Microfinancing: The Key To Reducing Poverty

Everyone is aware we are in for some hard economic times ahead. Businesses are closing, employees are being laid-off and the federal government has been in a non-stop debate over various bail-out plans. While we in the United States and other developing countries are shocked by this sudden economic recession, people across the world have been living in a permanent depression, with many surviving off as little as one dollar per day. There are thousands of organizations attempting to lift Africa out of poverty by donating money, food or political support, and while these intentions are good, they are not solving the problem in the long-term. Perusing the internet this past week, I found many blogs and articles discussing microfinancing, a concept I believe is one of the best solutions to ending this extreme lack of capital. In general, it involves loaning small amounts of money to people, usually women, who want to start or improve a small business. Muhammad Yunus, a Bangladeshi banker and economist, brought the idea of microcrediting to the world's attention after he founded Grameen Bank, (pictured to the right), which provides this type of financial support to people in need. Poor women, who often do not have a source of income due to lack of education or capital to start a business, and who are therefore unable to apply for a normal bank loan as they do not have an account or credit history, are candidates to receive small loans of $15-75 dollars as long as they have an existing business, or ideas for an intended one. The money is used to buy supplies for their trade, which most commonly involves the selling of groceries or hand-made crafts such as bowls, blankets, clothes or accessories, as illustrated by the picture below of a woman who used her loan for a clothing business. Recipients of microfinancing are expected to repay the loan with a small interest rate. This is an impressive and ingeniously simple concept for two reasons. First, women hardly default of their loans, and secondly, the interest can be used toward a loan to another small-business owner, making the program almost self-sufficient. It is my opinion that microlending is one of the most successful ways to afford people the opportunity to lift themselves out of poverty and make a long-term change in their lives. In my search of the internet, I found two other bloggers who also felt strongly about this topic, and enjoyed reading what they had to say as well as commenting on their posts. Laura Mehes, a volunteer for the nonprofit Apoolo Na Angor, promotes and explains her Ugandan microlending project in her blog, Lau, while Robin, author of Direct From Dakar, is currently traveling around Senegal to study first-hand the "impact of small loans on financial development" in the country. Robin's blog discusses what she hopes to find and how she plans to conduct her research. I left a comment of my thoughts, questions and opinions on each of their blogs but included them below for convenience. It will be interesting to see where the microcredit industry takes Laura, Robin and the world in the future.



Lau: Financing Microfinance

Hi Laura,

I came across your travel blog while researching microlending and felt compelled to comment. It was interesting to learn that Apoolo Na Angor, a group I was not familiar with, is a "completely self-sustaining, volunteer-run organization," and is developing a microfinancing program that will also be self-sufficient and able to "regenerate the funds needed...while simultaneously improving the lives of rural women." In my opinion this is a very effective way to help those in poverty since it provides the skills needed to build a better life in the long-term. In other words, it is the idea of "teaching one to fish, rather than giving one a fish." I found it especially intriguing that ANA's microlending project is made up of "cells" of thirty-five women and sub-groups of five, with loans made only to women in sub-groups so that they "can support one and other in their income generating activities, as well as build a support system in case of defaults on loans." You also mention that because of these groups, "they can pressure each other to make payments and also help each other make payments if one of the group members is struggling." I think the idea of teaming people up to increase accountability is good, however, I have questions about how it works in reality. For example, if one woman does not make a payment, why will the rest of her group members pressure her to do so? Is it resting on the belief that people will do so because it is the right thing to do, or is there a punishment for the whole group if one falls behind in payments? Since no consequence is mentioned, it seems as though it functions on "peer pressure," which I'm not sure would be entirely effective. Also, when women repay their loan with interest you note that they must contribute part of their profits to the group account as well. It seems to me that those in this program are expected to repay a lot (the loan, interest and contribution) when most microfinancing organizations only require a payment on the loan plus interest. What percent of their profit must they return to this group account? And what if they cannot afford this additional expense? Despite my questions, I admire the thought behind this approach, and understand and appreciate that the interest and contribution make this program completely self-sustaining and ever growing, though am uncertain how groups will truly account for each other and afford the extra contribution payment. In all, I think microlending is a wonderful way to really change people's lives and wish you luck with your project. I look forward to hearing from you at my blog, www.devonvdemars.blogspot.com.

Direct From Dakar: Microfinance in Senegal and a Long Technical Blog Entry

Hi Robin,

It appears you have an exciting and challenging task ahead of you! I also am researching how the microcredit industry works, though unlike you I will have to base my information on only secondary research. It will be interesting to see what you discover while out in the field! Although you plan on learning how microfinancing "impacts women's financial and social situation in rural Senegal" as well as their communities and gender roles, I was wondering what your thoughts are on these topics before beginning the study? I would like to know if you have a hypothesis or certain expectation, as it can make final results fascinating when they prove your supposition true or false. To give you my own opinion on those topics, I strongly believe that microlending can significantly impact a female’s financial and social situation over time because with her own capital she can be independent, which I believe is vital to improving her overall condition. With independence, she does not need to stay with a man who mistreats her or her children, can demand rights or an education and will eventually achieve more power and status in society. In time, females may attain equality. Some argue that women’s empowerment in Africa should be achieved diplomatically by applying international pressure or requesting governmental action, however much has shown that even where males and females are given equal rights under a nation’s constitution, it is not always practiced in reality. It is my belief that programs providing educational, vocational and financial opportunities to women will be the most successful way to truly improve the lives of women and their communities. To that end, I expect your research will find that communities as a whole benefit from this gendered-microfinancing. Women are often the backbone of the African community, and when they are better off, the whole community is better off. For more information on how a whole village can be positively affected, I suggest looking at www.Camfed.org. How powerful do you imagine this lending scheme will be in changing the situation of women? And do you think this will be one of the best ways to help solve poverty, or just one of many ways? I am eager to hear your current thoughts and opinions as well as your future findings. You can reach me at www.devonvdemars.blogpsot.com with questions or comments. Good luck with your study!