Type the words "microfinance" or "microloan" into any search engine, and you’ll be inundated with tales of once hopelessly impoverished people exiting poverty. A person living on next to nothing suddenly becomes a successful entrepreneur, able to feed her family, send her children to school, and make improvements on her home. She does this by taking out a tiny loan, usually no more than two hundred dollars (and often as little as forty dollars).

A loan that size is peanuts in the developed world, but to someone living on a dollar a day, that amount could allow someone to open a shoe stand or start a small restaurant. A little money could enable
someone to buy a carrying mule, or a cell phone
she can loan out to neighbors for a small profit.

Currently, there are thousands of "banks of the poor" or Microfinance Institutes (MFI) operating worldwide. Some MFIs consist of a person in a hut with a cashbox and a receipt book. However, others have become sophisticated enough to service thousands of clients. These institutions have served anywhere from 30 to 50 million people. Today, somewhere in the neighborhood of 2.5 billion dollars is being loaned out to start-up entreprenuers--all in tiny amounts with interest rates ranging from 25 percent to 100 percent.

Critics of microfinance charge that the high interest puts MFIs on par with loan sharks and moneylenders. Proponents of microlending counter that interest rates are high because poor people often have no collateral with which to take out a loan. This makes the risk of loan-default higher. And in most developing countries, property rights are not protected, which makes securing loans much more difficult in general. That said, MFIs may be the best current option for development.

Given the overwhelming evidence, it appears that microfinance does some good. A study in Indonesia showed that microcredit borrowers were able to increase their incomes by 12.9 percent, whereas a control group showed only 3 percent growth. A different study, done on Bank Rakyat Indonesia's loans to people on the island of Lombak, reported that clients increased their income by an unbelievable 112 percent and that nine out of ten recipients moved out of poverty. An eight-year study in Bangladesh demonstrated that, among the poorest in the country, only 4 percent were able to pull themselves above the poverty line without assistance. Recipients of loans from the Grameen Bank, a global leader in microlending, escaped poverty at a rate of 48 percent.

The Grameen Bank makes an interesting case study in the world of microfinance. It was unofficially started in 1976 by Dr. Muhammad Yunus, an economics professor. Dr. Yunus became taken with the idea that the extremely poor, particularly women, could escape poverty by taking out miniscule loans. He launched this concept with his own money.

A $200 loan is peanuts in the developed world, but to someone living on a dollar a day, that amount could allow them to open a shoe stand or start a small restaurant.

From these inauspicious beginnings came the Grameen Bank of Bangladesh, officially founded in 1983. The Grameen Bank serves almost four million borrowers a year, helping 10,000 families escape poverty every month. The Grameen Bank recently gave birth to the Grameen Foundation, a US nonprofit that assists MFIs worldwide in implementing the successful model created by Dr. Yunus.

Perhaps the most compelling reason for imitating the Grameen Bank on a global scale is its incredible loan recovery rate. Grameen borrowers have repayed their loans at a rate of 99 percent, which is higher than credit cards, student loans, or home mortgages.

“Although the borrowers are poor, they are proud,” says Kay Hixson of Grameen Foundation USA. “They feel an obligation to repay their debts because they see fast results.” For example, Hixson explains, a woman can borrow forty dollars to purchase a grain-milling machine, which she can start using for a profit immediately.

Interestingly, 95 percent of the Grameen Bank's clients are female. Hixson asserts that the reason for such a positive repayment rate is simple. “Women are the best poverty fighters,” she says, “because as soon as they get their business going, they take care of their children. Thus, their nutrition gets better; thus there is less illness; thus, there are less medical expenses. They can pay school fees and the children get an education. The next generation moves up.”

Last year, Hixson traveled to the Philippines to see firsthand one of their more successful microlending partners. One woman she met had started a business drying, curing, and selling fish that her husband caught. Demand became so great for her product that she hired additional workers and began to use fish caught by her neighbors. Her success eventually led to twenty employees in her community. The benefits of microlending, Hixson says, “often become circular and supportive in this fashion.”

Hixson adds that long-term studies on the Grameen Bank model have shown that a ripple effect occurs when women escape poverty. First, they use profits to better care for their children. Secondly, additional money is frequently used to take care of elderly or infirm family members. Also, the Grameen Bank cites increased investments in homes, such as the installation of air conditioning, glass windows, and improved sanitation.

The World Bank estimates that only 4 percent of worldwide demand for microfinance loans is currently being met.

In addition, Hixson attributes the Grameen Bank’s success to its peer group networks. Rather than loaning to one woman in a community, the Grameen Bank loans to a number of women in one village. The loan payments are due once a week, at the same time for everyone. All of the Grameen Bank borrowers meet, where they discuss their businesses' successes and failures. This allows banks to spread out their liability and reduces the risk of loan default.

The veteran borrowers, many of whom have already repaid their loans, often advise the group. If someone is unable to make their payment that week, they owe an explanation to the group. This, apparently, is a more powerful incentive than high interest rates or late payment penalties. “Peer support and peer pressure,” Hixson says, “are the things that make the repayment rates so high.”

“Some of our businesses have grown too large to continue with microloans,” Hixson says. “They’ve moved up to what some call small business loans, but these people often want to continue going to the meetings for the group support. They help each other.”

Grameen Foundation USA is currently working with partners in over 20 countries, from Africa to South America to Asia. They assist their partners in everything from setting up nutritional goals for their borrowers, to teaching the lending agencies how to use computer databases.

Though microfinance serves an enormous number of people already, demand is still largely unmet. The World Bank estimates that only 4 percent of worldwide demand is currently met and nearly a half a billion of the world’s most impoverished people are still without access to microfinance.

Once again, the Grameen Foundation has an interesting answer to this problem – private investing. “Revolving loans won’t cut it,” Hixson says, referring to the amount of money needed to reach the world’s most impoverished people. “The demand is just too great.” The Grameen Foundation is currently trying to group microfinance loans into large amounts so that investors will be able to see a reasonable return in a short time.

The driving ideal behind the Grameen Foundation, and microlending in general, is self-sustainability. “That’s why the Grameen Foundation's partners give loans, not grants,” Hixson says. With microloans, people understand that they are being given something they have to pay back and there are strong incentives to prosper.

“It’s fascinating how much borrowers can do with so little,” Hixson says, “and the difference it can make.”






Contributed by Sam Wardle, a writer in Asheville, NC. Reprinted with permission from A World Connected.

To read another Global Envision article about Dr. Yunus and Grameen Bank, see Eradicating Poverty One Loan at a Time.