Although it is widely recognized that microfinance alone will not end poverty, it is a vital step in that direction. Microfinance institutions, also known as MFIs, offer financial services to underserved, impoverished communities.
Previously, entrepreneurs seeking loans in these communities had to provide collateral to borrow from unlicensed lenders at inequitably high interest rates. A number of factors, including high administrative costs relative to small loans and small returns, had kept banks from setting up shop in impoverished communities when surer profits were to be had elsewhere.
The lack of an efficient financial services industry has held back many would-be entrepreneurs with viable business plans from realizing their own potential. Women, in particular, have been excluded as loan candidates in developing communities. The lending practices of many emerging microfinance institutions, such as the Grameen Bank of Bangladesh, have given people living in extreme poverty the opportunity to realize their potential in the business community.
But the benefits of establishing microfinance institutions go beyond microcredit services alone. Services offered by microfinance institutions include savings accounts, insurance, health care and personal development. When Muhammad Yunus, founder of the Grameen Bank of Bangladesh, saw the vast amount of latent human capital possessed by people living in impoverished communities, he realized these people had the potential to help themselves if given access to the benefits of efficient financial markets, particularly access to credit. What resulted was a new approach to solving the problem of widespread systemic poverty. Despite the formidable challenges involved in transforming impoverished communities, Yunus and others have proved that it can work.
By reaching out to those people living in extreme poverty, Yunus was able to determine their concerns and interests. This understanding made it possible to arrange services in a way that made sense for each community. In his book Banker for the Poor, Yunus referred to some of the benefactors of his innovative banking practices. “When I visit center meetings, not only in Bangladesh but all over the world, in countries as diverse as Malaysia, the Philippines, South Africa, and the United States, I realize how resilient and creative human beings can be when given the chance.”
There are pros and cons for both for-profit and non-profit organizations. Some people are more comfortable with a non-profit because they are turned off by the idea of making a profit by helping impoverished people. In most cases, non-profits can provide for loans issued at lower rates than for-profits can.
Fostering strong, efficient financial markets is important in enabling communities to sustain economic growth. This is more likely to occur when profits are sought by microfinance institutions.
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Start-up costs are significant and microfinance institutions often need help from non-profit organizations in getting off the ground, but the long-term success of any microfinance institution lies in its ability to attain profitability. They do not eliminate the need for charitable contributions any more than they promise to eradicate poverty. Instead, profitable microfinance institutions supplement existing non-profit charities by accessing far more capital than charity alone can gather.
Many of the organizations that support the establishment of microfinance institutions, such as The Grameen Foundation and Accion, are non-profit, but it is through their support that many microfinance institutions manage to achieve profitability. This profitability leads to greater access to capital and greater access to loan candidates.
“[W]hile programs that reach out to the poorest clients perform less well as a group than those who reach out to a somewhat better-off client segment, their performance is improving rapidly and at the same pace as the programs serving a broad-based client group did some years ago. More and more microfinance institution managers have come to understand that sustainability is a precursor to reaching exponentially greater numbers of clients,” according to MicrofinanceGateway.org.
Microfinance institutions first began to establish themselves with the help of big players and big money. With the growing popularity of microfinance and socially responsible investing, there came demand for a way to get involved as an individual investor.
By utilizing the networking power of the Internet, many organizations have made it possible for an individual to contribute to the growth of microfinance institutions, and provided the option to make loans to individual entrepreneurs from the comfort of a personal computer. On many websites, payments can be made with a credit card using PayPal, by mail or by phone.
Combining the sustainability of microfinance with the existing popularity of contributing from one individual to another seems to be a good match. Giving money away often has only a one-time benefit. Lending money at a fair price—the interest rate—can perpetuate benefits because lenders may choose to reinvest interest earned as well as the principal. Web-based organizations such as MicroPlace and Kiva have furthered access to loan monies for microfinance banks by catering to individual contributors. In investigating some of the organizations offering these services, here are three that are well established.
MicroPlace: A socially responsible brokerage specializing in microfinance investments, MicroPlace offers convenience for the individual investor through offering securities and the opportunity to earn returns—typically 1.5 to 3 percent—on their investments. MicroPlace is a registered broker-dealer with the SEC. The website offers some good information about what they do, convenient payment options and a wide range of regions throughout the world to choose from. While MicroPlace is a for-profit organization, most of the loans are made at low interest rates through non-profits such as Calvert and Oikocredit. This would appeal to the investor who is more inclined towards charitable yet sustainable investments.
Accion: There is an extensive amount of information available describing the work they do not just for individual investors but also for microfinance institutions. Accion, which boasts more than 30 years of success in microfinance, aims to help establish microfinance institutions to the point where they can be self-sufficient. Accion has a proven track record as a non-profit organization with roots in South America offering opportunities throughout the world. Accion has begun to market housing microfinance.
Kiva: Another user-friendly platform that caters to the individual investor who may want a story to go along with their contribution. Individuals can choose a business to loan to and track the progress of that business over time. Kiva lists the microfinance institutions for each loan so individuals can choose to place their investment through a microfinance institution in the risk category they are satisfied with. Kiva has a wealth of information on their activities, including statistics for variables such as delinquency rate, default rate and other relevant figures across five differently-rated categories. Investors even have the option to purchase gift certificates and spread the word about microfinance.
FINCA International (Foundation for International Community Assistance): FINCA places both donations and investments to facilitate “Village Banking” groups. This strategy utilizes the strength of community by grouping people with similar interests in order to support each individual. Village Banking groups are able to collectively insure loans borrowed by individuals without needing to provide collateral. The website offers a number of ways to get involved. Tax-deductible donations can be made on a one-time basis or as a recurring gift. FINCA does not offer a person-to-person lending program, but with a high loan repayment rate and proven success in microfinance, benefactors can be sure that donations will help the working poor. Sponsors may also choose to make bequests through the Planned Giving Program.
In developed nations, part of what makes economies strong is local ownership of small business and thus the vested interest people have in their own communities. The growth of microfinance institutions is making this a reality for impoverished communities throughout the world. To find a microfinance organization or to learn more about microfinance, see a search engine that rates them and offers information on the various microfinance institutions. Two of the larger such search engines are MicrofinanceGateway.org and MixMarket.org.
The previously published version of this story contained errors about the status of MicroPlace as a for-profit organization and as a broker-dealer registered with the SEC.
