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