Microfinance and its Increasing Popularity

About a year ago, I was first introduced to the idea of microfinance through the website Kiva.org. I was fascinated by the idea and inspired by the organization. In fact, last year instead of purchasing Christmas presents for my family members, I donated $100 to the Kiva website and my family and I chose entrepreneurs from the website to invest in.

The idea of directly investing in an entrepreneur’s personal development from halfway across the world was something really exciting. As my parents themselves are entrepreneurs, they liked the idea that they were not “donating” money, but rather “investing” in fellow entrepreneurs. It is not a donation, it is a loan; this is not only important for us, but is also important for the borrowers. They are improving their own economic situation.

As Jessica Jackley, co-founder of Kiva, explains in her TED Talk, when she went to Kenya, Uganda, Tanzania:

I never once was asked for a donation, which had kind of been my mode, right. There’s poverty, you give money to help — no one asked me for a donation. In fact, no one wanted me to feel bad for them at all. If anything, they just wanted to be able to do more of what they were doing already and to build on their own capabilities.  Because the best way for people to change their lives is for them to have control and to do that in a way that they believe is best for them.

The idea of being able to allow people to improve their own lives, in their own manner, was what really attracted my family and I to microfinance.

My family and I lent $50 to two borrowers in Kiva last Christmas.

Microfinance: An introduction

Mrs. Rajalakshmi displays loan cards issued to borrowers enrolled in Mahasemam Trust’s Microfinance Loan Program. Chennai, India.

Over the last few decades, microfinance, or microcredit, has become a popular mechanism for economic development and poverty reduction.

Microcredit can be defined as “programmes that extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families”. This “contemporary” idea of microfinance is widely believed to have been created by Mohammad Yunus, who began lending to poor women in Jobra, Bangladesh in the 1970s. He later founded his own microfinance institution (MFI) known as the Grameen Bank. In 2006, Yunus, along with the Grameen Bank, won the Nobel Peace Prize for “their efforts to create economic and social development from below”.

Microfinance, however, is not a new concept; it has played a large role in civil society for centuries and has taken several different forms outside of the modern, formal banking sector. In Latin America, for example, the use of Tandas is the most popular form of saving and financing among poor populations. Tandas are formed among a small group of people who agree to give a specific amount of money to the Tanda every week. The collected money is then given to one of the Tanda members on a rotating basis. Each member will receive the total amount of the Tanda one week during the arrangement. This system has proven to be a popular model for those communities in which “modern” financial services through the banking sector are not available. A good list of the different microfinancing models can be found on the Grameen Bank website.

Continue reading →