Written by Abbie Condie //
My eyes were starting to blur as I scanned row after row of numbers. Portfolio at risk? Unique clients? Average loan size? So microfinance is really just… finance? Despite a degree in International Relations, the truly obvious had finally dawned on me a few weeks into my internship at Opportunity International: Microfinance is just banking – banking for poor people.
But as I went on to finish my internship and eventually start working for Opportunity, I realized how truly essential extending basic financial services is to millions of people around the world.
What is Microfinance?
So why even distinguish between microfinance and finance? Practically speaking, the “micro” in “microfinance” refers to offering financial services on a “micro” scale – smaller loan amounts, savings balances, and insurance premiums. Let me start by clarifying that not all microfinance is good microfinance. Practices such as payday lending (high-interest loans on short notice that help you make it to your next paycheck) or loan sharks often hurt people more than they help them.
However, there are also hundreds of socially-conscious finance companies (cooperatives, savings and loan companies, even banks) around the world that specifically cater to people living in poverty, providing them with access to capital to grow their businesses and a safe place to save their money. Why aren’t normal commercial banks doing this? The typical answers are that it’s too risky to lend to poor people (hard to find – addresses and contact information changes frequently) and the reward is too low (the loan amounts/savings balances are too small). This is where socially-conscious companies, often partnered with non-profits (like Opportunity) come in.
Opportunity works with partner organizations (microfinance institutions, or MFIs) to design products and services that address the specific financial challenges facing poor people. For example, one barrier to getting a loan is a lack of collateral, or a guarantee. To overcome this barrier, many MFIs offer Group Loans, a group of people (usually women) from a single community co-guarantee each other’s loans instead of taking on the risk personally. In this situation, the pressure to repay comes more from other members of the community, who can work out more flexible repayment together were someone to default.
This regular meeting time also acts as a great setting for trainings on business skills, managing finances, and more. Many of these Trust Groups also take on community projects. For example, one of Opportunity’s Trust Groups in Colombia just built a school in their neighborhood. And by that, I mean literally purchasing the materials themselves and assembling a two-room schoolhouse from the foundation up – brick by brick.
I got my first real taste for what running a microfinance institution looks like in the day-to-day when I spent five weeks in Ghana working with one of Opportunity’s partners there – Sinapi Aba Savings and Loans. The name of the institution, Sinapi Aba, or “mustard seed,” is based on the biblical parable (to have faith like a mustard seed, which grows into a giant tree). This was the faith they had twenty years ago visiting rural communities, talking to local leadership, and gaining support for their vision of extending financial services to the poor. Sinapi Aba is now one of the largest microfinance providers in Ghana, and is internationally recognized for their quality of services and dedication to the poor. The mustard seed parable is also a vision for Sinapi’s clients: starting with small businesses, and watching them grow and flourish with access to capital and training.
Does Microfinance Actually Help Those Living in Poverty?
Does microfinance actually work? I think so. Small loans help people grow their businesses, and savings and insurance help people weather financial shocks. Financial measurements like “portfolio at risk” (loans that are past due on repayment) are closely monitored to make sure that clients are not being given loan amounts that will overburden them, or too many loans at the same time.
I also believe microfinance a compelling approach to poverty alleviation because—
- It gives people dignity. Microfinance is not charity. It simply gives them access to resources (capital, business information, etc.) that wealthy people already take advantage of, only catered to their specific needs and demands. Additionally, many microfinance institutions specifically look for ways to help marginalized groups in their communities – whether that be empowering women, ethnic, or religious minorities.
- It’s sustainable. A well-run microfinance institution does not need grant funding to break even. Instead, money these institutions lend out is returned with interest that covers staff and business costs – then is lent out again. Again, much different than your typical charity work. This means grant funding can be directed towards designing/testing new microfinance products and services instead of just covering day-to-day costs.
- It’s highly adaptable. Specific products and services are created for particular countries, regions, and markets (specific businesses like agriculture, education, etc.). For example, in Ghana, our MFI partners offer Susu savings, which is based on traditional money lending and savings practices that have been in West Africa for centuries, where a money lender visits you daily at your home or business to collect saving or loan repayments in smaller amounts. The only difference is that now, these traditional practices have an institutional guarantee behind them.
Where is Microfinance Headed?
The microfinance community is headed in exciting directions. Building on decades of strong experience, MFIs are continuing to innovate – stretching the possibilities of microfinance as a means of poverty alleviation. Great strides have been made in using specifically-designed financial products to address issues of education access and quality, farmer productivity and food security, and women’s empowerment. Additionally, advances in digital and mobile technology are on the cusp of revolutionizing the delivery microfinance products and trainings in a more efficient, cost-effective manner.
Ultimately, the beauty of microfinance is that we – the non-profits and organizations – can’t really take any of the credit. To borrow from Opportunity’s mission statement, we just provide the finance and the training. But in doing so, we empower the people we serve to transform their lives, and by extension, their families and their communities.
Abbie Condie works as a Research and Knowledge Coordinator for Opportunity International. Abbie began an internship at Opportunity in June 2015; she stuck around long enough that they eventually felt obliged to start paying her. More information about Opportunity’s Knowledge Management team and their research related to microfinance can be found here. link: https://opportunity.org/news/publications/knowledge-exchange/