Because the term microfinance is used in many different contexts, it can sometimes be oversimplified and viewed in a skewed or narrow perspective. At its core, microfinance can be viewed as an innovative segment of the banking sector to provide financial products and services, primarily credit, to the poor – bridging the gap that commercial banking has not been able to fulfill, and where philanthropy has not been able to go beyond pilot approaches to reach meaningful scale. However, microfinance itself was conceived with a different purpose than just providing the poor with access to capital. Microfinance and microcredit do not provide consumers with loans to simply increase their consumption; instead, they provide loans for the specific purpose of creating self-employment for the poor, thereby enabling the poor to build their own microenterprises and move themselves out of poverty. In short, microfinance is an income producing tool rather than a consumption aid.
What was simply thought of as just providing poor individuals with access to capital has revolutionized the development world, proving that loans as small as $50 or $100 in the poorest countries, and somewhat larger ones in middle-income developing countries, can transform lives.3 Through microfinance, we have witnessed that poor individuals, when given the opportunity to start their own business, can provide for themselves and their family with basic necessities and also generate sustainable income. If they can maintain that income, it can lead to improved living standards, and for some, a means to escape poverty. If individuals achieve economic freedom, it can lead to a series of improvements—improving the well-being of families, communities and society-at-large.
The exact benefits that microfinance brings to individuals and society may be difficult to measure from a technical standpoint, which is why there are relatively few rigorous studies about impact compared to the reach of microfinance. From studies and research, however, it is apparent that microfinance is an important catalyst for poverty alleviation. One such study on two major microfinance institutions, BRAC and Grameen Bank, found that participants who have continued access to loans have a lower rate of poverty than those without access, 57 percent compared to 76 percent, respectively.4 Another study, by S.R. Khandker, found that the poverty levels in villages with microfinance programs have declined more than in villages without these programs. Among program participants who had been members for six consecutive years, poverty rates declined by more than 20 percent (about 3 percent per year). Khandker estimated that more than half of this reduction could be directly attributed to microfinance. He had calculated that microfinance accounted for 40 percent of the entire reduction of moderate poverty in rural Bangladesh.5 These studies and numerous others6 indicate that microfinance can improve overall income, increase decision-making power, and provide general self-empowerment.
From its tremendous success as a poverty alleviation tool, microfinance as an industry has gained momentum and expanded its scope and reach. The awarding of the Nobel Peace Prize to Muhammad Yunus and the Grameen Bank will only accelerate its growth. To ensure that the poor not only have access to credit but other financial services, microcredit has expanded over the years to include a variety of financial products such as savings, insurance, transfer payments, and even micro-pensions. Where regulations permit, savings can be a very powerful tool since it allows the poor to conveniently amass liquid assets that can be used to self-finance education, health care, or disaster relief while also giving the MFI a source of capital for on-lending.
Microcredit, or what is now more aptly called “microfinance,” attempts to address the multitude of the poor’s financial needs. With this expansion of purpose, the field itself has increased its reach. By the end of 2005, according to the Microcredit Summit Campaign, there were over 3,000 MFIs serving over 112 million people worldwide, of which more than 82 million were among the poorest people in the world (i.e., earning less than $1/day) when they became clients.7 As the sector has evolved to meet the growing demands for its services, it has been reinventing itself to ensure sustainability at the institutional level. MFIs and the organizations that support them have taken lessons learned from the banking sector and the business world to improve efficiency and sustainability. (Perhaps no reinvention has been as dramatic and influential as the launch of Grameen II in 2003, and its rigorous but highly favorable evaluation by SafeSave.) We have witnessed firsthand MFIs improving their loan disbursement and collection methods in order to reach more clients faster and better. They are becoming better trained and better run to meet the growing demands for their services. As the field continues to evolve in its business model and operations to increase institutional efficiency, it is also critically important that the field focus on its client success and effectiveness.
Microfinance: A Platform for Social Change by Marge Magner March 2007 Grameen Foundation
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Grameen Foundation
(Visit Grameen's Website)
Grameen Foundation's mission is to empower
the world's poorest people to lift
themselves out of poverty with dignity
through access to financial services and
to information.
With tiny loans, financial services and
technology, we help the poor, mostly
women, start self-sustaining businesses to
escape poverty. Founded in 1997 by a group
of friends who were inspired by the work
of Grameen Bank in Bangladesh, our global
network of microfinance partners reaches
over 3.6 million families in 25 countries.
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