Microfinance and its world-changing potential

Microfinance offers key financial services to some of the world’s poorest and most vulnerable people. Millions of women and men are not viewed as valuable clients by traditional banks and consequently, lack access to services. 

In 2018 alone, the global microfinance industry helped 139.9 million clients through savings, loans, insurance and transfers. Microfinance empowered the poor with financial tools, more choices and greater capacity to change their lives. 

Many Canadians take this kind of financial inclusion for granted. We assume we can access useful and affordable financial products that meet our needs. But around the world, an estimated 1.7 billion adults don’t even have access to a bank account.

That’s where microfinance steps in – not just to help families become self-sustaining, but as a key driver of social change, including women’s empowerment. It’s perhaps not surprising that some 80 per cent of microfinance clients are women. 

In this article, you’ll learn how microfinance is transforming lives for the world’s most vulnerable people – especially women and children. 
 

1. What is microfinance?
2. Why is microfinance needed when banks already exist? 
3. How did microfinance originate?  
4. How does microfinance help the poor?
5. How does microfinance empower women?
6. Who offers microfinance services? 
7. What are the criticisms of microfinance?
8. How can I help through microfinance?  

1. What is microfinance?

“This is not charity. This is business: business with a social objective, which is to help people get out of poverty.” – Muhammad Yunus, 2006 Nobel Peace Prize Winner


In Zambia, microfinance helped Sanford (centre, yellow shirt) cultivate more of his land. He turned a profit, fed his family and covered school costs, then repaid the loan. The next year he borrowed twice as much, earning enough money to build a new house. Photo: Agatha Mali 

Microfinance is a term used to describe a range of financial services, such as savings, loans, insurance and money transfers. It helps some the world’s poorest and most vulnerable people achieve brighter futures. The main goal is providing equal access to financial services to help people become self-supporting. Another goal is social change, including women’s economic empowerment.

Women and men who have traditionally been excluded from the formal financial system can benefit greatly from microfinance. It offers poor and low-income people the power to make everyday decisions many of us take for granted. Things like:

•    how to buy equipment like a sewing machine or a masonry tool kit to start a small business
•    how to repair a broken roof 
•    how to pay for a child’s clothing and schoolbooks
•    where to get the funds for a family emergency such as funeral or medical expenses  

Microfinance clients are hard workers with dreams for brighter futures. They want to give their children better lives than they had. Many want to hire workers and improve their communities. To get there, the poor need and deserve access to basic financial services. Things like:  

•    small loans 
•    savings accounts
•    insurance
•    mechanisms for money transfers  


In Myanmar, Thin Thin’s flower business is rapidly expanding, thanks to her hard work and microfinance loans. Next, she strives to drill a borehole for clean drinking water and irrigation. Stable income in families means brighter lives for children. Photo: World Vision Myanmar  

Microfinance programs come with a vision for transformation. Many programs offer training, in skills like financial literacy, and support services such as business coaching. With the help of microfinance, people everywhere can gain the power to:   

•    start a small business
•    expand to provide jobs for other workers 
•    save for larger items like machinery 
•    insure their crops against threats like drought 
•    provide necessities and opportunities for their children  
•    send funds to suppliers or family members who live far away 
•    access markets beyond their immediate community 

2. Why is microfinance needed when banks already exist? 

“People … were poor not because they were stupid or lazy. They worked all day long, doing complex physical tasks. They were poor because the financial institution in the country did not help them widen their economic base.” –Muhammad Yunus, 2006 Nobel Peace Prize Winner


Krishneshwori (centre) has been saving her money through the World Vision-supported savings group in her community. She learned about tailoring there and is now earning a greater income. Photo: Nissi Thapa

Imagine you are a single mother in a remote community in Nepal. You are known for your sewing skills and want to start a small tailoring business. Your dream is to expand and hire other women. But you have no credit rating and no collateral to borrow against.
 
Even if the closest bank would offer you an account, it’s three days’ walk away. Banking services are too expensive for you. You can’t read, rendering simple documents impossible to navigate. And you may not trust the bank to have your interests at heart. 

These are common barriers facing many in the developing world, especially in remote areas. It’s not surprising that 65 per cent of microfinance borrowers reside in rural regions where traditional banking and lending is difficult or impossible.


In rural Malawi, about 25 people who do not have access to formal financial services have formed a savings and loans group, guided by World Vision. It’s the first step toward filling some of the gaps left by commercial banks. Photo: Jon Warren

Microfinance services are critical in the developing world, where 1.7 billion adults remain “unbanked”. Without a bank in their corner, these people have no access to an account through which to save, borrow and send money. Nearly half of people without a bank account live in just seven economies. 

Microfinance fills the large gap historically left by traditional banks, allowing people everywhere to live out their potential. Even clients with no existing credit rating can leverage their income and follow their dreams. 

3. How did microfinance originate?   

“For many years now, I have been impressed by the power of a simple, small loan to those for whom fate and circumstance have resulted in disadvantage.” – Queen Rania Al-Abdullah of Jordan 


In Senegal, microfinance helped Miriam increase her number of livestock. With the income this has generated, Miriam has opened a small hairdressing salon in her village. Photo: Santiago Mosquera

Microfinance has existed in various forms for centuries. But the popularity of modern-day microfinance surged upward in the 1990s and 2000s. 

In 2006, Bangladesh’s Grameen Bank, founded by Muhammad Yunus, won the Nobel Peace Prize for work on microfinance. Yunus believed passionately that credit is a fundamental human right. He became known as “Banker to the Poor”. 

Yunus established the Grameen Bank in 1983, with a goal of helping poor people move beyond poverty. They could do this, he theorized, by receiving access to loans on terms manageable to them. He believed in teaching the poor some basic yet solid financial principles. 

Replicas of the Grameen Bank model now operate in more than 100 countries around the world. What started as Yunus’ personal loans of small amounts to impoverished basket-weavers created a world-wide movement. 

Thanks to Yunus, a new model of micro-lending has emerged. Loan officers judge people’s credit worthiness, not by the collateral most do not have – but by what they expect to earn.
Earlier microfinance 

Modern-day microfinance stands on the shoulders of its forbears around the world, smaller groups in Asia, South America and Europe. In the early 1700s, for example, the Irish Loan Fund system was founded to provide loans to poor farmers with no collateral. 

In the 1880s, larger and more formal savings and credit institutions began to appear in Europe. Their main clients were the poor, both rural and urban. By the early 1900s, variations on these models began appearing in Latin America. 


In Malawi, Ireen took out a microfinance loan to buy seed and fertilizer from VisionFund which also provided non-financial services such as training in methods to increase productivity. Ireen now leads a group of five famers who have created a business and together, have increased their income. Photo: Jon Warren

Modern microfinance 

Nowadays, many proponents of microfinance are championing entire financial systems that work for the poor – not just the traditional micro-loans of decades ago. Microfinance is available even here in Canada, to those with low income who don’t qualify for services with their banks.

Globally, with the development of inexpensive smartphones, telecom providers have been motivated to enter many remote regions. Today, up to 95 per cent of the world’s people live in areas with mobile network coverage. Access to a Smartphone serves as a gateway to multiple services, tools, and technologies. 

4. How does microfinance help the poor? 

“Microfinance stands as one of the most promising and cost-effective tools in the fight against global poverty.” – Jonathan Morduch


In El Salvador, microfinance helped Bryan set up a t-shirt printing business from home. In an area heavily controlled by gangs, microfinance helped Bryan pursue a rewarding alternative to joining. Photo: Corey Scarrow

Many agree that microfinance is a valuable tool to help the poor, whether they are expanding a small business or surviving a food crisis. Microfinance can help people in need by:  
 
•    Helping them get started: With a small loan, a savings account and some basic training, many farmers, fishers or entrepreneurs begin turning a profit. They can put money away, gaining interest. Many pay off their micro-loans quickly. As their income increases, borrowers can even hire another worker or two. 

•    Empowering women: For decades, microfinance institutions have been a key driver for women’s empowerment. In 2018, 80 per cent of microfinance borrowers were women. Empowering women yields undeniable returns, for everyone in the community. 

•    Protection from “loan sharks”: Around the world, families have traditionally turned to “loan sharks” or payday lending institutions when they’ve needed cash for business ventures, necessities or debt. Such lenders often have exorbitantly high interest rates. They can trap borrowers in a strangle-hold of debt.

•    Building credit worthiness: Through microfinance, borrowers can establish both collateral and a credit rating. When the time comes to expand the company and hire more workers, many business-owners are then ready for a bank loan. 

•    Facing emergencies: With microfinance, families can rebound when emergencies strike. Consider a drought, in which farmers lose their crops and can’t purchase seed for the following year. With crop insurance, business loans and a savings account, they are better equipped to feed their families through the winter and plant again next year. 

5. How does microfinance empower women? 

“Give a man a fish, he’ll eat for a day. Give a woman microcredit, she, her husband, her children, and her extended family will eat for a lifetime.” – Bono 


In Sri Lanka, a particularly challenging dry season meant Dhammika could not pay her water bills. The pipeline was cut off. Thanks to microfinance, she was able to irrigate again and is looking forward to good income and repaying her loan. Photo: Megali Nanayakkara

Without financial inclusion, women lack the stepping stones to change their lives and those of their children. Yet globally, men are more likely than women to have access to traditional bank accounts – about 30 per cent more likely, in Bangladesh, Pakistan and Turkey. 

That’s where microfinance steps in. Many microfinance organizations have found that women tend to pay back loans more effectively than men. Women have dreams and ambitions, for themselves, for their businesses and for their families.  

At the Grameen Bank, the world’s largest microfinance institution, more than 90 per cent of loan clients are women. Many microfinance organizations make a point of partnering with female clients. This offers a great potential to bring about social change.

Microfinance empowers women by increasing their decision-making power and improving their overall economic status. For many, confidence increases. They start believing in their right to enter other spheres of society.

A 2017 study found that providing women with microfinance services could greatly impact gender equality in that country. Just a 15 per cent increase in female clients could reduce gender inequality by as much as half, the study said. 

These interventions are much needed. Though women comprise 70 per cent of the world’s farmers, they’re less likely to have a bank account than men. Women in rural areas face challenges when trying to become financially independent for some of the following reasons: 

•    Unfinished education: Girls are often encouraged to leave school before completion, for work, marriage or the care of younger siblings. 

•    Early marriage and motherhood: Once girls and women are busy with a home and children, they have less capacity to navigate complex banking systems, especially if illiterate. 

•    Lack of land inheritance rights: In many places, laws favour men, even if the property was originally in a woman’s family. This leaves a woman without assets to pledge for bank loans. 

•    Cultural attitudes: Women have traditionally been viewed as incapable of starting and managing a successful business. 

Microfinance is not a “magic bullet” for women’s empowerment. Some critics say it simply increases a woman’s already-heavy work burden. She must now run a business, on top of all her other, unpaid work. 

6. Who offers microfinance services?

“Microfinance recognizes that poor people are remarkable reservoirs of energy and knowledge, posing an untapped opportunity to create markets, bring people in from the margins and give them the tools with which to help themselves.” – Kofi Annan, former Secretary General of the United Nations 


Eleven-year-old Beatrice operates the family's treadle pump after school, while her stepfather, Patrick, waters the family's cabbage plants. The water is pumped from the nearby river using a treadle pump. Patrick was able to buy his first treadle pump using a VisionFund microfinance loan. In 2017, he bought this improved pump. Photo: Laura Reinhardt

Microfinance institutions (MFIs) are organizations which offer microfinance services to individual or group applicants. Over the past ten years, they have lent hundreds of billions of dollars with an average annual growth rate of 11.5 per cent. 

Microfinance institutions and programs come in various forms. Some organizations, World Vision, for example, are not formal MFIs, but do offer services which increase financial inclusion. Here are some examples: 
    
•    Microfinance companies: The original Grameen Bank is still among the largest and most influential MFIs in the world today. Others include KIVA, BRAC, Bank Rayat Indonesia and 51 Give in Beijing.  

•    Aid agencies: Non-profit organizations like World Vision promote financial inclusion through community based savings and loans groups. Community members decide together on the rules and terms for saving and borrowing. VisionFund, World Vision’s microfinance services arm, offers financial services – including insurance – in a more formal way. 

•    Banks and governments: Increasingly, governments, banks and credit card companies are supporting microfinance and financial inclusion. Here are the 30 members of CGAP – the Consultative Group to Assist the Poor. Global Affairs Canada is among them. 

Most MFIs are not-for-profit, focusing on helping the poor and propelling development and social change. But increasingly, some are looking to provide a solid financial return for their investors. In this way, even major banks like Citigroup Inc. are offering microfinancing. 

This has not been without its challenges, as explored in the Stanford Social Innovation Review. 

7. What are the criticisms of microfinance?

Some critics fear that microfinance lending can allow the rich to make money off the poor. The concern is that the borrowers receive loans they can’t afford to pay back easily. As a result, they accumulate interest over long periods of time. 


In Myanmar, only 5 per cent of the adult population has a bank account. Nilar (left) is not one of them. But, with the help of microfinance, she now has a successful fritter business. Her children are well provided for and educated. They’ve seen the possibilities life can bring. Photo: VisionFund

Microfinance through non-profit NGOs like World Vision eliminates that concern for many, as no one turns a profit except the borrower.

Other critics fear that microfinance is not as effective as many had hoped back in the 1970s. They do note, however, that the model offers a step in the right direction, especially when executed properly. Combining microfinance with other programs, like education and agricultural support, can further increase its efficacy.

World Vision sees microfinance as one tool among many, as Canadians partner with the poor to create brighter futures. It is not a magic bullet and was never designed to be. Microfinance does, however, give people struggling with poverty access to financial services the rest of us benefit from.

8. How can I help through microfinance?

In Sudan, Alawia (middle, holding child) formed a group with 3,000 other farmers to access credit through the European Commission. This microfinance program helped strengthen links to the private sector, increasing farmers’ income and bargaining power. Photo: Lucy Murunga

You can help families start businesses, through a donation to the World Vision Gift Catalogue. Your gift will provide a microloan or equipment and training so families can launch small businesses such as sewing, farming, dairy production, baking or weaving.

As loans are repaid, your gift will be re-loaned to help other families. Parents living in poverty have the skills, ideas and will to work. With the help of Canadian donors, they will at last have the funds needed to launch those dreams.