Enter microfinance, more specifically, microcredit. What is microcredit? In its simplest form, it is the extension of very small loans to impoverished borrowers who lack collateral, a steady employment and a verifiable credit history. It is designed to support and encourage entrepreneurship among the very poor. In many cases, it also has the effect of empowering women and uplifting entire communities. In many poor countries, women lack the highly stable employment histories that traditional lenders tend to require. At its core, mirocredit attempts to bring self-sufficiency through income generation rather than subsidies.
The origins of microcredit in its current practical form can be traced to several organizations founded in Bangladesh, but especially the Grameen Bank. The Grameen Bank is generally considered the first modern microcredit institution and was founded in 1983 by Muhammad Yunus. Yunus began the project in a small town called Jobra, using his own money to deliver small loans at low-interest rates to the rural poor.
Lending to women has become an important principle in microcredit, with banks and Non-Governmental Organizations (NGOs) such as BancoSol, Women’s World Banking and Pro Mujer all catering to women exclusively. Women represent most of the world’s poor. They have a higher unemployment rate than men and receive lower wages when employed. Typically, they are excluded from access to financial services. They are socially disenfranchised, geographically isolated and vastly undereducated compared to men. All of these factors have contributed to the feminization of poverty.
Besides the simple fact that women need microloans more than men, there are also practical reasons why banking institutions like the Grameen Bank give 97 percent of its loans to women. According to Katharine Esty, women make better use of loans than men do. Back in the ’80s, when Grameen Bank was still in its formative stage, Yunus observed that women borrowers almost always spent their money in ways that help their families over time. He observed that, when women received small loans, they did not squander their money on snacks or luxuries as men did. Instead, they used their funds to buy some chickens, a cow or some seeds. They put the money they made selling the resulting vegetables, eggs or milk into providing more food for their malnourished children or to sending them to school. Over time, they improved their families’ diet and education, contributing to the cycle of poverty alleviation. This leads to a better track record when it came time to repay the loan. Repayment rates are usually less than 70 percent at most commercial banks, but women borrowers at the Grameen Bank have achieved a 97 percent repayment rate on a consistent basis. From a financial standpoint, the poor are much more motivated to repay loans on time because the loans are the only way they can use to bring themselves out of poverty. Women are also a huge source of untapped labour. There aren’t enough charitable outreach to solve the problem of world poverty. Charity alone cannot address the problem. The poor must find ways to lift themselves out of poverty. By providing credit to poor women that allows them to start small businesses, microfinance is empowering the poor to raise themselves out of the cycle of poverty. This is how microloan is helping the world’s poor; one borrower at a time.