Mental Health in Lebanon

The Step-by-Step program began in Lebanon where there remains a high disparity in accessing and receiving mental health treatment. The disparity is due to a lack of resources, a high influx of refugees and social stigma. Lebanon is a Middle Eastern country located along the coast near the Mediterranean Sea. It borders Syria and Israel, and therefore, sees a large influx of Syrian refugees. The WHO hopes to address problems with mental health in Lebanon through the new digital model that is customized for the various groups in Lebanon.

The WHO and partners completed two randomized control trials with the Lebanese population and Syrian refugees, respectively, and found successful outcomes for addressing mental health issues. After the completion of the trial, the WHO partners continued to provide the service to the larger population of Lebanon in order to gather more data before implementing the program elsewhere.

Current Challenges

In the past, Lebanon experienced political and economic hardships and the onset of the COVID-19 pandemic worsened the situation. The Beirut explosion in August 2020 also exacerbated issues related to health and mental health in Lebanon. Currently, due to the combined effect of these problems, there is a shortage of medicines to treat mental health disorders. Due to the lack of supply, medication grew increasingly expensive in recent years. As 74% of Lebanon faces poverty, according to U.N. data from September 2021, the limits to access to treatments for physical and mental health in Lebanon are progressively more worrying.

Similarly, due to the proximity to Syria, the refugee crisis significantly impacts Lebanon, bringing in many refugees that also need access to mental health services in Lebanon. Internal events within Syria resulted in 13.4 million Syrians facing displacement, and inevitably, the traumas associated with the violence of the country. Prior research studies indicate higher risks for mental disorders among refugees, especially women and children. Estimates from the beginning of the Syrian crisis indicate that more than 2 million people in Syria struggled with depression and anxiety.

Step-by-Step for Syrian Refugees

The WHO and partners completed the Syrian randomized control trial in the initial research of Step-by-Step in December 2020, with positive results that mirrored the trials of the Lebanese civilians. Out of the 569 Syrian adult participants in the trial, women accounted for 58.3% of these participants, a notable factor considering the prior knowledge of the effects of mental health on women and children.

Participants accessed the program using mobile devices or web browsers. The Step-by-Step program consists of “[five] illustrated story sessions with audio recordings of the text to support accessibility” and recommendations of various practices to adopt in response to mental health struggles. Individuals who utilized the program noted “improvements in symptoms of anxiety, post-traumatic stress, well-being and personal problems, with all improvements maintained at 3-month follow-up,” says the WHO.

Given the ongoing hardships that Syrians experience and the medication shortage in Lebanon, Step-by-Step has the potential to advance mental health in Lebanon. The WHO and its partners continue to implement the program within Lebanon with the hope of eventually expanding the program to other countries that cater to specific populations. Upon successful expansion, the program will begin to address the mental health treatment gap in low and middle-income countries.

– Kaylee Messick
Photo: Flickr


In the past decade, microfinance has soared as a strategy to alleviate poverty. BRAC International, one of the world’s largest nongovernmental organizations, supports microfinancing in seven countries in Africa and Asia. Importantly, BRAC’s microfinance program supports people to engage in financial activity to overcome poverty.

Microfinancing

Microfinance is a financial practice that lends small sums to people with few means to support their small businesses. The goal is for small businesses to earn a profit and then pay back the loan. The microfinance institution then loans the capital out again. Through this cycle, people are able to rise out of poverty. Microfinancing frames poverty as the deprivation of the ability to participate in economic and political processes. By that logic, if people can obtain microloans, these individuals will engage in financial activity and overcome poverty.

Studies have only found limited evidence of the efficacy of microfinancing at eradicating poverty. However, the practice is far from a failure. Specifically, the capital lent to the impoverished provides stability in their lives, easing the day-to-day anxiety about monetary shortages. In addition, studies have found that people who take out microloans are motivated to invest more time into their businesses. Though not miraculously transformative, microfinancing has achieved overall positive results in reducing poverty.

BRAC Programs

Sir Fazle Hasan Abed founded BRAC in 1972 to help refugees from the Bangladesh Liberation War. Since then, BRAC has created eight programs to empower people suffering from poverty, social injustice, illiteracy and disease. Microfinance is one of the eight programs of the organization. BRAC believes that the financial inclusion of impoverished people and communities is an essential step toward ending poverty.

More than 660,000 people benefit from BRAC’s microfinance program, which operates in Bangladesh, Myanmar, Tanzania, Uganda, Rwanda, Sierra Leone and Liberia. Along with loans, BRAC also provides financial literacy training to the borrowers. This teaches borrowers to be responsible with money and make better financial decisions. In addition to microfinance services, the organization also provides communities with programs like agriculture classes, youth education and health care. When paired with these programs, microfinance has an even greater impact on communities.

BRAC’s Focus on Women

More than 96% of BRAC’s borrowers are women. One female entrepreneur, Kadiatu Conteh from Sierra Leone, exemplifies how BRAC impacts its beneficiaries. Conteh’s sister introduced her to BRAC. At the time, Conteh’s family was struggling to make ends meet and she was trying to earn money by selling drinks with only a cooler. Conteh took out a loan and invested the money in more beverages for her business. Slowly, she increased her profits. After four years with BRAC, she accumulated enough funds to invest in her own store where she now sells household items.

Selina Karoli Fissoo also benefited from BRAC’s microfinance program. With other women in the city of Arusha, Tanzania, Fissoo formed a microfinance group to receive loans and financial literacy training from BRAC. She invested her first loan into her small grocery business, and as her profits increased, she applied for larger loans. After more than 10 years of working with BRAC, Fissoo has a large retail store and even dabbles in poultry farming.

The Benefits of Microfinance to Alleviate Poverty

Conteh and Fissoo are just two of hundreds of thousands of entrepreneurs who have prospered from the help of BRAC’s microfinance programs. Microloans provide stability in the lives of the impoverished and can motivate people to invest more time into their businesses. Especially when coupled with other programs, microfinance is an effective method for alleviating poverty.

– Alison Ding
Photo: Wikimedia Commons

Sustainable Farming Techniques
AmazonPasto, an app that the Instituto Ouro Verde built, will bring sustainable farming techniques to rural farmers in the Amazon. The organization expects AmazonPasto to help Brazilian rural farmers increase their agricultural yield. The app also provides rural farmers access to economic development services. Importantly, AmazonPasta offers a concept for future innovations in global poverty reduction strategies.

What is the IOV?

The Instituto Ouro Verde (IOV), or Insitute of Green Gold, is a Brazilian non-governmental organization (NGO) fighting rural poverty with innovative solutions. Launched in 1999, the IOV operates within eight different municipalities across Brazil. Working to build a more resilient Brazilian economy, the NGO connects small farmers to sustainable land restoration practices. Already, the IOV works with 1,200 small-scale farmers and has restored 2,700 hectares of pastoral land. Also, this land now produces $35,000 in agricultural products a year. By building stronger food production systems, the IOV hopes to promote social participation and fight poverty head-on.

Why Focus on Small Farmers?

Brazil is currently the fourth largest agricultural production economy in the world. Small-scale farming operations are the chief economic drivers. In fact, small-scale farms are responsible for 85% of all agricultural production and employ 75% of the total farm labor pool.

Operating in rural regions, the small-scale agricultural sector also has the highest wealth inequality within Brazil. This makes it a focal point of poverty reduction strategies. Poverty in Brazil has dramatically improved over the last three decades, dropping from 17.4% in 1990 to 4.2% in 2020. However, of the estimated 20 million people remaining in poverty, rural farming supports nearly half. For this reason, targeting rural farmers for economic development has become a key aspect of ending poverty in Brazil.

How is an App Going to Help?

The Brazilian NGO launched AmazonPasto as a way to expand rural reach. Researchers at the organization found that most farmers had access to a smartphone. Using this to their advantage, the Instituto Ouro Verde built AmazonPasto as a central hub for land restoration practices.

Within the app, farmers can build sustainable farming techniques by deciding what native trees they should plant and how to improve soil quality. They can also access troubleshooting practices. Farmers can also upload their ideas and share them with each other. The AmazonPasto has already created over 60 hectares of silvopastoral systems. These are areas where animals graze among the trees.  In turn, the silvopastoral systems produce both milk and crops. The Brazilian government can buy the milk and crops at a fixed price for use in schools and other institutions. The 60 hectares house 20,000 trees, and IOV hopes to increase the project by 150 hectares each year for the next six years.

By providing a source for both reliable income and food, the AmazonPasto app and the project have made a dramatic difference for the small-scale farmers. This is especially true for a number of farmers who were previously homeless.

Moving Forward

While the app currently only undergoes use for sustainable farming techniques, the IOV hopes to expand the utility of AmazonPasto to other development services. The organization has begun extending microcredit lines to rural farmers and small communities. As of 2021, the IOV has identified 21,000 properties that may benefit from their work. The institute predicts their combination of economic and ecological development strategies will reforest 3,000 hectares of protected land. Further, if all goes according to plan, the AmazonPasto app expects to help produce $7.9 million of agricultural yield.

Rural poverty deep in the Amazon may sound like a foreign affair, but an app successfully increasing accessibility for those in poverty has broad implications for the future of global poverty reduction.

– Aiden Marina Smith
Photo: Flickr

OpenTabs Browser ExtensionPeople are now able to help raise funds to provide loans to impoverished people all over the world through the OpenTabs browser extension. OpenTabs allows users to raise funds passively every time users open tabs in their browsers. Microfinancing proves to be an effective tool to reduce poverty, helping 139.9 million people in 2018 alone through loans and insurances. In particular, microfinance has a lot to offer low-income countries as 1.7 billion people worldwide remain unbanked, according to the World Bank’s Global Findex database.

Barriers to Financing

Every day, financial institutions reject the loan applications of thousands of low-income people looking to escape the poverty trap and start their own businesses as these populations are labeled high-risk and high-cost customers. Crowdfunding loans offered by international nonprofit organizations such as Kiva are often the only means low-income people can afford to help them launch their businesses. Inspired by the impact that microloans have in combating poverty and hoping to make lending easier, 20-year-old Umberto Greco and his colleague Matheus Paro created OpenTabs.

The Story Behind OpenTabs

Umberto Greco told The Borgen Project that on a mission to make crowdfunding loans “affordable and convenient” for lenders in 2019, Greco and Paro created a free web browser extension that allows users to raise funds to provide microloans to people all over the world. Established as a nonprofit organization, OpenTabs allows its users to “passively raise funds” simply by adding the OpenTabs extension to their browsers. By replacing users’ tabbing pages with paid advertising banners, OpenTabs was able to provide more than 107 microloans in more than 18 different countries since its founding in 2019.

How OpenTabs Works

The 2019 award-winning startup, OpenTabs, generates revenue to provide microloans by placing non-intrusive advertisements on the corner of each tab users open. OpenTabs can raise on average one-tenth of a penny for every tab that OpenTabs users open at no cost to users. OpenTabs can transfer all the funds raised through advertisements and turn the advertisements into microloans by using universal nonprofit microfinancing platforms such as Kiva.

After a borrower pays the loan back, usually between 8 and 18 months later, the same funds go towards providing loans to new people. In addition to providing opportunities for underprivileged people by simply opening tabs on a browser, people who add the extension also help save trees. By partnering with Rainforest Trust, a nonprofit environmental organization, OpenTabs will help users protect one tree for every 10 tabs users open. Since its partnership with Rainforest Trust, OpenTabs browser extension has allowed users to save 453,265 trees.

OpenTabs browser extension aids people with busy schedules in helping to provide thousands of impoverished people with the opportunity to start their own businesses. Providing people with the opportunity to start their own businesses and provide for their families allows impoverished people to obtain a steady income. The income helps by improving their living standards and contributing to the local economy and national productivity. Yet, what truly makes the extension effective is its ability to grant financing at no cost for users. Users who would like to join the fight against poverty while lacking the funds to do it can now participate in fundraising by allowing companies to do the funding in exchange for non-intrusive advertising.

– Carolina Cadena
Photo: Flickr

Microfinance in CambodiaFinancial institutions, like banks, are vital for the creation, collection and management of a country’s currency. In Cambodia, the microfinance industry acts as a banking system for many people, with around 160,000 branches across Cambodia in 2016. Of the 10 million people in Cambodia, a little more than one in five people have taken out some sort of microloan. Average loans are more than twice as much as the country’s average yearly GDP per person. Microfinance in Cambodia has the potential to help people trying to survive the COVID-19 pandemic and avoid poverty, but it does not come without consequences.

The Microfinance Boom

In Cambodia, predatory loan sharks with exorbitant rates were the norm until microfinancing came into prominence. Microfinancing offered lower interest rates and shifted residents toward more formal money lending institutions. Microfinance institutions have allowed people to rise out of poverty because people are able to start businesses, fund their education and pay for emergency healthcare. The Cambodian Microfinance Association (CMA) sees a clear link between access to credit and reduced levels of poverty. The benefits of microfinance help Cambodia to develop and expand economically. For instance, for farmers who would typically be unable to access improved agricultural equipment, microfinance in Cambodia means sustaining a livelihood.

The Impact of COVID-19

The credit boom in Cambodia did not come without consequences. Firstly, the size of household debt exploded. The average microloan borrower in Cambodia has $3,800 worth of debt, the highest in the world. The IMF and the World Bank have warned that an improperly regulated microfinance industry can push Cambodians further into debt and further into poverty. In 2017, when the Cambodian government responded with policies to cap the interest rates, microfinance institutions, in turn, garnered more money through increased loan fees. Due to the poverty brought on by COVID-19, the debt crisis in Cambodia ballooned. The CMA reports that in March 2020, in response to the impacts of the pandemic, repayments were paused for about 25,000 people and roughly 25,000 loans were restructured to ease financial pressures.

The Outlook of Human Rights Watch

In spite of some debt relief procedures during COVID-19, many Cambodian families are still pushed to the brink of selling their homes and land in order to pay back debts. The Cambodian government received criticism for not doing enough to help indebted Cambodians. Human Rights Watch (HRW) recommended that Cambodia “urgently suspend debt collection and interest accruals for micro-loan borrowers who are no longer able to meet their debt payments due to the COVID-19 pandemic.”

According to Phil Robertson, deputy director of HRW’s Asia Division, “Many Cambodians fear losing their land more than catching the novel coronavirus because they can’t pay back their loans and the government has done little to help them.” When land collateral strips Cambodians of their homes, their ability to remain out of poverty is severely threatened. The poorly regulated microfinance industry in Cambodia risks becoming a catastrophe because of the lasting effects of the pandemic and little government action.

The Way Forward

Hun Sen, the prime minister of Cambodia, remains optimistic about the future of microfinancing in the country. In June 2020, Sen committed to dedicating about $25 million per month to help roughly 600,000 indebted and impoverished families in Cambodia. The National Bank of Cambodia has called upon lending institutions to restructure or defer loan repayments for those in economic struggles. The HRW feels more needs to be done and has provided guidelines in this regard combined with close monitoring of the situation.

– Alex Pinamang
Photo: Flickr

Microfinance in Zimbabwe
Imagine a Zimbabwean woman trying to run a very small chicken farm amid the rising inflation of Zimbabwe’s unstable economy. Prices are constantly shifting, making it harder to buy the chickens and feed she needs to keep her business afloat. Her name is Nyachi and she is constantly struggling to stay ahead of the rocky economic situation in Zimbabwe.

Partners Thrive Microfinance and Whole Planet Foundation provided her with a loan of $50, equivalent to 500 Zim. Nyachi was able to buy more chickens and feed, allowing her to remain open for business. With the boost from the loan, she can pay back the money and even take out another loan. Thrive Microfinance also provides courses in business and economics, so Nyachi can be more prepared to handle the complex financing of being an independent entrepreneur. She is an example of how microfinance in Zimbabwe can change the country. Her story is just one of many featured on Whole Planet Foundation’s website, illustrating hard times for many small business owners as well as stories of hope.

The Situation in Zimbabwe

Zimbabwe is currently experiencing an economic crisis. Recent natural disasters, the COVID-19 pandemic and poor economic and financial leadership contribute to the country’s current situation. High inflation rates and the rapid devaluation of the Zimbabwean Dollar plunged the population into poverty and food insecurity. In 2015, The World Bank estimated that around 72% of Zimbabweans lived in poverty. In 2019, it was reported that 50% of Zimbabweans were food insecure and 49% were living in extreme poverty.

More and more women in Zimbabwe are taking on small-scale entrepreneurial roles. However, the male-dominated traditions make it difficult for women to get the loans needed to start and run a business. Without a bank account or the proper collateral for a loan, female entrepreneurs have a challenging road to success. These low-income businesses often struggle to profit since, without loans to start or expand a business, it is often impossible to procure necessary equipment and workers. In Zimbabwe, 52% of the population is female, yet women earn only 10% of the country’s income. This disparity is why most organizations for microfinance (MFIs) in Zimbabwe and worldwide cater specifically to women.

Simple Solution but Complicated History

Microfinancing is not an especially new concept, but its history is complex. In 1997, the wild success of Grameen Bank in Bangladesh sparked global attention. Unfortunately, many MFIs popping up in the wake of that success failed to improve or even worsened situations in their countries. Low-income borrowers in India and Nigeria were victims of MFIs with ultra-high interest rates and other issues that made paying them back difficult or near impossible, especially for those who were not financially literate.

Zimbabwe faced similar challenges when introducing MFIs into the economy and still struggles with some of those issues today. However, with more NGOs and nonprofits becoming involved in microfinance in Zimbabwe, interest rates and other predatory lenders are more scarce. Additionally, with organizations like Thrive working to teach financial literacy to aspiring entrepreneurs, the likelihood of borrowers being taken advantage of is much lower.

Today’s Goals

In 2018, the non-banking financial institution Thrive Microfinance partnered with Business Call to Action, an alliance bringing together multiple governments to address the need for low-income business owners to have the ability to engage in their country’s economics more fully. This alliance aims to provide loans and business management training to 16,500 women and girls in Zimbabwe.

The global nonprofit Kiva uses donated funds to finance small loans. Once a loan is repaid, donors can either withdraw their funds or recycle them back into the revolving lending system. Kiva is currently able to crowdsource an average of $2.5 million in renewable funds every week, making for a total of $1.4 billion in loans given to date. Their mission is a financially inclusive world where everyone is capable of improving their situation.

Programs like these lend more than money. The satisfaction of running a business, the empowerment that comes from education and the security of financial stability lend hope for the future, a loan that never has to be repaid.

– Kari Millstein
Photo: Flickr

Microlending Model
The international development community has both praised and vilified microlending as a means of poverty alleviation. Although the microlending model is not the apodictic poverty solution that some once believed, research on its impacts has shown that one should not easily dismiss or affirm it.

The History of Microlending

The modern-day microlending model comes from the Grameen Bank model that Muhammad Yunus created. Yunus won the Nobel Prize in economics in 2006 for his microcredit operations.

While teaching at Chittagong University in Bangladesh, Yunus would visit the impoverished households in Jobra, a neighboring village. Yunus found that those suffering in poverty often could not gain access to even $1 in credit except under unfair terms.

Jonathan Wight, a professor of international economics at the University of Richmond, explained in an interview with The Borgen Project that this barrier to traditional credit markets often pushed the poor into borrowing on the black market or from payday lenders with astronomical interest rates.

Financial markets work through financial intermediaries that loan savings out to investors, such as banks. Investors is a loose term here – it could refer to someone taking out a loan to buy a car. To get access to credit, one must have collateral – assets to forfeit if the debtor becomes unable to pay off the loan.

The poor have little in the way of financial collateral making them unfit as borrowers in the eyes of traditional banks, so Yunus decided to create the Grameen Bank. This bank would require those in poverty to join the bank in self-formed groups. The bank would then give the group a loan with no collateral requirement.

By lending to a group, Yunus capitalized on social capital relying on the groups’ links and relationships as a form of collateral: if one member of the group did not pay the loan back, they risked the loans of the entire group.

This microlending model became fad-like in its popularity in the economic development field. By the 1990s, it became the most highly lauded and generously funded poverty alleviation policy in the international development community.

Critiques of Microlending

In theory, microcredit should boost income-generating activities, but the industry has seen a move toward the support of consumption spending. Rodrigo Peláez, who worked at the BBVA Microfinance Foundation in Spain for six years, explained to The Borgen Project that a lot of harm can occur when MFIs support consumption rather than productivity. Instead of generating income, MFIs can end up making people poorer.

The intention of loans is for people to invest them so that their investment can fund the repayment. For example, when a person takes out a car loan, they are investing in that car with the expectation that they will gain a return. Buying that car may mean that they now have the ability to get a higher paying job in a city where they need to commute.

If a person were to instead spend that loan on a television, they would not get any returns on that expenditure. They would then have to pay back a loan principal that they could not pay before purchase, in addition to interest. This would make the person poorer than when they started out.

This phenomenon has deteriorated the efficacy of the microlending model as a development tool and has caused some to go as far as labeling it an “”anti-developmental” intervention.” Another critique is that even when microcredits create productive investment, the business activities those investments support are not sustainable development drivers nor are they geared toward poverty reduction.

Studies by Abhijit Banerjee and Esther Duflo, the 2019 Nobel Prize winners in economics, have found that microlending is not, in fact, a tool for creating transformative social or economic change in impoverished communities. Furthermore, in some cases, borrowers from MFIs end up saddled with too much debt having taken a loan without the income to sustain repayment or with the expectation of using the loan to create income. These borrowers then have to sell personal property or go further into debt to pay their loans.

Ben Blevins, the director of a developmental organization based in Latin America called the Highland Support Project, described first-hand accounts of exploitative microfinance to The Borgen Project. The microlending model, Blevins said, is a perpetuation of white settler colonialism policies. “The purpose of microlending is about a move to innocence for people in the Global North,” Blevins said. “It is also about extending and conditioning the entire world to the neoliberal model of debt servitude to the capital class.”

The Impact of Microlending

Some have believed that microcredit has numerous positive social, educational and economic outcomes, but empirical studies have shown mixed results. In a study by Banerjee with facilitation from Duflo, researchers found results suggesting that although microcredit does not necessarily lift communities from poverty, it can foster more freedom of choice and the capability for self-reliance. The study did not find sufficient evidence to support either the proponents of microcredit or the adversaries, although, this study and more targeted studies have shown the marginally positive impacts of microcredit in niche scenarios.

A 2019 working paper for the National Bureau of Economic Research, with authors Banerjee and Duflo, found that “For talented but low-wealth entrepreneurs, short-term access to credit can indeed facilitate escape from a poverty trap.” Meanwhile, a study published in 2019 found that Haitian women who received health education training as part of the microfinance loan program, “were over 50% more likely to use condoms, over 50% more likely to have a recent HIV test, and over 60% less likely to report recent STI symptoms.” The degree of positive impacts from the model seems to depend largely upon the MFI itself and its priorities.

Some MFIs will remain in a village for years nurturing human development through financial management or other training programs, Alejandro Cañadas, associate professor of economics at Mount St. Mary’s University, explained in an interview with The Borgen Project. These institutions aim to create financially savvy citizens, foster economic growth and break poverty traps.

“These microfinance organizations, they have a different way: they go, they train, they show. They bring the training and education, and then they give the money to see it in practice,” Cañadas said. “And then people use what they learn, and they make mistakes and they fix those mistakes.” However, Peláez noted that not all MFIs have a social impact in mind. A lot hinges on the management of the institution and whether that institution cares about its social responsibility and staying true to its mission of poverty alleviation.

There is a thin line to walk between productive and nonproductive loans in the finance sector in general, Peláez said, “But microfinance is much more dangerous because it’s vulnerable people we’re talking about.”

Concluding Thoughts

The microcredit industry has proven over time, with large scandals erupting across the industry, that it holds great potential for exploitative practices.

“We wouldn’t expect that any solution as big as this one ­– microlending – as momentous as this is going to be all beautiful, all perfect,” Wight said. “There are bad apples who get in there and say ‘Hey, this is a chance to make some money. I’m going to prey on the ignorance, lack of education of a poor person. I’m going to get them to sign some contract.’”

The microcredit poverty solution is not all bad or all good. It has proven to have some positive impacts, but there are large failings in this microlending model that people need to address if they are to continue to use it in any form of development work.

– Olivia du Bois
Photo: Flickr

Mobile BankingMicrofinance programs are a popular development tool that gives poor households loans and access to formal banking and other financial services so that they can generate income and market their enterprises. Others have questioned the true extent of the effectiveness of this bottom-up approach to development in actually reducing poverty in recent years. However, the rise in access to mobile banking in the developing world brings hope of a new generation of microfinance.

Microfinance as a Development and Poverty Reduction Policy

Mobile phones have been one of the fastest-growing devices in the developing world. International reports found that global mobile phone ownership is growing exponentially, especially among young people in emerging economies. Although ownership is higher in developed economies, a median of 45% of people in developing countries now owns a cell phone compared to only about 25% 10 years ago. The new groups of people with access to technology have created opportunities both for investors and the world’s poor.

Mobile banking accounts and transactions are now accessible in two-thirds of the developing world. Moreover, they are beginning to exceed the number of traditional banking methods in some regions. This growing market is not only multiplying the success of banks but also giving entrepreneurs new ways of selling and profiting from their labors. Through mobile banking services, customers are also gaining access to loans and insurance to protect themselves and their families if they become vulnerable to falling back into poverty.

Mobilizing Myanmar

Mobilizing Myanmar is a prime example of the impact of these new financial programs. A woman from Myanmar started this program to increase tech and communication access for women and the poor with the support of the Bill and Melinda Gates Foundation. She was inspired by having limited connections during her childhood in Myanmar. In 2013, the program noted that SIM cards cost over $2,000 USD and now, thanks to its hard work and partnerships with the Myanmar government, over half of the adult population has a cell phone. The successes of this approach to microloans and development has gained the attention of major international aid organizations due to its potential to boost people out of extreme poverty. This is because reports have indicated that users had better health outcomes, more financial stability and security and new sources of income.

Benefits of Mobile Banking

Mobile banking has also been more accessible for users who are illiterate as many apps are pictorial, especially those pertaining to farming. Agricultural productivity is yet another opportunity for mobile finance services to increase market access and demands. Mobilizing Myanmar also cites access to a phone and mobile money as an opportunity for online learning for children unable to attend school. It also presents new opportunities for women in the developing world as approximately 42% of women across the globe are not incorporated into the formal financial system. Mobile banking can help women gain control of their household finances. It has also proven effective as a means for group savings in parts of Myanmar.

While questions remain in many regions of access to a cell tower of even basic electricity to power cell phones in order to operate mobile banking, the cost of setting up these systems is a relatively low-cost investment. Also, once set up, these financial systems and microcosms, with regulations in place, can sustain themselves and reinvest in their communities. Thus, although mobile banking is by no means a perfect solution to lifting the world out of poverty, it has proven to be an effective development tool and a reliable investment. Mobile banking is just one way that modern technology can help the world’s poor lift themselves out of poverty.

Elizabeth Stankovits
Photo: Flickr

poverty reduction through microloans

Poverty reduction through microloans has been a successful strategy in many parts of sub-Saharan Africa. Between 2007 and 2016, Tanzania’s poverty rates have decreased from 34.4% to 26.8%. Consequently, microloans have become a necessity for low-income earners whose businesses are apart of informal sectors.

MYC4 is an online platform that helps individuals loan money to small enterprises in sub-Saharan Africa. Mads Kjaer, its chief executive, describes the importance of microcredit by stating how “people need access to capital to grow their informal and formal businesses that offer them a regular income and enable them to lead decent lives.”

As a result, governments now appreciate the impact of microfinance. They are encouraging investments by opening up the industry to foreign capital and improving policing mechanisms for customer protection. With micro and small enterprises making up approximately 32% of Tanzania’s GDP, microcredit strategies have played an essential role in reducing poverty through progressive business approaches.

New Microfinance Act in Tanzania

In 2018, the parliament of the United Republic of Tanzania passed a Microfinance Act that illustrates the framework under which microfinance institutions operate. The Act allows for enhanced regulation of the microfinance sector for the mainland of Tanzania and Zanzibar. But with only 16% of Tanzania’s population banked, 27% is financially excluded. Microfinance options and the accessibility of mobile money have expanded financial inclusion to nearly half of Tanzania’s population. For example, as of 2017, financial NGOs, mobile money and microloan providing institutions served 48.6% of the population.

Nonprofits that are Helping

Opportunity Tanzania, a nonprofit organization that provides loans, savings, and insurance to impoverished entrepreneurs, has helped over 3,625 clients in Dar Es Saalam. Its microfinancing services provide entrepreneurs and their families with a path out of poverty. Only 20% of Tanzania’s population has access to a formal bank within an hour’s walking distance of their home. Therefore, Opportunity Tanzania is now working to build a regulated bank that will offer clients savings products and provide them with a secure place to store their money.

The International Labour Organization [ILO], in collaboration with the UN joint program on Youth Employment, established a five-day training program for financial service providers to create outreach strategies that will educate youth on microfinance resources.

High population growth and substantial poverty are still present in Tanzania. However, the expansion of microloan services play a crucial role in supporting entrepreneurs and creating more job opportunities for youth. In short, poverty reduction through microloans is an important avenue for growth in Tanzania.

Erica Fealtman
Photo: Unsplash