Muhammad Yunus, microfinance pioneer and Nobel Peace Prize recipient. Bonus points for argyle socks!
Loans. Muhammad Yunus. Kiva. Poverty. Grameen Bank.
This is what comes to mind for most people when you mention the world ‘microfinance’. But you’re not alone if the details are a little fuzzy. In fact, the fact that microfinance has become trendy and hip means that more people are likely to feel embarrassed for not knowing what it is, and avoid asking questions.
If that’s you, then help is here. Here’s Microfinance 101:
Microfinance is the provision of financial services like loans (microcredit), savings, insurance, and training to people living in poverty. It has been a great success stories in the developing world in the last 30 years and is widely recognized as a just and sustainable solution in alleviating global poverty.
Benefits: Clients use services to learn skills, grow businesses, employ others, and transform their own communities. One of the harshest aspects of poverty is irregularity and undependability of income. Access to credit and savings helps the poor to spread out cash flows to avoid periods where access to food, clothing, shelter, or education is lost. They can better manage shocks like sickness of a wage earner, theft, or natural disasters. The poor use credit to build assets like buying land, which gives them future security. Women participants in microcredit programs often experience important self-empowerment.
Microfinance Institutions (MFIs) are organizations that provide financial services to the poor. MFIs are, in effect, banks. MFIs can be owned by governments, like the rural credit cooperatives in China; members, like the credit unions in West Africa; socially-minded shareholders, like many transformed NGOs in Latin America; and profit-maximizing shareholders, like the microfinance banks in Eastern Europe.
Sustainability: Microfinance has proven to be a sustainable model of development. This means that when it is done right, relatively small up-front subsidies (from donors or governments) lead to permanent institutions that can continue providing services year after year with no further subsidy needed, and can expand those services to reach many millions of low-income clients.
Microfinance is very complex and there’s a lot to learn, but hopefully this is a good start. If you’re curious for more, go here, here, or, of course, Wikipedia.
What questions about microfinance do you have? Let me know and I’ll attempt an answer in subsequent posts.
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