Is Microfinance an effective financial strategy to eradicate poverty particularly in developing economies?

I would blog on this as briefly and pragmatic as possible, as some of you may know that this topic is quite broad and would require empirical data/analysis to support any findings and recommendations.

In its simplest terms, microfinance involves extending loans to a group of borrowers or individuals, specifically the  marginalized sector of society involving poor people encountering difficulties to transact business with private and government banking institutions. In other words, these are the poor people throughout the world numbering over 1 billion living in rural areas with less than $1.25 per day and who cannot afford to meet the collateral requirements offered by banks and other financing institutions.  As such, these people  cannot qualify for credit services which, in a way, could  help improve their lives. Microfinance is also known as microcredit as lending transactions can go as low as $25.00 for a start-up business.  Grameen Bank is one of the pioneers in microfinance operations.

Four years ago, I was contemplating on coming up with an impact study regarding microfinance activities in South East Asia, in conjunction with the plan to privatize the operational aspect of a particular government owned credit facility in my home country. The study would have likewise  touched  on how the money from donor countries, multilateral institutions and affluent private individuals were utilized for these kind of operations, specifically on whether or not the funds were properly utilized/monitored and that the funds indeed were catered to intended beneficiaries, the qualified poorest of the poor. However, the said plan was put on the back burner in view of the 180-degree turnaround in my career. While the said plan was set aside, it was not forgotten, these things were still part of the agenda and to-do-lists.

Incidentally, Microfinance is considered by the UN as important and an integral part of the efforts to achieve its Millennium Development Goals (MDG’s). You’ll observe that my blog has tackled earlier topics on the MDG’s and so the subject matter is still in line with my blog’s objectives.

Similarly, some of my closest relatives have  recently participated in lending money to the poor.

They joined (as lenders) Kiva, an international non-government organization (NGO), the mission of which, among others, is to assist poor people access to safe and well-priced credit through its lenders and field partners. Said lenders are given the choice on which person or loan requests they would like to fund. As mentioned earlier, the minimum fund ceiling involves a measly amount, only $25.00 and the lenders can hopefully make a change in the life of a small borrower. Since it involves small amounts, the loan is non-interest bearing and the repayment schedule would depend on the borrower’s capacity to pay, thus there may be some risks attached to it. The primary objective here is not for the “haves” to gain interest from their investments, but the happiness that they gained from helping alleviate the lives of the poor. I was just happy to note of my relatives’ decision to join in this endeavor. A good deed to start for the New Year!

But as I said, does microfinance activities really benefit the qualified poorest of the poor? Does it really improve the quality of life of the poor? There are so many things being said in the media but how accurate are these? While there are positive contributions and advantages of microfinance activities throughout the world, there are calls for changes and reforms as there were findings and cases where there were anomalies and bad practices in certain NGO’s and non-profit organizations involved in this undertaking. One was a case of fund diversion and another was about some of the funds earmarked for qualified beneficiaries went to individuals who weren’t poor at all!

Likewise, there is also a need to look at the entrepreneurial skills of the borrower individuals as most of them may lack education about engaging in any form of business. I recall some small borrowers of a certain government financial institutions were not able to continue operating the business and not being able to pay the loans at the end of the day as they were not equipped with all the skills needed to be successful even in low level businesses. It turned out these borrowers faced various difficulties on the marketing aspect and other financial services such as insurance, etc. Apparently, the lending institutions merely approved loans without giving due attention to the other needs of the small borrowers, i.e. educating them about doing business, particularly products marketing.

Sure, there are visible positive effects but there are dangers of the hype of microfinance. Yes, it may sound something smart and in-thing to do but there are things to look at before a particular developing economy ventures into this kind of endeavor. Perhaps a policy framework and implementing guidelines should be well crafted taking into account the best practices and the lessons learned from other countries which have previously dealt with it.

Should you however have the heart now and extra bucks  to help those in need and willing to improve their lives, go ahead and look for a reputable NGO who would be able to assist you on this matter. It would be good to conduct due diligence before embarking on any venture, especially if it involves large amounts.   By the way, my relatives are now receving the monthly payments from their chosen borrower.   Good job!

My next blog on microfinance is on how overseas contract workers and retirees can avail of said activity in their respective home countries.