PROFESSOR (Australian): As we’ve been talking a lot this semester about trends in international development, it’s imperative that we spend at least a little time on microfinance. Microfinance—which is a source of loans, savings and other kinds of financial services for people in poverty—has, uh, has in my opinion had some of the most success in poverty reduction and women’s empowerment worldwide. So, first let’s talk about what microfinance is exactly, and then we can look at the effects that it’s had on the poorest regions of the world.
Now, as I said, microfinance is the supply of financial services to people who live in poverty. Why, you might ask, can’t they just go to a regular bank? Well, if you think about your own banking experiences, you’ll probably recall that opening a savings account requires deposits of $500 or $1000. Impoverished individuals can’t come up with those kinds of funds. Also, taking out a loan usually requires proof of financial backing. This might mean showing proof of employment or assets. At the very least, it requires having a credit history. But, uh, as you can imagine, someone who has spent his or her life just trying to survive day-today is not going to qualify.
So, microfinance alternatives deal with small amounts of money…anywhere from, oh, $25 to $25,000…and therefore don’t carry the risks that typical financial services do. Such amounts of money may seem insignificant for us in the developed world, but in many places this money can go a long way. A loan of $25 can help a person in rural Senegal buy three goats to start a goat farm. A mere $100 gives a person in rural Cambodia the chance to purchase and set up a fruit stand. In other words, microfinance funds small-scale, local entrepreneurial initiatives that can lift individuals and families out of poverty.
The, um, the idea for microfinance is usually credited to Mohammad Yunus. He started lending to impoverished women in a village in Bangladesh in the 1970s. He was pleasantly surprised by how successful the women were with the businesses they started with the money, and by what a positive impact that the women’s entrepreneurial initiatives had on the entire community. He saw the money they made going right back to their families and therefore strengthening the entire society. So, he went on to found the Grameen Bank… uh, a microfinance institution...in 1983, and to win the Nobel Peace Prize in 2006.
Since then, microfinance has really taken off. Today, major microfinance providers offer financial services to poor across the world, primarily serving women. Even the United Nations and other major international organisations have enveloped microfinance as part of their development strategies. Why? Because giving women a chance to participate economically not only improves household well-being and resiliency but also increases gender equality in the larger society. Women who are able to generate income are more likely to be given leadership roles in their communities, and therefore have the chance to influence local social and political developments. In short, economically empowering poor women transforms communities for the better.
That is not to say that there aren’t challenges to this approach. The low profits derived from offering microfinance services aren’t very attractive to financial institutions and investors. And, uh, unfortunately not everyone who borrows from microfinance institutions makes good use of the money. Then when they don’t invest the money wisely and fail to repay the original loan amount, there is little that a lender can do to retrieve the loss. So, while microfinance can be an incredibly powerful development tool, it’s not a sure-fire solution.