Globally, 55% of women live in poverty and 42% do not have access to financial institutions. The majority are subject to subordination by patriarchal societies and reliant on their male counterparts because they do not have access to financial independence. This prevents women from better providing for themselves and their families. However, with the arrival of microcredit and microfinance institutions (MFI) in the last couple of decades, millions of women around the world are uplifting generations out of poverty.

What is Microcredit?

Microcredit is a path toward financial inclusion through the lending of small loans, without collateral, to the poor. Microcredit is part of the broader spectrum of microfinance institutions (MFI) that provide additional financial services like micro-insurance and financial literacy. These services help those impoverished to start small businesses, break cycles of poverty and boost the economy of local communities.

Microcredit is largely made possible through peer support systems applied in many MFIs. Because they mostly reach rural villages, many borrowers know each other and know that their failure to pay back loans will hurt their community.

Primary investors are interested in social returns to reduce poverty and boost the economy. They are not philanthropists but are committed to social businesses set with proper risk assessment, transparent monitoring and educational programs to protect investors and borrowers. Eleven MFIs are perceived as competitive for investors due to their growing success, including global income on investment to be high at 19%, only 6% at risk and strong 11.5% return on equity which all show great development in the industry.

Why Focus on Women?

Aside from the fact that women have been predominantly denied crucial financial services, of the 139 million MFI borrowers worldwide 80% are women. Before, many would assume women and those impoverished would be risky borrowers. Now, studies confirm that female borrowers of regulated MFIs have lower write-offs, portfolio risk and fewer provisions than men, making them ideal clients.

Additionally, women spend 90% of their income on family needs compared to only 35% of men. This also means educational attainment for their children increases, which can double or triple a young girl’s future income. Research also shows that when women control family money, their children are more likely to survive by 20%.  Microcredit allows for the kinds of investments and benefits for gender equality to occur through avenues of financial independence. Such investment in long-term gender equality means 150 million more people have access to food worldwide and boost the economy by doubling global GDP to about $160 trillion.

A recent International Monetary Fund (IMF) study reported that gender equality consistently has proven to boost the economy. Countries with higher rates of gender equality, 70% or above, directly correlate with up to 13% growth in their GDP per capita compared to countries declining as much as 15% with lower rates.

These results come from smaller wage gaps which are derived from more equal access to opportunities.

Overall, women provide diversification and economic resilience to the global market and efforts to multiply gender equality, like microfinance services, will only further boost the economy.

Global Success of Microcredit

Today, there are some 916 MFIs serving about 140 million people globally. Of those, 65% live in rural areas where financial services are needed the most.

Many remain skeptical after corrupt and exploitative practices from lenders in the 2000s. Money was seen to be used for non-entrepreneurial endeavors like home loans and trying to make loans profitable. For-profit banks and techniques like lender intimidation and excessively high-interest rates had greatly diverged from the mission to help the world’s poor.

However, these three organizations are just examples of how beneficial and empowering the diverse practices of microfinance are at its core and after reform and innovation.

  • Grameen Bank: Muhammad Yunus is the catalyst of this industry in the 1970s with his establishment of Grameen Bank in Bangladesh. By using group-based lending to offset collateral, the Bank is able to securely provide loans to the poorest and foster a collaborative setting. Through this, its 9.6 million borrowers, 97% women, can meet weekly, pay off loans, uphold the 97% repayment rate and share ideas. Proven results include a 50% increase in average household income compared to the original target groups of Grameen Bank and only 20% are below the poverty line compared to 56% of non-members.
  • Opportunity International: This organization serves 17 million clients in 27 countries, and also has an impressive 97% repayment rate. They provide additional services like saving accounts and trust groups and have been able to develop and sustain 20 million jobs.  Opportunity International maximizes its efforts by prioritizing four “Key Focus Areas.” This has resulted in $49 million towards agriculture, 263 million children experiencing education, expanding technology like mobile banking and empowering women, who are 95% of their clients.
  • Kiva: This unique non-profit connects borrowers and lenders through crowdfunding resources which help minimize risk to its 1.9 million lenders and help its 3.6 million borrowers, 81% of whom are women, in 77 countries. Unlike other institutions, lenders have more power in deciding who they want to lend to, with regulated and monitored interest rates. This enables more women to go to college and others to build their own bakeries, but still managing risk by only distributing a second loan after the first has been fully paid back.

These three organizations collectively benefit 30.2 million people around the world. They only shed light on a fraction of the total positive impacts of microfinance which boosts the economy locally and globally. While microcredit for women and the poor is not a silver bullet for poverty alleviation, it is a vital avenue for financial inclusion and should only be further pursued.

Mizla Shrestha

Photo: PX Here

A Look at Credit Access in HondurasMicrofinance has become an important tool for increasing credit access in Honduras for low-income people. Microfinance, or microcredit, entails banks lending small amounts of money at low interest rates. It is a great method to get loans to people living in poverty who have no credit history, little to no income, no collateral and often no education. This practice is particularly popular in the developing world.

The Current Situation

Without access to credit, savings or other basic financial services, over two billion people around the world are financially excluded. Increased credit access in Honduras and other developing countries enables poor families to earn a larger income, build their assets and cushion themselves from extra costs from external shocks like natural disasters. Poverty in Honduras is exacerbated by a consistent threat of natural disasters, such as floods, hurricanes and land erosion.

In Honduras, 60 percent of the population lives below the national poverty line and the country has one of the lowest per capita incomes in Latin America. Credit access in Honduras is limited, especially in rural areas due to obstacles including high operating costs because of infrastructural deficiencies, a high level of risk due to the threat of natural disasters and a lack of flexible financial products and financial intermediaries that can cater to specific needs.

Improvements to Credit Access in Honduras

In 1989, a non-banking financial institution called FINCA was established in Honduras to provide banking services to people across the country, including loans, savings deposits, money transfer services and insurance. FINCA now has 21 branches and serves over 47,000 people in rural and urban areas of Honduras. The average loan is less than $800 and the institution’s loan portfolio amounts to over $21 million.

In 2014, the Rural Savings and Credit Union was formed in Honduras to provide these financial services in rural areas and offer flexible financial services based on individual negotiations and a deep knowledge of local communities and the businesses within those communities. Rural Savings and Credit Unions have promoted a more gender-inclusive market system, empowering women to participate in the economy to open small businesses and support their families financially. They are also sustainable and easy to replicate, ensuring a stable source of financial services to rural and poor areas in Honduras.

The Multilateral Investment Fund also approved a $200,000 technical assistance grant and a $3 million loan to the José María Covelo Foundation. The funds will allow the organization to pursue a project to improve the economic conditions of productive and entrepreneurial individuals in rural and peri-urban areas by increasing the microcredit supply in Honduras.

Real Life Results

Microcredit services like FINCA have helped increase poor people’s credit access in Honduras, enabling them to start small businesses and increase their incomes without having to go into major debt. For example,  62-year-old Consuelo Esperanza Rueda Aguilar has been able to start several businesses, from running a taxi service to selling a variety of different items ranging from cell phones to clothing to pots and pans. By utilizing FINCA’s services, Consuelo carefully invested her earnings to develop her entrepreneurial endeavors. She was also able to educate all five of her children and to buy a bigger house.

Models like FINCA and Rural Savings and Credit Unions strive to reduce poverty by increasing credit access in Honduras, providing economic opportunity for people in the most vulnerable settings and increasing economic empowerment by giving Hondurans the tools to become more financially stable.

– Sydney Lacey

Photo: Flickr

Access to Credit in MadagascarAccessing one’s credit can be a difficult task when there is not much information provided on how to do so. Madagascar has a plethora of farmers due to its vast landscape, and agricultural production could be greatly altered in a positive way if the MFI, or Microfinance Institution, was able to offer accommodating microfinance loans.

According to a report from the University of Göttingen, “agricultural firms with flexible microfinance loans have significantly higher credit access probabilities than non-agricultural firms and agricultural firms with standard microfinance loans.” Access to credit in Madagascar can be greatly improved by supplying the population with particular loans that allow them to enhance their financial stabilities.

Access to microcredit has a profound impact on Malagasy people. As The Guardian writes, “Microfinance is seen as a vehicle to help Madagascar attain some of its millennium development goals, particularly on eradicating extreme poverty.” Approximately 85 percent of the nation’s population lives on less than $1.25 a day. Credit availability in Madagascar has been able to create severe advancements for small businesses and provide a higher income for the average Malagasy family.

Since most individuals are without access to credit in Madagascar due to their financial status, providing goods for the family and bringing in a steady income can be very difficult. Many rely on informal moneylenders who charge annual interest rates anywhere from 120 to 400 percent for unsecured loans.  These numbers are astronomical compared with the MFI’s average rate of 36 percent for the same period, equating to two to four percent a month.

Extremely high interest rates can be very dangerous for people who do not make enough money to continually make payments every month. Supplying the Malagasy citizens with microfinance loans would give them the opportunity to discontinue their relationships with informal moneylenders and ultimately save additional money for other necessary goods.

However, a country that mainly relies on farming can be slightly strenuous for the MFI. It can provide the people with loans to help supply their agricultural needs, but when the weather does not cooperate with the proper farming conditions, these loans can then be used for other purposes. This is what the institutions do not want to happen. According to Serge Rajaonarison, Chief Executive Officer of the Caisse d’Epargne et de Crédit Agricole Mutuels de Madagascar, by accurately determining the “areas and farmers affected by hailstorms, for example, we can subsequently compensate according to the losses caused.”

The prime concern for the MFI is for its loans to be paid back by the people of Madagascar. Even after the country is devastated by severe weather events, the MFI continues to obtain its money back from those who were given loans. Continued payments by the people and being able to provide a better life and workplace for the community will allow the MFI to implement a strategy that will give everyone access to credit in Madagascar.

– Matthew McGee

Photo: Flickr

MicrofinanceIn 2006, MIT Professor Muhammad Yunus was awarded the Nobel Prize for his work in the creation of the Grameen Bank. The Bank was created primarily to microfinance, or provide small loans, to the impoverished in Bangladesh. Today, over 97 percent of Bangladesh’s villages have a Grameen Bank presence, a whopping 7.5 million people have borrowed from the Grameen Bank and 65 percent of the borrowers “clearly improved their socio-economic conditions.” Yunus has even advocated for credit to be considered a human right because of the extent to which it can help people deal with their financial situations.

Prior to the emergence of this practice, the term “finance” largely carried the connotation of large banks, governments and corporations, and their respective handling of money or value. Liabilities, assets, savings, loans and other banking concepts can all be categorized under finance. So then, what exactly is microfinance?

Microfinance is the practice of bringing financial systems that are commonly used in the developed world, and applying these concepts on a much more personal and micro-scale. While we typically think of finance as a system that deals with large sums of money and organizations, microfinance is quite different because it deals with much smaller denominations of money and groups or individuals.

In practice, microfinance institutions or programs can differ in their specific models of operation. For example, Kiva is a microlending institution. It operates on donations, and any donor can personally become involved by browsing through testimonials and deciding whom to fund. On the other hand, the Grameen Bank no longer takes donations, and the Bank itself is actually 94 percent owned by the borrowers themselves. The majority of microfinance institutions deal primarily with microcredit, with most extending credit to women. About 97 percent of Grameen Bank’s loans are offered to women.

One point of criticism is the very high interest rates sometimes charged by various microfinance institutions; in some cases, the rate is over 50 percent. However, many argue that this is necessary to cover administrative and risk-taking costs. Defendants of the interest rates contend that participating in the loan program does not proportionately diminish the received benefits based on interest rate.

The benefits of providing financial services – often taken for granted – are unmistakably significant. The first benefit, as told by Mr. Yunus himself, is the mental and psychological stimulus a loan can give a person. The recipient of the loan becomes more independent and less inclined to feelings of marginalization. The second benefit is an increase in small businesses and economic activity in the villages. For some, small loans serve as the building blocks for small businesses. For others, the loans help pay for large goods or services like schooling, or healthcare costs, among other things. Providing small loans at affordable rates allows people to have more purchasing power than they might have otherwise, and to make purchases once considered not within their means.

An MIT study titled, “The miracle of microfinance? Evidence from a randomized evaluation,” was highly critical of the actual effects of microfinance versus the observed perceived effects before the study. Those conducting the study found that microfinance had some benefits for helping businesses increase profitability, and in increasing household income. They also found that household spending increased on durable goods, meaning goods that can be used more than once like cooking pots and mosquito nets. However, the MIT study found no significant changes in women’s empowerment, education or health. Finally, the study found that the adoption rate for microfinance was around 38 percent, indicating that many people still preferred to take out informal loans from other parties or family members.

Despite the critiques, microfinance has emerged as an innovative tool within the largely unchanging financial sector. By giving the impoverished access to financial services, the affected begin to have more opportunities and resources to turn to when dealing with personal or small business finances.

There are 2.5 billion people worldwide who are “unbanked” according to the World Bank. High costs, bureaucratic barriers and physical distance from banks facilitate this huge gap in the number of people with access to financial services and the total population. Microfinance has the potential to help bridge this gap by empowering the poor and providing them with more tools to help themselves. Although it may not be a miracle, it’s certainly better than nothing at all.

– Martin Yim

Sources: PBS, Kiva, Grameen Bank, MIT, World Bank
Photo: Flickr

A new experimental study, out June 10th of this year, examines how microcredit, or the lending of small amounts of money at low interest to new businesses in the developing world, may not help jump start poor populations’ financial growth as much as some may think.

The authors of the study, Bruno Crepon, Florencia Devoto, Esther Duflo, and William Pariente, randomly assigned 162 villages in rural Morocco to either receive microcredit (these villages would serve as the treatment group) or not to receive it (and these would serve as the control group).

The researchers, who are affiliated with the Abdul Latif Jameel Poverty Action Lab (or J-PAL), found that microcredit does not lead to families and businesses exiting poverty in the long-run.

This is in opposition to a similar study conducted by Shahidur Khandker and Hussain Samad of the World Bank in March 2014 which found that microcredit increased personal expenditure, labour supply, household assets and schooling of children in impoverished communities of Bangladesh.

Furthermore, Bono, whose humanitarian work in developing nations is highly documented, has lauded microcredit as an effective means of alleviating poverty, stating, “Give a man a fish, he’ll eat for a day. Give a woman microcredit, she, her husband, her children and her extended family will eat for a lifetime.”

However, the researchers at J-PAL found that microcredit decreased the amount of time Moroccan laborers spent on work. The effect on investment was greatly offset by a reduction in income from wages. The researchers concluded that access to microcredit, at least in Morocco, did not result in income gains, personal consumption or education of the youth.

Writers at the Economist are attempting to analyze the conflicting results of these two studies, and learn why they produced such significant differences. One theory is that microcredit may only reduce poverty and increase income in the long run, making short term studies irrelevant and ineffective at gleaning a meaningful answer.

The two studies also took place in two very different countries on separate continents. One can reasonably conclude that there may be social, environmental, or political factors at play, as well. Economists refer to this issue as “external validity,” meaning the extent to which a study’s results are generalizable outside of its given context. The effects of microcredit may not be clear until researchers readily take place, setting, and social and political structures into account.

Further research is needed to know whether lending sums of money to businesses in poor areas of the developing world may actually be a beneficial policy. Crepon and his co-authors are currently planning a follow-up experiment to study the long term implications of microcredit. All involved hope to find some answers to these questionable methods of alleviating global poverty.

-Paige Frazier

Sources: The Economist, The World Bank, MIT Economics, Look to the Stars
Photo: African Microfinance Network