As a young business person, I have found it increasingly important to think about giving back to my community and the world around me. While I believe it is important to start at home, before trying to help people in other countries, it is important to gain a global perspective on the landscape around us; how systems are interacting on a global platform to impact our everyday lives and decision-making processes. About a year and a half ago I worked for a Philanthropreneur who opened my eyes to the world of philanthropy, and the idea of Microfinance, Microloans, etc. From there, he shared with me the concepts of MacroFinance, and Macroloans. This world helped me to delve into the contemporary definition of philanthropy (and how we may come to see it tomorrow – the Philanthropreneur I worked for is ahead of his time).
Today, I am going to share with you the world of MicroFinance, brought to you by Muhammad Yunus.
Microfinance, originally introduced by Muhammad Yunus, has drastically altered the landscape of lending and borrowing in developing countries. To his credit, Yunus won the 2006 Nobel Peace Prize winner for his work in social and economic development, specifically in the area of Microfinance.
Microfinance provides financial services to low-income or solidarity lending groups, including consumers and the self-employed, who lack access to banking and financial services, at lower interest rates. The microloans are usually paid back within six to twelve months, and are reused as other loans, ensuring that more people benefit from the loaning process. The basic idea behind microfinance is exemplified through Kiva, a non-profit company which seeks to connect the less-fortunate with loans that can be repaid over time with minimal interest. Individuals are able to donate as little as $25 to help support an initiative.
The basic foundation of microfinance, to give loans to the impoverished for start-up business, has specifically helped children and women in developing countries gain independence and make a living for themselves. Over the past thirty years, microfinance institutions (MFIs) have given small loans to poor or low-income people, taking minimal collateral (if any). The microfinance movement is premised on the dream that low-income households have permanent access to quality financial services to finance income-producing endeavours, “build assets, stabilize consumption, and protect against risks”.
Services include microcredit, savings, insurance and money transfers. Other services include education and support, which are integral to providing lasting growth and prosperity for lendees. While microfinance has helped to bring economic independence to women and children, there are questions as to the long-term stability of the microfinance movement. Does it provide the long-term answer for the world poverty crisis?
There are three (3) main issues with Microfinance:
Short-term Focus: A Band-Aid for Extreme Poverty
Due to the extreme poverty, some loanees have taken on loans in the guise of starting a business, but have simply used the loan to cover their personal expenses. In places such as India, when a woman is found to have a MFI loan, the dowry price increases, lessening the likelihood of her using the loan for business purposes. Extreme poverty provides a strong foundation for exploitation of not only the people, but also the gift itself.
In developing countries, only the extreme poor are given microloans. While the poor loanees are given support by weekly community support groups, it is questionable whether or not they have the skills, or the market opportunity to make a lasting impact on the economic landscape of the country. Can such an investment truly see high economic return for the country? Microfinance is only addressing what its name implies, the micro issues within the country, and forgetting to provide solutions at a macro level, that could change the economic prospects of the entire country.
Microfinance takes a minimalistic approach to a larger issue.
While microfinance addresses the issues of individuals, it lacks the foresight to solve the core issues of multi-generational poverty, and exploitation. An entirely new economic system needs to be implemented if lasting change is to be realized. Microfinance merely provides a uni-generational Band-Aid to a multi-generational issue.
Loans should also be available to citizens that have already shown business acumen; the loan would be an investment into an already proven business, or concept. Why is it that formalized microcredit is superior to informal credit systems already in place in developing countries?
High interest rates, dictated by MFIs
Over time, dishonest MFIs have begun to target women in their lending strategies. Women tend to repay their loans at a higher rate than men, and are more likely to take out a loan and pour it back into their business – instead of spending it on themselves. Dishonest lenders have the potential to exploit women’s dependability by charging high interest rates, or encouraging them to take out larger loans than necessary.
In order for microfinance to succeed, or more specifically, microcredit, loanees must be able to pay back the loan, plus interest. There is no guarantee that the small business venture will be prosperous. This extreme pressure exerted over lendees has forced relatives to take on the debt of dead relatives. Instead of passing on a legacy of economic growth, many poor loanees do not have the resources to pay back the loans plus the accumulated interest, thus thrusting themselves and their relatives into deeper poverty.
Lack of Loanee Control
A lender’s top priority is to ensure that their money will be returned to them. In a lender-small business relationship, the business owner usually loses, because of their lack of experience and need of the money. The lendee must be able to “generate income at a higher rate than the interest they are paying”. The best time for any business to seek financing is when they do not need it. In the negotiation process, if the potential loanee desperately needs the money, they have minimized their bargaining power, as they grasp for any and all resources that appear before them. The lender has the opportunity to seize the most control, because they are the financer, limiting the vision and decision-making power of the small business owner.
MACROfinance is the Answer:
Microfinance might not be the best long-term answer, although it is an admirable beginning. Instead, Macrofinance is the ultimate provision that can create lasting economic change throughout the world. Macrofinance takes a holistic approach to the issue of poverty, and its fruit. It creates shared value for both the donator and the recipient. The donator is able borrow the money to make a loanation (loan + donation) to charity. The donor then receives a tax credit, or profitable gifting arrangement for their charitable donation. This form of profitable giving produces a whole new realm of shared giving; one can do well while doing good in a philanthrofinancial, philanthronomic system.
Philanthropy demands that people on a national and global scale ban together to initiate change. While Microfinance is a great start, it might not have the strategy in place to initiate lasting impact, economically or socially.
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How do you make the world around you a better place? Have you donated to Kiva, or a similar Microfinance institution before? What successes have you seen?
by Brienne Torley is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 2.5 Canada License.