With access to microfinance, low-income families can earn more, build up assets, and protect themselves against unexpected setbacks and losses. They can move beyond day-to-day survival and plan for the future. They can invest in better nutrition, housing, health, and education for their children. In short, they can break the vicious circle of poverty. The author of this article believed in this concept, and put it to work by founding Unitus. Unitus has pioneered a way to accelerate the growth of microfinance institutions worldwide.

As tsunami survivors struggle to repair their lives, a United Nations report on the Millennium Development Goals challenges the developed world to help victims of what Columbia University Professor Jeffrey Sachs dubs the “silent tsunami”—those who live in abject poverty generation after generation, with no apparent way out. A coalition of development charities wants the Group of Eight leading industrial nations to do the same.

Microcredit is the practice of providing very small loans to the working poor in developing countries. It enables people to transform their lives. Investing in the microfinance institutions that directly change the lives of the working poor should top our list of poverty strategies. The UN clearly embraces the approach, having designated 2005 the International Year of Microcredit.

There are many reasons why women have become the primary target of microfinance services. At a macro level, it is because 70% of the world’s poor are women. Women have a higher unemployment rate than men in virtually every country and make up the majority of the informal sector of most economies. Targeting women has also proven to be a successful, efficient economic development tool. Women are usually the primary or sole family caretakers in many developing countries. Helping them gain additional daily income improves the condition of their entire household.

More than six billion men, women and children occupy our planet. Over half live on $2 a day or less; 1.3 billion have no access to clean water; 3 billion have no access to sanitation; 2 billion have no access to electricity. These statistics – as stark and troubling as they may be – fail to capture the humiliation, powerlessness and brutal hardship that are the daily lot of the world's poor.

Massive amounts of foreign aid rarely get to the villages at the end of the road. Indeed, this top down approach to poverty alleviation has failed to trickle down. There’s no reason to think that doing more of the same will solve the problem.

What the poor lack is opportunity for economic empowerment. They have no access to money. Banks will not lend to them. They have few hard assets – a mud hut, one or two pairs of shoes and not much more. For the past 30 years microcredit lending has proven that the very poor, when given an opportunity for upward economic movement, will seize it with great enthusiasm. To date, more than 80 million have benefited. Yet it is estimated that the total market for this remarkable product is greater than 500 million.

In the U.S. only slightly more than 2 percent of our charitable giving goes outside our borders. We have historically been comfortable staying within the confines of our own backyard secure in the knowledge that our borders are safe and our lives are protected by two large oceans and friendly neighbors. Since 9/11 everything has changed.

We can reach the village at the end of the road with a message and a result that self-propels the poor up the economic ladder and is more powerful than the recruiter’s anthem of terror. And the speed at which we can reach these villages is surprisingly fast. All that is lacking is monetary resources to expand the reach – the skills, tools and know-how are in place.

What has been a specialized service of organizations like the Grameen Bank, ACCION International, Women’s World Bank and Unitus, must now go mainstream. Whereas top down foreign aid may fail to trickle down, the bottom up approach of $100 microcredit loans hits home time and time again. Microcredit lending is not a hand out – it is, in fact, Adam Smith’s invisible hand reaching down to the bottom of the economic ladder and lifting up those who so eagerly desire to begin the climb.

We know firsthand that microcredit works. With our help, one of our microcredit lending partners in rural India has grown from serving 7,000 to more than 70,000 in two years, with a 100 percent repayment rate. Few microfinance institutions in the world have seen this kind of accelerated growth. This is the way we will achieve the democratization of opportunity.

Microfinance History

Microfinance is the practice of extending small loans to the poor for income-generating activities often coupled with other financial services such as savings and insurance.

Terms and Definitions: Microfinance is a general term describing the practice of extending small (“micro”) loans and other financial services, such as savings accounts and insurance, to poor borrowers for income generating self-employment projects. Microcredit is often used as an interchangeable term. It is the practice of extending small loans to poor people for income generating self-employment projects, allowing them to improve their standard of living. Microenterprise is self-employment project or very small business run by a poor borrower. Types of business vary widely by geographic location and may include shining shoes, selling items as a street vendor, selling agricultural products, weaving, sewing or baking.

During the 1970's, social innovators revolutionized the banking industry. They created microfinance institutions (MFIs) that lent money at reasonable interest rates to poor women who could not offer collateral. Not only did the borrowers expand their businesses and increase their incomes, but their high repayment rates demonstrated that the working poor are capable of transforming their own lives given the chance. This model of lending disproved all conventional thinking. Microfinance was born.

More than a quarter century later, MFIs serve more than 80 million poor people in developing countries with over $7 billion in outstanding microcredit loans. They exist in many forms – credit unions, commercial banks and, most often, non-governmental organizations (NGOs). Repayment rates average higher than 95 percent while commercial loan repayments from large businesses often fall below 50 percent. The high repayment rates demonstrate that the working poor are willing and able to repay their loans, and that they are capable of transforming their own lives given the chance. Microcredit promotes self-reliance and empowers the poor to lift themselves out of poverty.

Poverty in the Developing World

Poverty crushes the human spirit. Three billion people — half the world’s population — live on less than $2 per day, unable to meet their basic human needs. Malnutrition, lack of health care, substandard housing and illiteracy breed desperation, disease and daily suffering. Poverty traps future generations in a vicious cycle without hope or opportunity. In an increasingly globalized world, no one is immune to these problems.

Most of the world’s poor are self-employed. Each day, without the security of formal jobs, they eke out livings, whether it is by raising chickens, selling produce in markets or weaving baskets. Despite working from dawn to dusk, there is no money left over to improve their quality of life or expand their businesses. All they earn goes toward basic survival.

So why then can’t the poor improve their lives? In most cases, it is because local money lenders, often the only available capital source, provide business loans at exorbitant annual interest rates of 300 percent - 3,000 percent. Under this system, virtually all of a borrower’s financial gains are passed directly to the money lender. Individuals do not reap the rewards of their own hard work.

Focusing on income-producing solutions for the working poor is a powerful way to alleviate the pain of poverty for an entire family.

Poverty Statistics
According to 2001 World Bank Poverty Indicators

• Three billion people – half the world’s population – live on less than $2 per day.
  
• 29,000 young children die every day from preventable malnutrition and disease.
  
• 900 million people live in slum-like conditions without access to clean water and sanitation.
  
• 104 million primary-age children are not in school.
• Annual per capita income: U.S. $30,600 / Poor Countries $410
• Literacy rate: U.S. 97% / Poor Countries 30%
• Deaths per 1,000 children under 5: U.S. 6 / Poor Countries 107
• Children under 14 in the workforce: U.S. 0% / Poor Countries 19%

Reprinted with permission from Unitus. The author is Mike Murray, co-founder and chairman of Unitus. Mike is a venture philanthropist committed to economic and social empowerment of the poor.

To read another Global Envision article about Unitus, see Unitus Makes $1.9 Million Microfinance Investment in Pro Mujer .

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