Microfinance and Poverty

Poverty and Microfinance are two sides of the same coin. Microfinance is there because there is poverty that needs to be fought globally.

Microfinance and Poverty
Microfinance: Developing Paths to Self-Sufficiency

And, Micro-financing or Micro-lending is one of the systems that could effectively help in poverty alleviation.

Here are some reasons that will encourage you to take part.

  • Poverty means Death

In the West, it is easy to lose sight of the urgency of tackling poverty. . . But poverty in the Third World means death. For the 1 billion people who live on less than $1.00 a day, one bad cold, one unlucky fall, one month of poor rainfall, and they or their children – or both – will likely die.

(Fareed Zakaria, Editor, International Editions, Newsweek, March 28, 2005)

There is enough food in the world to provide every human being with 3,500 calories a day. Scarcity is not the problem, but the absence of purchasing power of the ill-nourished to buy in the market.

(Jeremy Seabrook, World Poverty, 2003)

  • Most people make their living through self-employment in the informal sector

Regular salaried or wage-paying jobs are scarce in many developing countries. Most of their citizens instead make their living through self-employment in the informal sector. The Economist and the International Labour Office estimate that nearly 60% of Latin America’s and two-thirds of Africa’s non-agricultural employment is in the informal sector. In India, nine out of ten workers are in the informal sector, contributing 60% of net domestic product and 70% of income. The story is the same throughout the developing world. But without access to the quality, affordable financial services they need to fuel their productivity and reduce their vulnerabilities to external shocks, the poor majority can never grow their microenterprises into businesses that can help them escape poverty. They can never escape survival mode.

(FINCA International, Web Site, 2005)

  • World’s poorest households lack access to Financial Services

Around the globe, there are 2.8 billion people, or approximately 560 million families, who are considered poor, living on less than $2.00 per day. Of those, 1.2 billion people live in abject poverty. . . Despite recognition of microfinance as a proven poverty reduction tool, fewer than 18% of the world’s poorest households have access to financial services. . .

(Jennifer Meehan, Tapping Financial Markets for Microfinance, Working Paper Series, Grameen Foundation USA, October, 2004)

The reasons for this lack of access vary from country to country but there are certain common elements. Many of the world’s poor live in rural areas, scattered across geographically isolated regions that are difficult to serve. Many are illiterate, and thus cannot read or sign their names to standard loan agreements. Some come from cultures without consumer protection policies, leaving poor people routinely exploited by predatory lenders. Virtually all lack credit histories, business track records, and assets to pledge as collateral.

(FINCA International Web Site, 2005)

  • Formal financial institutions may not offer financial products that are appropriate to the needs of the poor.

Like everyone else, poor people need and use financial services all the time. They need financial services to take advantage of business opportunities, invest in home repairs and improvements, and meet seasonal expenses. . .

Most of the poor, though, usually lack access to the formal financial system, so they have developed a variety of informal financial relationships with, for instance, moneylenders, saving clubs, rotating savings and credit associations, and mutual insurance societies. These informal systems are pervasive in nearly every developing country: vendors may sell goods such as seed and fertilizer on credit and the poor may use informal savings. . . to provide liquidity when the need arises or opportunity knocks.

However prevalent, the mostly informal financial services currently available to the poor have serious limitations in terms of cost, risk, and convenience. Moneylenders generally charge extremely high interest rates on loans. Buying supplies on credit is far more expensive than paying cash. Rotating savings and credit associations usually offer little flexibility in the amount or timing of transactions. Lastly, formal financial institutions may not offer financial products that are appropriate to the needs of the poor.

(CGAP, World Bank Consultative Group to Assist the Poor, Annual Report, 2004)

Given the above reasons, we could infer that:

  1. Poor people do not want to just die without doing something to their lives.
  2. Poor people, because they do not want to die due to hunger, make a living by engaging into activities that could give some income.
  3. While poor people engage on some entrepreneurial activities, they want to improve, thus, they want to have more capital to become successful.
  4. Poor people could not access financial services from formal financial sectors because banks do not want to gamble on unsecured loans.

Poor people are bankable, indeed.

One of the radical ways of changing lives is Microfinance.

Other Resources: (links to other sites)

Other Documents: (PDF/DOC)

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13 thoughts on “Microfinance and Poverty”

  1. Thanks for the well researched post. MFIs currently have high costs and risks to cover with soaring interest rates and this may continue until they (different MFIs) combine forces to achieve efficiencies in the area of service provision. At the same time, as long as businesses continue to seek profits instead of social development, high interest rates will prevail.

  2. Hi, markaz18, thank you for your visit on this site. Our site is still very young, though.

    You pointed out that unless MFIs combine forces, their effectiveness on poverty alleviation is still have a low impact as well as their efficiency on giving quality service.

    Actually, I am engaged with MFI and my experiences –as one in the middle management forces– are telling me that the more MFIs (individual operations) in the area, poor people are becoming poorer. I termed this as credit pollution. Without single, concerted efforts among and between MFIs, microfinance will be a failure.

    Your last sentence is somewhat disturbing. MFIs are sprouting everywhere because of the profits and not anymore focused on social development. However, MFIs can’t accept that fact. That is why I asserted that the more MFIs operating in the area, the more people becoming poorer.

    I am still developing a post on this but first, I will focus on the positive sides of Microfinance to encourage people to take part on it. The negative sides will caution them later not to cross the line between profits and social development.

  3. Thanks for the reply. Could you please elaborate the idea of credit pollution? If I understand you correctly, your experiences tell you as the number of MFIs in a region increases, more people become poor. This is rather discouraging from an micro-entreprenneurs point of view because it may imply that many MFI customers are being troubled by high interest rates.

  4. Well, it is something like this. Some MFIs do not care anymore on the principle: One MFI (one microloan) for one client. Because of the commercialization of microfinance and the goal towards profit, one MFI still offers a microloan to a client eventhough this client has an existing microloan from other MFIs. In this case, client is overburdened with too much credit she couldn’t handle. When this client is hard up anymore to meet her obligation, she will seek for a microloan from other MFIs to update her loan from other MFIs.

    As the money revolves and moves, this client has to pay service fees and interests but she she did not use the money for income generating project, instead she used it to pay her old debts.

    When poor people are given too much access to capital they always tend to borrow more which is not commensurate to their ability of putting that capital to some productive activities. Outreach and credit access should be evaluated, vis s vis, with the services of MFIs’ capability building programs and governments support programs.

    Micro-entrepreneurs will sprout everywhere, competition will become stiff, demands will shrink, income will dive. Well, these are the things I observed in the field and I am making an article on this and I will post it later here. Thanks.

    1. That definitely seems like a good idea for an article. If we look at this problem from another angle, we see that it isn’t the MFI’s fault only. The fault lies with the borrower, for not ascertaining his/her business needs and not being too greedy. Would you agree?

      1. Yap, that’s it. I think you pointed out that poverty alleviation is a social process and not a mere social welfare case. There are a lot of ingredients to this and MFIs cannot do it alone as you mentioned in your article on MFIs social impact. Some multi-dimensional approaches should be applied like their active participations in the management of Microfinance Institutions.

        As you can see, some MFIs started as NGO wherein they have no legal entity to accept small amount of share capital/stock or deposits. Originally, MFIs accept deposits as security of loans, they termed it as ‘voluntary savings or compulsory savings’. Partners/members/clients sense of belongingness is shown in the so called ‘solidarity value’ but this is to ensure only the ‘peer/community pressure’ of paying back what was borrowed.

        In the advent of the commercialization of microfinance, some MFIs upgraded into banks or banks –commercial and rural banks– and engage in microfinancing because of profits.

        Waaa, sorry, I talked too much. If you want, you could do an article on this. Just do it buddy, it’s ours.

    1. hi wjgrun,

      Thank you for the visit. I hope you saw what you’re looking for. Please, tell your friends what you like the most in this site. You can subscribe anytime…


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