Microfinance in the Third World Country
Microfinance is the provision of financial services such as loans, savings, insurance, and training for people who live in poverty (“What Is Microfinance”). The small amounts of money involved in the transactions is what differentiates microfinance from financial services offered by formal banks. Private and government owned or sponsored agencies have provided loans on credit to rural and urban poor in the past for the purposes of increasing commercialization of the rural sector and reducing oppressive feudal relations that were enforced through indebtedness (“The History of Microfinance”). These types of microfinance were not successful. Rural development banks suffered massive erosion of their capital base due to subsidized lending rates and poor repayment discipline. In addition, funds would often end up concentrated in the hands of wealthier farmers rather than the poor.
In the 1970s, experimental programs of lending small amounts of capital to poor women for their micro-businesses were launched in Bangladesh, Brazil, and a few other countries. These microenterprises were under attack for the lack of performance and recovery rates, but as microcredit programs throughout the world improved upon the original methodologies, repayment increased and cost-recovery interest rates increased. This allowed microfinance institutions to achieve long-term sustainability and reach a large numbers of clients (“The History of Microfinance”).
The promotions of microfinance in the 1990s as a strategy for poverty alleviation increased microfinance sectors in many countries, leading to multiple financial services firms serving the needs of micro-entrepreneurs and poor households. Modern microfinance differs from early microfinance in term of sustainability and commitment. Early microfinance focuses on making money on small loans for short periods, but now microfinance not only offers loans, but also savings and other services such as insurance and money transfers for longer periods. These changes can be linked to the globalization of microfinance, changes in perspective of society, and technologies, which leads to a growing market for microfinance.
Dr. Mohammad Yunus, economics professor at Chittagong University and Nobel Peace Prize winner, is credited for the pioneering of modern microfinance. In 1976, Professor Muhammad Yunus and his graduate students in Chittagong University designed an experimental credit program to address the banking problem faced by the poor. He began his experiment with lending to poor women in the village of Jobra, Bangladesh, which rapidly spread to hundreds of villages across Bangladesh (“About Microfinance”). His credit program used rural banks to disburse and recover thousands of loans, but at the end of the pilot phase of the project, the banks refused to spear head the program.
The banks rationalized that there is a high risk in lending to the poor. In the past, the poor has shown a low repayment rate. The banks did not want to be held accountable for any losses that can occur in the future. Before any responsibility would have fallen under Dr. Yunus, but now if the experiment yields poor results, the banks would have to take responsibility for the failure. With the help of donors and sponsors, Dr. Mohammad Yunus founded Grameen Bank in 1983 and the success of his bank stimulated the establishment of several other giant microfinance institutions.
Modern microfinance is an innovation that was influenced by the modification of a previously existing innovation into a more defined one, adjusting for the evolution of society through technological and moral advancements and the alleviation of poverty around the world. Microfinance is no longer a system of a specialized microfinance institution that focuses on providing subsidized agricultural credit to small and marginal farmers, but is now a micro-enterprise credit concentrated on providing loans to poor women to invest in tiny businesses (“About Microfinance”). Modifications of microfinance have led to the emergence of nongovernmental organizations (NGOs) that provided financial services for the poor. Many of these nongovernmental organizations would transform themselves into formal financial institutions in order to access on-lend client savings, thus enhancing their outreach (“About Microfinance”).
Microfinance continues to influence businesses and the life of people around the world. According to the Gates Foundation, just 10 percent of the global population has access to traditional banking (Neumann 1). With the help of microfinance, the World Bank estimates that more than 500 million people of the 90 percent of the global population that do not have access to traditional banking can now access financial services through microfinance institutions such as Kiva, Accion, Grameen America, etc (Neumann 1).By 2007, the Microcredit Summit Campaign Report documents 3,552 institutions with reported loans to over 154 million clients throughout the world (Buera, Kaboski and Shin 5). Those institutions are responsible for lending out an average loan balance per borrower of $1,351 in 2008, which is equivalent on average to 62 percent of per-capita gross national income of the poor countries (Buera, Kaboski and Shin 6). Since its establishment in 2005, Kiva, a person-to-person microlending organization, has provided more than $329 million U.S. dollars to microenterprises from 786,000 lenders in 62 countries, with a repayment rate of 98.97 percent (Neumann 1). Kiva is just one of many microfinance institutions that has positively impacted the life of many in third world countries.
In the above chart, the vicious cycle of people who are living in poverty is shown. In order to break the vicious cycle, the issue of poverty has to be address. Microfinance is one of the solutions that can help break the vicious cycle. Microfinance offers microcredit to mostly individuals that are currently living in poverty. The microcredit creates a cash flow that provide the necessary tool to fight poverty including better education, self-sufficiency, protection against illness and crisis, and better health. The cash flow allows individuals to start or maintain their businesses. The profits from the business are used for micro-saving, loan repayment, and micro insurance. This will ultimately lead them out of poverty.
The impact of microfinance on the poor is not immediate, but by a duration of “three loan cycles” which is “roughly 2- and- a-half to 3 years” (Quast 1). For example, Joyce, a Kenya native woman, took out an initiate loan of $680 USD to start her own hardware business. Since her first loan, Joyce has “received, and promptly repaid, five loan installments from Kenya Women Finance Trust, for a total of $16,500 USD (Quast “Microfinance 101 – Part 1” 1). Since the establishment of her business with the first loan, she had expanded her business and currently employed 25 full-time workers. Joyce’s story is just one of many that have been impacted by microfinance. Microfinance institutions do not solely lend to third world countries but to entrepreneurs, with solid business plans but who do not qualify for traditional bank loans in the United States.
Microfinance does not only affect third world countries but domestic markets of the lending countries as well as the country itself which includes the United States. Successes in the third world countries have many asking whether microloans “can have the same affect in a developed country where although entrepreneurship and financial services are plentiful, but may be out of reach for some” (Bayrasli 1). In 2008, Dr. Mohammad Yunus, along with several corporate sponsors including Citi Foundation and Capital One launched Grameen America in New York. Since then, Grameen America, not the banks, has been serving the poor, mainly women, throughout four of the city’s five boroughs as well as Omaha, Nebraska and Indianapolis, Indiana (Bayrasli 1). In four years, Grameen America has facilitated loans to over 9,000 borrowers valued over $35 million USD with a 99% repayment rate (Bayrasli 2). The borrowers of these loans have increased their annual income by about 20%. The microfinance industry will continue to dramatically evolve within the next few years as seem in the previously couple of years.
Since its founding 30 years ago, microfinance has continued to slowly evolve. In the last 5 years, microfinance industry has undergone a dramatic shift. Microfinance used to rely heavily on government subsidies to guarantee repayments for investors’ investment into the microfinance sectors as well as encourage people to invest through the subsidy incentives. Now, it has moved into the commercial mainstream, reducing its reliance on subsidized donor funding and, instead, using other, more commercial sources of capital to finance operations (Quast “Microfinance 101—Part 3” 1).
Microfinance industries do not have to depend on government subsidies to recruit new investors or maintain their current ones. This shift produces positive and negative outcomes. The commercial mainstream of microfinance has increased the number of investors, but at the expense of the future alleviation of poverty. Commercial mainstream does not bring in regular investors, but profit-seeking investors. The profit-seeking investors will influence the microfinance institutions’ direction from the alleviation of poverty to increasing profit. For example, the microfinance institutions might not “elect to serve women clients” in the attempt to cut costs and increase profits (Quast “Microfinance 101 – Part 3” 1). This will affect the alleviation of poverty since women are accounted for the majority of the world poor. We are still unsure about whether commercial mainstream will bring positive or negative changes to the microfinance industry.
Modern microfinance is just an example of the many innovations that have impacted the world both positively and negatively. Another example of an innovation that has an equal importance in influencing the global markets and current events is texting. Texting has grown in popularity in the last decade. Similar to microfinance, texting has evolved over time. It has evolved from a communication tool created for the disabled into a popular source of communication for the general public, especially among the younger generation, people who were born between the year 1981 and 2000.
The advancements of technologies can accord for the evolution of both
innovations. Both texting and microfinance have seen great increase in its respected market in the last few years as rapid globalization of businesses occurred. Not only do both innovation share benefits from globalization of businesses, but they both greatly depend on the communication aspect of the innovation. Texting offers a convenient method of communication and relies on society’s lack of time to increase its market. Similarly, microfinance has come to rely on communication the last few years to increase the number of investors. Both industries came from a very different origin and evolved into something unexpected and will continue to do so in the future.
Although both texting and microfinance benefited from society’s advancements in technologies, they both do not provide the same benefits and value to society. Texting has decreased society’s interpersonal communication skills, writing skills, and presentation skills. Nowadays, people are communicating not through a face-to-face conversation or voice-to-voice conversation, but short text messages. People always seem to be in a rush and have no time to communicate with each other. Lack of communication is accord for many conflicts around the world and with an increased interest and use of texting; we might see problems arise in many sectors of the world. Texting might be a convenient for society, but do its risks justify the benefits. Only time will tell.
On the other hand, microfinance has greatly benefited society. It has increased the awareness of poverty and the need to alleviate it. It has also given the poor a tool to help fight their own poverty as well as the poverty of others. Microfinance, not only, benefits the borrowers, but the household of the borrower and the community of the borrowers. In the future these benefits will continue to grow and nurture future ideas and movements.
For example, the United Nations Capital Development Fund is planning to organize a movement using microfinance as a foundation. The movement is the Cleanstart initiative with the objective of using microfinance opportunities for a clean energy future. According to UNCDF, “more than 1.6 billion people lack access to electricity and 2.7 billion people rely on the traditional – and typically polluting – use of biomass for cooking and heating,” which shows that a huge percent of the world population is at a disadvantage in terms of jobs, security, climate change, food production, and poverty. Sustainable energy is essential for strengthening the economies of the countries that lack access to electricity, protecting ecosystems by reducing the traditional uses of biomass, and achieving equity (UNCDF 1-2). In addition, UNCDF states that “clean energy, in return, has the potential to improve the quality of MFIs’ loan portfolios and create a new, higher-return ‘star’ segment of the market.
Carbon credit markets, particularly voluntary ones, are potential additional income streams for MFIs developing this opportunity” (UNCDF 2). This shows that microfinance industries are impacting other markets and have great potential to grow in the future as it continues to expand. Different organizations that wish to organize a movement or start a business in third world countries may wish to use microfinance institutions as a foundation or gateway to the market of that particular country. The innovations of texting and microfinance have different backgrounds, but despite their differences, they can still benefit from societal advancements.
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