Microfinance for Dummies

Before I made the “prudent” decision to quit my job and blow my meager life savings doing micro finance work in Nepal, I had very little knowledge of what microfinance even was. Banking with tiny freeze-dried bills? Finance for elves?

Dr. Yunus - Nobel Prize

Some simple investigating (check out Banker to the Poor by Dr. Muhammed Yunus, the founding father of microfinance) revealed that microfinance does not in fact help our earth’s elfin poor. Instead, it is a system of credit and savings provided to a society’s most destitute peoples; people who lack proper collateral to get loans from traditional institutions.

Typically, when you apply for a loan the bank needs to know you have an S-class and a timeshare in the Poconos that they can repossess should you skip town with your high-heeled flavor of the month. They also need to make sure the amount they lend you is worth the trouble of investigating you and running their dorky little risk assessments (this is where interest derives from – it is partially adjusted for the natural inflation rate and partially a deal sweetener to make it worth the bank’s time to take on risk).

In a nutshell, unless you have 1- collateral, and 2 - a request for a significant loan amount, then bank won’t let you sit in their air-conditioned lobby sucking on their free lollipops.

Here’s where Dr. Yunus of Bangladesh gets creative. Yunus developed a system of societal checks and balances so that his Bangladeshi organization, the Grameen Bank, profitably loans to people—primarily women—from the lowest economic group in their community. Women with no car, no home, no whirlpool washing machine, no indoor plumbing. No collateral. Nothing the bank can reclaim and sell. And what's crazier - these women are asking for insignificant loan amounts (the weekly cost of your Starbucks habit). So why on earth would anyone take that gamble, for next-to-nothing? 

The driving belief behind microfinance is that poverty is cyclical. One needs capital to beget more capital. Without access to money or resources, one cannot break their current stalemate. Without loans, the poor are in a sense, trapped. They are forever living in the short-run. Forever barely getting by. 

For instance, say a woman has a business selling dresses. She does not own the machinery necessary to produce them, so she rents a sewing machine every week and must pay high amounts for it. The money she makes from the dresses goes to barely feeding her family and then buying thread and then lastly paying back the machine-owner-- leaving her broke again. So she rents again. And again. Add, rinse, repeat. Microfinance gives her access to her own modest amount of capital: the opportunity to buy her own sewing machine. With her own machine, she can drastically cut her overall costs, effectively breaking the cycle. Without capital first, none of these options exist for her. She is trapped just as desperately as that kid in the Alabama bunker two weeks ago.

When these women receive loans, something else happens as well. An arguably more-important bi-product of microfinance is confidence. Many of the women participating in microfinance hail from cultures that grant them little or no rights. Women who have never even touched money with their own hands; wives who cannot leave their houses unsupervised. Women who must sit idly by as their family struggles to feed and clothe themselves, and do nothing. Watch. 

Nepali woman receiving her first microloan

Through microfinance, in just a few short months, women go from being helpless spectators to productive contributors. Businesswomen. Successes. Commandeering their families’ financial destinies: making decisions, creating savings, investing in capital, and most importantly, investing in their children.

What exactly does a poor woman do with her new earned dough? According to a 2003 Yale Daily News study, when women earn income, they reinvest approximately 90% of it into their families. This is compared to only 30-40% for a man. This is the reason so many aid programs have identified female empowerment as the most effective way to lift a community out of poverty. Women invest in children, and children are the future. That's right - these tiny, bald, sticky-fisted potatoes will one day rule the earth. And right now is our opportunity to feed, clothe, clean, and educate them. And it starts with their mothers.

So after doing all this research, microfinance sounded pretty ideal to me: empowering the poor women of the world financially and emotionally, and in the long run uplifting communities. Sign me up! However, I’m old enough to realize that every rose has its thorns. So what’s the catch? What about microfinance is flawed? Show me the pimples! It seemed too perfect a solution for there to not be a skeleton in its cute little micro-closet. And that is precisely what I went to Nepal to figure out.

In the meantime, here's how you can help! Make a small loan today---starting at as little as $25--through Kiva and see your Starbucks money go to better use (and then get it all back!): http://www.kiva.org/lend