Over the last several decades, microfinance, broadly defined as financial services to poor and low-income clients, has become an increasingly important tool to address both poverty and social issues associated with poverty.
Initially, for example with Banco Sol of Bolivia, the Grameen Bank of Bangladesh, and Bank Rakyat of Indonesia, microfinance was focused primarily on microcredit, small loans to poor people. The basic idea was to extend credit to poor people who do not have access to finance enabling them to help themselves.
In designing products for the poor, the industry produced substantial innovations in the practices used in lending such as group lending and dynamic lending. In addition to microcredit, some microfinance institutions (MFI’s) now offer a range of financial services, including savings vehicles, money transfers and insurance specifically designed to meet both the needs and specific situations of poor people. Broad recognition of microfinance as a development strategy came with the UN declaring 2005 The International Year of Microcredit and with the awarding of the 2006 Nobel Peace Prize jointly to Mohamed Yunus and to the Grameen Bank which he founded.
A surprising outcome of the “microfinance revolution,” as it was referred to by Marguerite Robinson (2001), is that poor people, despite their impoverished situation, are good credit risks. Poor people borrowing small amounts of money almost always repay their loans, including sometimes fairly steep interest charges, and do it on time.
Initially this was taken as evidence that they find productive uses for the funds, i.e., to increase income. However, recent research by Collins, et al (2011) in Portfolios of the Poor indicates that people in poverty lead very complex financial lives. With sporadic income, few opportunities to save for large outlays, and shocks such as illness, bad weather, etc. people in poverty often have difficulty finding reliable financial tools to manage either their day to day or their larger expenditures needs. In some cases, microcredit has provided people in poverty with a valued way to more reliably manage their income even when it does not lead to higher or additional income.
In recognition of the need for additional financial tools, MFI’s are increasingly offering additional products such as microsavings, microinsurance and payment systems.
The long-term impacts are still being researched and early evidence of social benefits of microcredit in terms of education, nutrition, female empowerment, etc. are mixed. Given the risk of over-indebtedness, i.e., that borrowers may be unable to make their payments and be in a worse situation has led some to doubt its ability to alleviate, much less eradicate poverty. There is more agreement on the positive impacts from microsavings and MFI’s are increasingly seeking to provide more savings opportunities for their clients, despite the high costs of servicing very small deposits.
In order to ensure the continuation of their services to clients, many MFI’s have sought to become sustainable, i.e., able to provide their financial products while covering their costs. This movement away from donor funding has raised concerns. The goal of sustainability and consistent access to funds has led some MFI’s to organize as “for profit” institutions. The high profits generated for the founders of Compartamos (Mexico) when they began to offer shares to the public led to controversy and complaints that it was immoral to make such high profit from the poor, especially given the very high interest rates many MFI’s charge (though lower than the money lenders which are often their only other alternative).
However, the movement for sustainability also led to more professional and efficient management of MFI’s and opened the door to private sector funding that fueled the industry’s growth. That growth enabled it to continue to extend its outreach. As of 2010, the Microcredit Summit Campaign has estimated the number of clients of MFI’s to have reached over 200 million people in poverty.
The industry is currently in a state of self-assessment. Many MFI’s are reassessing the products being offered and industry groups have formed to establish standards to ensure client protection and appropriate practices. Research is still nascent concerning the impact of microcredit, much less microsavings, with the recent work with randomized control trials (RCT’s) able to shed light on some important, but very narrow questions, but only for relatively near term effects.
From its very promising beginnings have sprung many tales of success, but also tales of difficulty and failure. MI3 seeks to engage students to critically assess what is known, to extend the knowledge of impacts and best practices, and, when the opportunity is right, to give of their own time and effort to the microfinance goals of poverty alleviation.