By Samuel Steinmetz
Imagine being able to break the cycle of poverty with just a small loan – this is the reality for millions of people around the world through the powerful tool of microfinance.
For billions of people around the world, access to financial services is a distant dream. They are often excluded from the traditional banking system due to their low incomes, lack of collateral, or simply because they live in remote areas. By providing small loans and other financial services, microfinance enables the poor to start businesses, build assets, and manage their finances more effectively. We will examine the challenges and criticism facing microfinance, as well as some inspiring success stories of individuals who have benefited from this powerful tool for poverty reduction and economic development.
The loans ranging from as little as 100$ up to thousands of dollars are particularly important for households without steady income, in order to hedge against emergencies, for their children’s educations or other long term investments. In our developed part of the world a loan of that size may not seem to be of much importance or impact but for the impoverished people it enables them to break the cycle of poverty because they are able to start business or engage in profitable activities. Many microfinance organizations require the people seeking a loan to take a class on different subjects. These can range from money management to basic skills and knowledge development. Saleha B. Khumawala, has shown that this concept combined with opportunity are key factors to empower the poor. And it seems to work! A study conducted in Bangladesh found that microfinance programs increased household incomes and assets, reduced poverty, and improved women’s empowerment.
Even though microfinance has improved the lives of thousands of people it has fallen under criticism, especially for-profit institutions. Critics say it is unethical to make money of the poor. While NGOs use their profit to expand the number of people they help, other companies distribute it to their shareholders. By being a profitable business and their very nature helping the poor is not their main priority anymore. Others say that interest payments no matter their amount is still a burden. Borrowers are also sometimes unable to repay the loans due to catastrophes or simply because their business did not pay off. This can leave the recipient of the loan even poorer than before. Also a microcredit is not always enough to alleviate poverty as it may not address underlying structural issues such as inequality or limited job opportunities. Despite this criticism, microfinance remains an important tool in the United Nations first Goal to reduce poverty and can create a lot of success stories.
Finca International, a nonprofit microfinance organization, operates in over 20 countries and provides a range of financial services. Finca has partnered with local communities to provide access to credit and savings accounts, and insurance. With this they helped thousands of people to improve their financial stability and built towards a brighter future.
Lalmba Association’s plan is to empower rural communities in Africa with basic healthcare, microfinance, and support for vulnerable children. They have given ninety-eight microloans so far and have a 100% repayment rate. One of their recipients is Fatima Abagero, a single mother from Ethiopia. She turned 100$ into a restaurant at the main street in Chiri and selling raw coffee beans, grains and spices int the marketplace. Before receiving the loan, she would get occasional day labor jobs but now she is able to provide food for herself and her children.
In conclusion, microfinance has proved to be powerful and an important tool in the United Nations Goal to reduce poverty. While there are limitations in addressing underlying structural issues, microfinance organizations have successfully helped thousands of people and will provide many more opportunities to create inspiring stories like Fatima’s