Microfinance refers to financial services for low-income individuals who are without access to banking services. It was developed by Muhammad Yunus, Nobel prize-winner and founder of the Grameen bank. It started when he launched a project in rural Bangladesh making small loans to low income families.
Examples of microfinance can be seen in loaning an individual enough money to buy a sewing machine, enabling them to produce clothing and sell it on, generating enough income to improve their living standards and repay the loan with interest. Microfinance now spans myriad other services including savings, insurance, remittances and non-financial services such as financial literacy training.
Microfinance spiked in popularity during the 2000s, hailed by leading development economists and world leaders alike, as a powerful tool that could help eliminate poverty. Expectations were high that the movement would enable individuals to lift themselves out of poverty, with programs often targeted towards poor women, providing the access to finance through them. Having women responsible for loan repayments improved their status and in some communities has even lead to declining levels of violence against women.
However since 2010 there has been growing criticism for micro finance institutions (MFI). Due to the high return rate, some new MFI’s now operate for profit and the market is becoming increasingly commercial. This trend has been condemned by Yunus who claimed that “poor people should not be considered an opportunity to make yourself rich.”
Daniel Ortega, the Nicaraguan President, supported people who weren’t repaying their loans as they had been trapped in debt, while Sheik Hasina Wazed, Bangladeshi Prime Minister, described the MFI’s as “sucking blood from the poor in the name of poverty alleviation.”
A study by Kinnan suggested that monthly consumption (an indicator of welfare) had not been increased in those who had received a loan. Potentially because families have invested in durable goods like a tin roof, providing long-term social benefits not increased income.
There are still “not for profit” microfinance organisations such as Kiva where individuals can make a loan of $25, collectively with other donors from around the world, providing a loan for someone in a dire situation to help themselves and their families.
Currently data is inconclusive, as only a small amount of information has been gathered on people who qualify for micro-loans but are not recipients. Without this comparison group it is difficult to draw conclusions on the effects of microfinance, but there are now larger scale studies being carried out using randomised controlled trial techniques. This method compares current income and assets of two groups – one of which opt to receive loans and one of which don’t – and these results will shape our future understanding.
Many people have said Microfinance is not the “silver bullet” to end poverty, and is open to abuse by western companies. Whether it will live up to its initial expectations is still open to debate.