Do you know about Microfinance?

How many bank accounts do you have? How many banks can you see on your way to work or to school? I think it will take you some time to count. However, can you imagine that millions of people in this world do not have access to bank services as we take for granted? Those people live in the underdeveloped and rural areas on this planet. Due to their limited livelihoods they can only meet their basic living needs. They make a living through agriculture or simple handwork.

They also have the need to save money and take loans as we do, but in very few amounts. Usually, they save by hiding their money, like under the bed or bury them in the yard. Also, they change their money into valuable commodities or livestock. However, these are not safe ways to save their fortune. There is also local informal saving or loan services which will charge them very high service costs. Beside the costs, those services are illegal so there is no guarantee of safety and stability.

Why don’t modern banks help them? Banks are designed for people already with certain assets. Moreover, the high maintenance cost and low profits make modern banks disinterested in serving the poor, especially those in remote rural areas.

Actually, there are formal credit and saving institutions for poor which existed for decades. They are now called Microfinance Institutions (MFI), providing loans, savings and other basic financial services for poor people in rural areas. MFIs range from NGOs to big commercial banks. The earliest one is the Irish Loan Fund system which started in the 1700s. In the 1990s, there was a growing enthusiasm for microfinance as a strategy for poverty alleviation. Thus, diverse financial services firms were established and thrived in many countries.

These microfinance services usually involve small amounts of money, such as even a few euros. Don’t underestimate it, sometimes it is the key to change their living situation. For example, a poor farmer cannot make any money by growing the seeds he has now. But he does not have the money to buy quality seeds. He is in a vicious cycle now. However, if someone lends him some money, then he could afford the quality seeds, pay off the debts after one year and even save some money. It is where microfinance can help the poor getting out of poverty by them own.

Nevertheless, there are criticisms about microfinance that it is not actually helpful. One thing is that the interest rate is high. Furthermore, some people pointed out that most people use microcredit to buy commodities so that they cannot make money out of these. As a result, they can only take new loans for the previous one and can never pay them off.

Nothing is perfect. Microfinance does provide opportunities for poverty alleviation, but it can never work the best on its own. Other sectors need to develop at the same time, like education, basic infrastructure and gender equity.

By Yijing Zhang

References:

http://www.globalenvision.org/

https://www.youtube.com/watch?v=bpSNM625LFU

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