Understanding a great tool for global development: Microfinance
Blog post by Roopa Suppiah, Co-founder of Water Well-ness Project – Get free updates of new blog posts here.
International development can take many forms. It might be educating farmers about the best practices for seed spacing and irrigation. It might be building schools for remote communities that have no place for children to gain an education. It might be installing toilets for families that have no place to poop except out in the open fields by their houses. To carry out international development, organizations worldwide have either worked with local governments urging them to address root causes for these problems or acted charitably–giving people what they need, with no expectation of much in return.
But there is also another way to carry out international development, or in fact development anywhere including within one’s own country, that emerged in the 1970s and has been a growing practice ever since. This method is called “microfinance”, also known by other similar terms such as “microcredit” and “microloans”. Muhammad Yunus, a well-respected Bangladeshi professor, developed, tested, and perfected this model in Bangladesh and created the Grameen Bank (a microfinance institution). His model has spread across the world.
So how does it work?
Microfinance is giving small loans to extremely poor individuals who are stuck in a cycle of poverty. These small loans are used for any income-generating initiative. Traditionally, banks do not give loans to the poor because the poor have no collateral (i.e. something that the borrower can forfeit if he or she is unable to repay the loan). However, microfinance challenges this idea. The poor, in fact, are more likely compared to the wealthy to pay back their loan because they know that this credit is their only opportunity to create a better life for themselves. Moreover, they know they must be accountable and repay their loan in order to get a second or bigger loan next time to grow their small business and to make more money for their family.
Why are the poor in a cycle of poverty?
Without the basic necessities such as clean water, adequate food, and education, individuals are unable to secure a job to give themselves and their children just that–clean water, adequate food, and education. Generation after generation, these people suffer. Some of the poorest in many developing countries have to resort to begging. Many women get trapped in “jobs” that involve borrowing money from a moneylender, using that money to buy materials like bamboo to weave baskets, then selling the baskets back to the moneylender as debt repayment. The women really only receive pennies for their labour, not enough to lift themselves out of poverty.
Why does microfinance work?
Microfinance is an effective model to help the poor for several reasons:
Small and regular repayment: Borrowers are given loans and expected to repay the loan slowly over time in very small chunks. Repaying a large lump-sum all at once can be daunting, whereas repaying a small amount every week is more manageable. If the borrower is finding it difficult to repay these small amounts, the underlying reasons can be addressed before the issue becomes insurmountable.
Group loans: In order to obtain a loan, individuals must form a small group of several people who are in a similar situation, socially and economically. Healthy peer pressure ensures that all members of the group repay their loans and the group can provide support to those who are having trouble.
Women are given opportunities: Sadly, women are often not valued in society. Providing microloans to women specifically empowers them; they gain skills, earn money, gain self-confidence, receive more respect in the household, and support their family in a substantial way, often devoting any money earned to their children’s education, healthcare, and to improving living conditions.
The microfinance model does have its challenges. Organizations that administer microfinance programs must continuously monitor loans and work closely with their borrowers to build trusting relationships, which requires significant resources, such as time and personnel. Also, microfinance has been traditionally restricted to “income-generating” initiatives, such as starting a small business, yet there is great potential to expand to other poverty-alleviating activities such as using loans to install water and sanitation facilities. The installation of the facilities and its continued maintenance provides job opportunities in the community, and once women are no longer burdened with the task of fetching water every day, they can secure employment to earn money.
A promising solution
Microfinance has been tried and tested. When thinking about helping the world’s poorest, microfinance provides a solution that promotes long-term sustainability. It is a promising method to alleviate poverty in a world where, unfortunately, so many suffer.
You can easily become an active participant in microfinance, helping to change lives, by joining Water Well-ness Project’s H2O Investments program or making a donation towards our work.