September 27, 2013 | by Brianna McKinney
Microfinance has quickly become one of the more important means for developing nations to improve the quality of life for impoverished citizens. While the global economic impact of microfinance is met with mixed evidence and growing concern, a case can be made that microfinance positively supports the United Nations goal of global financial inclusion. It can also improve the socioeconomic conditions of individuals and groups of persons around the globe living in poverty that are seen as undesirable candidates for more traditional forms of loan assistance; particularly women.
Providing a form of financial services for those lacking access to traditional services, “only 35 years after its inception, nearly 4,000 microfinance organizations operate in over 100 countries around the world (even in the U.S.), providing very small business loans (typically under $1,000) and other financial services to over 150 million disadvantaged entrepreneurs who aspire to work their way out of poverty” (Contexts). In the United States, the major players in microfinance are Accion USA, Project Enterprise, Grameen America, and Capital Good Fund. Additionally, internet access and software technology advances have facilitated the creation of global peer-to-peer platforms that connect lenders to micro-entrepreneurs around the globe.
One such platform is Kiva. Frontline took a look at Kiva’s model, stating “the concept of Kiva is simple. Using just a credit card, a lender in the US can make a small loan to an entrepreneur. What’s different about Kiva is that through the web, a more direct connection is forged between lender and borrower,” (Frontline iWitness). From its inception in 2005 to 2011, Kiva has provided approximately $200 million in loans from 561,000 lenders to 415,000 micro-entrepreneurs throughout the world, with eighty-one percent of those entrepreneurs being women. Zongty Em, a Cambodian silk weaver, received a $1,000 loan through Kiva “to help pay for raw silk for her weaving business and for her eldest daughter’s college tuition,” (Huffington Post Impact Blog). The loan had significant long-term impact on her family’s socioeconomic status. The use of the loan to send her eldest daughter to college not only resulted in her obtainment of a better paying job, but inspired Zongty’s youngest to pursue higher education as well. Leveraging the internet, Kiva has created a nearly instantaneous “way to allow people to invest in each other,” and in this case “even in a single generation, microfinance had helped Zongty build a better life for her daughters,” (Huffington Post Impact Blog).
It is not a coincidence that nearly all forms of foreign aid, including microfinance, are increasingly directed at women. According to an article in the New York Times, “in a large slice of the world, girls are uneducated and women marginalized, and it’s not an accident that those same countries are disproportionately mired in poverty and riven by fundamentalism and chaos. There’s a growing recognition among everyone from the World Bank to the U.S. military’s Joint Chiefs of Staff to aid organizations like CARE that focusing on women and girls is the most effective way to fight global poverty and extremism,” (The New York Times). The same article analyzes the situation of a Pakistani woman who prior to receiving a microloan in the amount of $65 was regularly beaten by her unemployed husband, had to send her daughter to live away from home because they could not afford to feed her, and was preoccupied with her husband’s debt. The loan, obtained through Pakistani microfinance organization Kashf Foundation, enabled her to start a business, eventually resulting in her becoming the “tycoon of the neighborhood,” able to both reverse and vastly improve her situation to enjoy a new prosperity that “transformed the family’s educational prospects,” The New York Times . In India, a woman named Abbas, a former victim of human trafficking, was able to “move from being a slave to being a producer, contributing to India’s economic development and helping raise her family,” (The New York Times). The takeaway from these stories is that “with education and with help starting businesses, impoverished women can earn money and support their countries as well as their families,” representing what may be the “best hope for fighting global poverty,” (The New York Times).
As is the case with every global initiative, microfinance is not without challenges and opportunities for improvement. One source of controversy is the World Bank’s involvement in global microfinance through its creation of its Consultative Group to Assist the Poor (CGAP), as “typically, the World Bank approach has been predicated on mainstream economic principles, which have often translated into policies that favor economic growth over social justice and free markets over social spending,” (Contexts). The heightened commercial involvement in microfinance has caused interest rates to soar, as donor profits become of more importance than the constituents served. Others argue that microloans only serve to push the impoverished further into poverty, with unpaid debts adding even more burden. Additionally, microfinance is just one factor that influences the success of micro-entrepreneurship, as success is often more greatly influenced by how much an economy or a particular market grows. Another issue is that it remains difficult to accurately measure global impact as the evidence is mixed.
Although this list barely scratches the surface of the contention surrounding microfinance, the flip side reveals many untapped opportunities for improvement. The Stanford Social Innovation Review offers one new model, one that “views microfinance not as a mere financial product, but as a platform for delivering a host of products and services to the world’s poorest, most isolated people,” (Stanford Social Innovation Review). The model includes ways to improve the financial viability of microfinance by focusing efforts on marginally profitable transactions and pairing micro loans with social programs, such as health insurance.
There are mixed opinions and positions regarding the global impact of microfinance, however, there is also evidence that experts agree on two key points: that the greatest opportunity to eradicate global poverty lies in educating and empowering women, and that the “real impact of microfinance lies in its ability to create inclusive financial systems and inclusive societies,” greatly supporting the United Nations goal of global financial inclusion (accion.org). With continual improvements to the model and educational efforts to influence public perception and participation, microfinance has the potential to provide monumental support in the reduction of global poverty and socioeconomic inequality.
“Measuring the Impact of Microfinance: Our Perspective.” – ACCION International, FINCA, Grameen Foundation, Opportunity International, Unitus,Women’s World Banking
“Reimagining Microfinance.” – Stanford Social Innovation Review
“Banking on the Poor.” – Contexts
“The Women’s Crusade.” – The New York Times
“Peru: Kiva’s Web-based Microfinance Growing Up.” – Frontline iWitness
“Kiva.org and the Ripple Effects of Helping Women.” – The Huffington Post Impact Blog