By Cortney Berry, M.A.
Photo: Kamala Parekh, Village Earth’s Microfinance Course Instructor
Twenty-two cents. That was the sum of money that Sufiya Begum lacked access to when Dr. Yunus interviewed her in 1976. To eke out a living, she bought material for bamboo stools on credit and then she sold the stools back to the very people who loaned her the money to purchase the materials in the first place. What profit did she make? After working all day, she earned only two cents. She was unable to borrow money from the moneylenders, because they charged up to ten percent per day. She was stuck with the middlemen, who kept her trapped in subsistence living conditions, constantly having to run but getting nowhere.
Dr. Yunus was dumbfounded by the situation—he was used to working with problems whose price tags soared into the millions, but Sufiya was living on the edge for want of a sum that most people lose in their couch (Yunus, 2003). It was this interaction that sparked the chain of events that eventually led to the creation of Grameen Bank, an institution which went on to win the Nobel Peace prize in 2006. Since its creation it has disbursed $11 billion dollars with an impressive recovery rate of almost 97%. In Bangladesh, a study concluded that more than half of the reduction in poverty was directly attributed to microfinance (McCarter 2006). Grameen Bank stands as one example among many of the impressive results microfinance can achieve. Today, microfinance is a mainstream development strategy which plays an integral role in the U.N. Development Goals and forms the backbone of many development plans large and small. Online, popular sites such as Kiva connect would-be-borrowers with lenders, many of whom are drawn by the sustainability of a model in which the same dollars flow from borrower-to-borrower as loans are repaid and disbursed, over-and-over again. The idea that a $100 loan could allow a woman to break out of a cycle of poverty is incredible and the ability to act as a lender and see a business succeed as a result is a powerful experience for donors.
The positive impacts of microfinance do vary, however, and much depends upon an understanding of the financial and business needs of a local culture so that program design can be carefully approached. It is certainly no panacea and like any development strategy it is best implemented in ways that would-be business owners and communities feel are culturally appropriate. The indiscriminate application of microfinance has at times yielded less than ideal results, proving once again that even the most effective programs cannot be generically implemented.
Loans and financial packages should be individualized as much as possible and lending groups should not merely provide collateral, but should be coached on how to increase knowledge and business savvy amongst their members (Mayoux 1998). Microfinance goes beyond simply disbursing a loan- successful programs include the community and make lending groups, which provide support and guidance. Within such a community-driven program, microfinance continues to be an impressive force for alleviating poverty. In the 35 years since microfinance hit the development world as an exciting new strategy, its popularity and prevalence continue to grow.
Whether online or in the field, the power of connecting lenders to borrowers and providing much needed capital proves again-and-again to be transformative in the lives of millions.
Village Earth offers a five-week online course on the topic of microfinance. If you are interested in participating in the session starting September 30th, please read more here.
Mayoux, Linda. 1998. Women’s Empowerment and Microfinance Programmes: Strategies for Increasing Impact. Development in Practice 8 (2): 235-241.
Yunus, Muhammad. 2003. Banker to the Poor: Micro-Lending and the Battle Against World Poverty. New York: Public Affairs.
McCarter, Elissa. 2006. Women and Microfinance: Why We Should Do More. University of Maryland Law Journal of Race, Religion, Gender and Class. 6 (2): 353-366.