intro to micro-financing
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An Introduction to Micro-FinancingHelping the World’s Poor
To start off: Two types of Poverty
1) Relative Poverty – An individual lacking a certain level of resources or income compared to the rest of society Example: In the US, relative poverty was set in 2011 at a yearly
income of $22,314 (family of four) and $11,139 for an individual*
*CNNMoney
And the worse kind...
2) Absolute Poverty – An individual living on less than $1.25 a day* and lacks basic human necessities: Clean drinking water Healthcare Nutrition Education
In 2011 there were 1.5 billion people living in absolute poverty throughout the world**
*World Bank**United Nations General Assembly
Why do we have absolute poverty?
Lack of resources
Political corruption
Poor are marginalized from society and not given a voice
Institutions in place benefit the rich, not the poor
Cutbacks in social services
Combine most of these together and you get…
Modern Day Slavery
27 million slaves in the world today* with some activists saying as much as 200 million
Sufiya from Bangladesh** Makes bamboo stools
5 Taka for supplies Borrows it from the paikars (middlemen) MUST sell the stools back to them to repay her loan Sells it for 5 Taka and 50 poysha Makes a profit of 2 cents per stool
Bonded slave labor Situations like this is one of the reasons why the cycle of poverty continues
*Disposable People**Banker to the Poor
How do we break this cycle?
All Sufiya needed was 22 cents Could buy her own raw material Set her own price to sell stools Sell to more people Make more of a profit Improve her family’s life (better nutrition,
medicine, shelter, education for children etc.) Better life means new opportunities and a way out of poverty
We need to provide these people with financial resources like credit
“People like Sufiya 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 – Banker to the Poor
Here’s the problem
What bank would loan out such a small amount? The costs for all the “behind the scenes” tasks like processing the
loan, salary of banker etc. doesn’t equal out to what the bank makes in interest
To make money, banks charge absurdly high interest rates on these small loans
Banks want collateral to guarantee repayment, which poor people don’t have
In the end, existing banking institutions do not help those that need it most
Finally we get to: Micro-Financing
A general term describing financial services for low-income individuals. Credit Savings Fund transfers Insurance
The poor need this because they lack access to traditional banking services
It (ideally) helps lift low-income individuals out of the vicious cycle of poverty
Micro-Credit
A term referring to a small amount of money loaned out to low-income individuals
How small of a loan? Depends on the micro-finance institution (MFI) For example: $50 to $2,000*
Interest rates: MFI interest rates range from 4% to as high as 85%**
Note: High interest rates like the 85% are uncommon and a topic of heated debate. Some argue that this is excessive and these types of organizations are exploiting the poor.**
*Hope International**CGAP
Video explaining it all
*Kiva
How does micro-credit work?
MFI’s have their own way of doing things but generally: Loan out small amount of money at low interest rate (say 10%) Individual(s) pays back the amount, plus interest at a set time
(every day/week/month) Once fully repaid, that individual(s) can take out another, larger
micro-loan
Some MFI’s like Grameen Bank set up groups of borrowers for support and an added security measure for loan repayment
High Repayment Rates
98% with Grameen Bank, 98.88% with Kiva and 96% with Hope International
Why so successful? The poor know this is their only chance to break the cycle of
poverty They are so thankful that someone gave them a chance
“Unlike the rich, the poor can’t risk not repaying. This is the only chance they have.” Muhammad Yunus – Banker to the Poor
*Grameen Bank
Women borrowers
“Micro-credit plays a critical role in empowering women, helps deliver newfound respect, independence, and participation for women in their communities and in their households.” – Juan Somavia, International Labor Office, Director-General
70% of the world’s poor are women
In 2006, 93 million poorest of the poor took out their first loan, 85% were women
Women have higher repayment rates
Money entering the household through a woman usually benefits the family as a whole whereas men are more likely to spend the earned money on themselves
International Labor Office
So does it work?
There is some debate. In Bosnia, micro-enterprises were failing by 50% just after one
year* But what support systems were in place? What MFI was operating?
Critics argue that over time the market becomes saturated and the people in these poverty stricken areas are using the same skill sets and selling the same products.* Why business 101 skills should be taught so borrowers are
encouraged to think of new business ventures
*Share the World’s Economic Resources
On the up-side
It helps poor households meet basic human needs: clean drinking water, healthcare, education, nutrition etc.
Protects against risks like illnesses and natural disasters
Helps economic welfare, stability and growth
With women borrowers it provides empowerment and thus promotes gender-equality
CGAP
Personal Experience in Nicaragua
In the end
“Micro-credit is not a miracle sure that can eliminate poverty in one fell swoop. But it can end poverty for many and reduce its
severity for others. Combined with other innovative programs that unleash people’s potential, micro-credit is an essential tool
in our search for a poverty-free world.” Muhammad Yunus – Banker to the Poor
References
Banker to the Poor by Muhammad Yunus
CGAP
Disposable People by Kevin Bales
Grameen Bank
Hope International
International Labor Office – “Small Change, Big Change. Women and Micro-Finance”
Kiva
Poverty Rate Rises in America – CNNMoney
Share the World’s Resources
United Nations General Assembly – GA/EF/3313
World Bank
Additional Resources
Ashoka documentary on Muhammad Yunus
Grameen Foundation: Empowering the World’s Poor