Micro-Lending for Macro Results: Microfinance, Micro-Enterprise, and the End of Poverty

Microfinance is a big idea that is based on small change. Some researchers attribute the origin of microfinance to a village bank movement in Germany in 1864 that was successful in providing loans to rural farmers. Other researchers consider modern microfinancing to have begun in the 1970s when community development banks started in places such as Chicago (ShoreBank) and Bangladesh (the Grameen Bank). However, regardless of its origin, microfinance was initially the subject of much skepticism.

Microfinance’s mechanism works primarily by giving poor people tiny loans for their small businesses without mandating that borrowers provide collateral to gain access to these loans. At the birth of microfinance, the fact that poor people could be depended upon to pay back their loans at the due date was a reality most financial institutions and private investors refused to imagine. Typically, the poor lacked good credit history simply because they never gained access to credit in the first place. Conditions of absolute poverty existing in most developing regions of the world meant that borrowers had no collateral with which to secure their loans. As such, the world’s poor found themselves in a Catch-22; they lacked collateral to receive loans and, as a result, lacked the credit history that would make them good risks as borrowers. This vicious cycle kept many people cutoff from capital and trapped in poverty.

However, since the birth of Microfinance Institutions (MFIs), these organizations have weathered the storm of skepticism and proved that the poor can and should be given access to credit. For instance, the Grameen Bank of Micro-credit in Bangladesh currently boasts a loan recovery rate of about 98% and revenues of approximately US $ 112.40 million. Indeed, many microfinance institutions around the world, such as ACCION International and Unitus, have remained self-sustaining over the years and have proven that lending money to the poor, contrary to previous notions, can be profitable.

Today, the world is rapidly witnessing a proliferation of these institutions. In Latin America, MFIs like Pro-Muje and in Africa institutions such as Pride Africa and Kixi- Credito are making strong in-roads in promoting grass-root development in rural communities. Two years ago, the United Nations named the year 2005 the International Year of Microcredit and, only last year, the founder of the Grameen Bank won the Nobel Prize for Peace for his efforts at empowering rural women through credit access in Bangladesh. The international community seems to have finally caught the microfinance fever. In recent years, Microfinance has branched out to incorporate private sector partnerships and integration with international capital markets. These trends mean the world’s estimated 500 million small scale entrepreneurs may soon have greater opportunities to become economic engines for lifting their communities out of poverty.

The increased commercialization of the microfinance sector has meant a surge in the availability of funds for small scale enterprises. Many microfinance organizations, such as Microvest Capital Management and Kiva in the United States, act as middle men between private investors and small scale entrepreneurs. For example, through Kiva, investors can go online, select a business in the developing world, and sponsor that business by giving the business owner access to funds. These funds are then paid back in full after an agreed upon period. Global investment banks and technology firms over the past few years also have become active participants in microfinance. Firms such as Citigroup, Deutsche Bank and Google have set up foundations designed to provide loans and grants to small scale entrepreneurs in the developing world. Joint ventures between the commercial sector and the microfinance sector abound. Recently, Morgan Stanley, a top tier global investment banking firm, teamed up with BlueOrchard Finance SA, a Swiss firm, to turn microfinance loans into bonds, thus using the capital markets as an important conduit for providing third world businesses with long-term financing. This single deal raised about $100 million from bond investors.

Morgan Stanley’s partnership with BlueOrchard points to a new era of collaborations between Wall Street and the developing world. This exchange of capital could make a phenomenal impact in the macro-economy of developing countries. As the United Nation’s 2015 target year of achieving the Millennium Development Goals (MDGs) draws nearer, these new trends in micro-finance offer hope for accelerated economic gains in the developing world.

One of the primary objectives of the Millennium Development Goals is to eradicate extreme poverty and hunger by reducing by half the proportion of the world’s population living on less than a dollar a day. Unlike grants and aid to the developing world, microfinance provides an opportunity to teach the poor to become self-reliant by encouraging them to be entrepreneurial. Successful entrepreneurs improve the economies of and quality of life of people in of developing nations by increasing employment and access to food, healthcare, and education.

While microfinance alone cannot ensure that the U.N. reaches its goal of halving poverty and hunger worldwide by 2015, stronger partnerships between the private sector and microfinance institutions is a key strategy for reducing global poverty. As one campaign advertises, with microfinance as one engine of change, we can hope that by the next century, people will be able to say, “Poverty? Never heard of it.”