How Microfinance helps alleviate poverty and adds impetus to economic development
This is the observation of Dr Muhammad Yunus, Bangladeshi social entrepreneur and Nobel Peace Prize winner who pioneered the concepts of microcredit and micro finance. He says, “Every day, they (poor people) must innovate in order to survive. They remain poor because they do not have the opportunities to turn their creativity into sustainable income.”
Yunus, born in Chittagong, Bangladesh, was inspired by his mother at an early age to alleviate poverty that had helpless people in merciless bondage. In fact, about 1.4 billion people around the world, live on less than one dollar a day, and, at least 3 billion people do not qualify to apply for bank loans. Reflecting on this unequal and unfair system, Yunus, decided that good economic theory must give the people the chance to use their talents to build their lives. He determined to “get away from the traditional route where the rich will do business and the poor will depend on private or public charity.”
His determination strengthened when he, as an economist from the University of Chittagong, took his students on a field trip to an impoverished Bangladeshi village in 1974. They had a conversation with a woman who made bamboo stools. She was able to earn only two cents for every stool she made because she owed money to the man who sold her bamboo, and he dictated the prices of the stools. This distressing story spurred Yunus to establish the Grameen Bank (meaning the Village Bank), to provide microloans to poor people. Banks in Chittagong and Dhaka rejected his idea, condemning the poor as the “worst risk for bankers.” In Yunus’ perspective, the poor needed the money more than the rich with whom banks were ever eager to do business. He created Grameen Bank on trust and solidarity, with the intention of promoting financial independence among the impoverished on the path to poverty alleviation. The core principle of Grameen is that loans are preferable to charity in overtaking poverty. “They offer people the opportunity to take initiatives in business or agriculture, which provide earnings and enable them to pay off the debt.” Grameen microfinancing focuses on groups hitherto rejected by the banking system – the poor, the illiterate, the unemployed and women. They are offered reasonable credit packages like the group lending system and weekly instalment payments. Sensible long term loan packages are a boon to the poor to enhance existing skills. By 2015, Bangladesh had 2568 branches of Grameen with 21,751 bank employees serving 8.81 million borrowers in 81,392 villages. About 97% of Grameen microloans are taken by women and a 97% recovery rate makes it higher than found in other banking systems.
The Grameen movement gained momentum and steadily spread worldwide, its microfinancing methods adopted by projects in 58 countries, including US, Canada, France, Norway and the Netherlands.
In practical terms, microfinance is broadly refers to financial services like loans, savings accounts, and insurance products meant for people at poverty level. Globally, the average microloan is $1,026 and the average savings account balance is $1,126. Customers receive microfinance services through specialized micro finance institutions (MFIs), which are both bank and non-bank. There are over 133 million clients of microfinance today, served by at least 3300 MFIs. Around 85% of these customers are in Asia. Microfinance became a vital component in entrepreneurial efforts of developing countries, where many people in rural communities could not get business loans. What appears heartening is that these loans have around 95% repayment rates, commitment to conditions, low probability of default, and positive social impact. Micro finance has led to greater participation of women in economic development, especially in developing countries, where family and child care responsibilities are a woman’s lot.
Years later, in 2003, Yunus happened to speak about microfinance to an audience at Stanford Business School in California, in the US. Among his audience that day were American entrepreneurs Matt Flannery and Jessica Jackley, who, after listening to Yunus, decided to launch Kiva, a nonprofit organization for microfinancing low-income entrepreneurs and students in over 80 countries, through the Internet. The mission of the organization is “to connect people through lending to alleviate poverty.” Though similar in vision to Yunus’ Grameen Bank, the Kiva concept is different in that it judiciously selected 246 partners in 76 countries to manage the loans. Kiva collects the necessary loan money and send it to the field partner. During the loan period, the entrepreneur is required to repay the loan in stages, from profits earned. As the loan installments are repaid, the funds are transferred back to the entrepreneur’s account. The entrepreneur has the choice of re-using the funds or lending it to another entrepreneur. With checks and balances to control the lending and repayment, the Kiva web site became the online connection for donor savings from the developed world and entrepreneur needs of poverty-ridden developing country communities.
One reason why Kiva became popular is the sharing of personal stories of impoverished entrepreneurs brought a human touch to the program – a feeling of helping real people rather dealing with numbers. It also helped to differentiate between needs and wants, and helped generate perspective in developed countries.
With microfinance contributing significantly in poverty alleviation, the United Nations declared 2005 as the International Year of Microcredit, bringing the concept of microfinance from the periphery into the center, providing an opportunity for around 2.5 billion poor entrepreneurs to “grow thriving businesses and, in turn, provide for their families, leading to strong and flourishing local economies.”
On the other hand, there are players in international development who view microfinance a little differently. According to Donna Katzin, Executive Director of Shared Interest, a New York-based nonprofit focused on microfinance in South Africa, “Microfinance is only one tool.” She believes microfinance is more productive when used as a part of amalgamated development strategy to boost social and financial capital. For instance, microfinance could be balanced with education or health programs to bring about greater social return than if the focus was business alone.
It was the rigidity of commercial bank lending policies that paved the way for the existence of MFIs as a beacon of hope to the world’s poor, for financial inclusion. Former UN Secretary-General Kofi Annan echoed this thought in declaring microfinance could be a “weapon against poverty and hunger.”
Anyhow, pride of place in the world of microfinance will always belong to Yunus as the trailblazer of the concept. He said, “Poverty is the absence of all human rights.” Therefore, he fought for the human rights of the impoverished and won for them financial freedom. In recognition of this unsung heroism, former US President Barack Obama presented the Presidential Medal of Freedom to Yunus in August 2009.
Yunus very aptly says, “Poverty is unnecessary.”
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