Did you know that over 1.7 billion people worldwide do not have a bank account with a financial institution? (World Bank Global Findex Database 2017) The vast majority of these unbanked people live in the developing world, and overwhelming evidence demonstrates the positive correlation between financial inclusion and development. Without access to financial services, unemployed or low-income people are far worse off. Cash can be hard to manage, loans from family, friends, and loan sharks can come at a high cost, and the ability to manage financial emergencies can be severely compromised.
Microfinance addresses this basic unmet need. The goal of microfinance is to provide people who are typically excluded from the traditional banking system access to it, in the form of savings accounts, individual and group loans, agricultural loans that can be paid back when the harvest comes in, insurance, and education, among other services. These small working capital loans are also known as microloans or microcredit. Microloans do not require collateral, and can be distributed in small amounts and paid back over long terms. Like conventional lenders, microfinance lenders charge an interest rate and establish a repayment schedule. However, there is no profit motive.
What is the global reach of the microfinance movement? In 2018 $124 billion was distributed to 140 million borrowers, of which 80% were women and 65% were rural borrowers, and it is growing every year. (Microfinance Barometer 2019) With cash infusions from microfinance programs the data shows that borrowers are better able to feed their families, send their children to school, improve their homes, reinvest in their businesses, leave farming and become entrepreneurs, and put money aside for savings goals or to serve as an emergency fund.
The impact of technological innovation in this space cannot be overstated. With increasing ownership of cell phones and access to the internet in the developing world, the fast-growing fintech industry is better able to deliver financial platforms to rural populations. These software applications remove old obstacles and create new efficiencies. For example, the ability to make digital payments or send money transfers can eliminate travel time and cost, administrative work, and also reduce corruption.
Above and beyond financial inclusion, microfinance organizations seek to promote self-sufficiency and economic justice for underserved populations. In a global pandemic our struggles are amplified and this message resonates more than ever. To find out more, check out the crowdfunding site Kiva (I have no affiliation) to see how one of the largest and most well-regarded microfinance organizations embodies this spirit.