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Thursday, November 1, 2012

Microfinance: A Solution For Poverty

Orcun Kahyaoglu


In a world that is covered by huge corporations and financial institutions many of which have scales that are larger than some countries, the need for a campaign that supports poor is a rising issue. Like every people, poor ones may also be in need for financial services. There is a program, which is showing its positive outcomes more clear in recent years called microfinance. Microfinance is a program that fights against poverty, aims to help the poor and women to reach financial services that they cannot reach without any support.

Three parts that are microcredit, microsavings, and microinsurance form microfinance. The widest part is microcredit, which is in use by the ones who cannot find a capital to open a business but are poor entrepreneurs. It is a very important opportunity for breaking the poverty chain.  It helps the poor to open small-scale businesses, to improve their pre-existing small-scale businesses, or to afford their emergency needs like health or education. Although it is not cheaper to use, the users of microcredit are not able to have services from the financial institutions. The second part, microsavings, is a way to keep the savings of the poor regardless of the amount in a safer place, and protect them against inflation and give the opportunity to gain interest on these savings. In addition to these two parts, microinsurance is an umbrella over the poor’s houses protecting from open-risks like catastrophes, deaths, illnesses and accidents. For example, deaths of head of families or unsatisfied harvests may cause the poor become meld, homeless and defenseless. By periodic principal payments, the poor can reduce the risks and guarantee to survive with microinsurance. 

The Grameen Bank, which is a great example and the start point of a microfinance organization, and a community development bank started in Bangladesh that makes microcredit to the poor without collateral. The bank was founded by Muhammed Yunus in 1976 with some core objectives, which are extend banking facilities to poor men and women, eliminate the taking advantage of the poor by money lenders, create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh, bring the disadvantaged mostly the women from the poorest households within the fold of an organizational format which they can understand and manage by themselves, and reverse the age-old vicious circle of "low income, low saving and low investment", into virtuous circle of "low income, injection of credit, investment, more income, more savings, more investment, more income" (Grameen Bank, para. 2). Yunus started with the idea that the poor can be good lending risks even without collateral. With solidarity lending a group of 5 women would form a lending pool. The other four could not get a loan until the first was paid off. So instead of collateral there is a peer pressure as an incentive to repay. This system has been turning the poor into entrepreneurs and survives them from poverty. Hence, its founder Muhammed Yunus was deemed to deserve the Nobel Peace Prize in 2006.


By the evolution of microfinance, it becomes a major role player in community development. The system creates many entrepreneurs through years and today they are the owners of small businesses. Although it is less popular in the US because many businesses can be started through credit cards, the Bank of Grameen US that has started recently is a good example to realize the spread of microfinance. There are also groups such as Accion and the Small Business Administration. They bring the spirit to the community and now they account for 18% of new employment in the U.S. It brings self-employment, living wage, and local spending; in other words, it brings a stronger community. Many of these poor opportunity seeking potential entrepreneurs cannot get loans from banks and they have to borrow from family or friends or the worst they use credit cards that brings out high costs of capital. Accion, which is operating in microfinance industry in U.S. has loaned out about $210 million to over 20,000 entrepreneurs. They have created an average of 2.4 jobs in each business. They called microfinance as a chance instead of charity (Accion). As another institution, Alternatives Federal Credit Union in Ithaca has classes to teach people how to run a business. They have Individual Development Accounts. After they take a class, they can open a savings account to encourage savings. After one year, the savings are matched 3 to 1. So if a low-income person saves $500 over the year, they end up with $2000 to start a business or buy their first home. It definitely helps the poor to gain assets. 

The New York Times profiled some microlenders experimenting in the USA. They note that in 2003 that there were 246 known microlenders most of which were non-profits (Zipkin, 2005). These microlenders have the capability to move quicker and provide more flexible products that are critical for businesses. Microlenders all over the U.S. are connecting the credit gap that is widespread within income levels from low to moderate among communities.  By creating lending programs such as start-up loans or established business credits in order to meet the needs of the poor entrepreneurs located in the U.S., microlenders pride of repayment rates that are in competition with those of traditional lenders. 

In U.S. there are non-profit organizations that help the idea owners with lacks of support and training. According to Chalupa, microfinance phenomenon has been slowly growing in U.S. for the past 30 years and is picking up steam as a result of the credit freeze. The stimulus bill that President Obama signs gave $6 million to fund microloans in 2009 and $24 million to market and manage microlending programs (2009, para. 3). Obama's mother was also involved in microfinance through the Ford Foundation in Indonesia. Another president, Bush, used microfinance as a cost-efficient and effective tool to fight against poverty in Afghanistan. He provided very small business loans to the poorest people with a majority of women by microfinance (Houchberg, 2002, para. 1). Marida Otero, who was the CEO of Accion and coordinator of the Council of Microfinance Equity Funds, was nominated by President Bush to be a member of the United States Institute for Peace (MicroCapital, 2007). These events indicate the supports of both President Bush and President Obama’s Administrations on microfinance.

To sum up, small loans can help the poor to gain the assets they need to get themselves out of poverty. Lending cooperatives and credit unions have been serving for many years but fortunately, innovation in microfinance is continuing and providing financial services to the poor by giving them fair stakes to survive from poverty. Today, the World Bank estimates that microfinance is serving about 160 million people in developing countries but this is not enough for a perfect survival (Kiva, para. 2). There are 1.4 billion people who are in need of financing against poverty and seeking an access to microfinance. 




Chalupa, A. (2009). Microfinance In The USA About To Explode?. Retrieved from: http://www.dailyfinance.com/2009/02/17/microfinance-in-the-u-s-a-about-to-explode/

Grameen Bank. (n.d.). A Short History of Grameen Bank. Retrieved from: http://www.grameen-info.org/index.php?option=com_content&task=view&id=19&Itemid=114

Houchberg, F. P. (2002). The New York Times. Practical Help for Afghans. Retrieved from: http://www.nytimes.com/2002/01/05/opinion/practical-help-for-afghans.html?src=pm

Kiva. (n.d.). About Microfinance. The History of Modern Microfinance. Retrieved from: http://www.kiva.org/about/microfinance

MicroCapital. (2007). Who’s Who in Microfinance: ACCION President and CEO Marida Otero. Retrieved from: http://www.microcapital.org/microcapital-story-whos-who-in-microfinance-accion-president-and-ceo-mariða-otero/

Zipkin, A. (2005). The New York Times. For Some, a Little Loan Goes a Long Way. Retrieved from: http://www.nytimes.com/2005/12/22/business/22sbiz.html

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