by Quanda Zhang, RMIT University with a foreword by Nomad
There are other valid criticisms too. How can we guarantee that immediate help doesn't simply create a counter-productive culture of dependency? That's been a long-standing complaint of all social assistance programs.
One tool that has achieved considerable success in the last few decades is micro-financing.
What is Micro-Lending?
As the term suggests, micro-loans operate at a much smaller level than loans issued by major banks or credit unions.
Microloans, or microfinance, are loans that can be issued by a single individual or aggregated across a number of individuals who each contribute a portion of the total amount.
Different than charity, these loans are repaid to the individual lenders. In general, microloans are for less than $50,000. Sometimes much much less than that. The loans are generally used to help cover startup costs and other early expenses for small businesses and not-for-profits. As one website notes:
Microloans, true to their name, are sometimes as small as $25, although they can be much larger. In many parts of the world, $25 or $50 goes very far and can buy a decent supply of inventory for an enterprising person who can, with some hard work, produce a product and turn a profit.
If an entrepreneurial woman in rural Bangladesh needs $75 dollars to open a shop, selling, for example, children's clothes. She would employ two or three workers but because the banking infrastructure doesn't exist in her country, there's no way for her to ever get her foot in the door, so to speak.
And as micro-financing initiatives were taking root around the world, it soon became clear that women invested their business profits in ways that would have a longer-lasting impact on their families and communities. Moreover, women were more likely to repay the loans when it became possible.
As one report notes, for this reason, the women of the developing world became "fundamental to the success of the microfinance model as a poverty alleviation tool."
Here's a short video with more information:
In the article below, an economics researcher looks into the subject to understand whether it is really a viable solution to extreme poverty in the developing world.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
And as micro-financing initiatives were taking root around the world, it soon became clear that women invested their business profits in ways that would have a longer-lasting impact on their families and communities. Moreover, women were more likely to repay the loans when it became possible.
As one report notes, for this reason, the women of the developing world became "fundamental to the success of the microfinance model as a poverty alleviation tool."
Here's a short video with more information:
In the article below, an economics researcher looks into the subject to understand whether it is really a viable solution to extreme poverty in the developing world.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
Yes, Micro-lending Reduces Extreme Poverty
by Quanda Zhang, PhD Candidate and Researcher in Economics, RMIT University
A small boost in micro-lending to the developing world could lift more than 10.5 million people out of extreme poverty. That’s one conclusion of my study, published last month in The B.E. Journal of Macroeconomics, which found that micro-finance not only reduces how many households live in poverty but also how poor they are.
Currently, 836 million people – or 12% of the world’s population – experience extreme poverty, living off less than US$1.25 a day. Using data from 106 developing countries from between 1998 and 2013 to examine the efficacy of micro-lending as a poverty-reduction tool, I found that just a 10% increase in the gross micro-finance loan portfolio per client could cut this number by 1.26%.
Poverty may have retreated, but it clearly remains a force in people’s lives.
Microfinance and poverty reduction
The practice of giving small loans (as little as US$10 or as much as $US500) to the very poor, alongside other financial services such as savings accounts and financial training, was the brainchild of economist Mohammad Yunus.
In the 1970s, he began offering credit to poor women in the village of Jobra, Bangladesh, so that they could launch income-generating projects to help support themselves and their families. In 2006, those experiments won Yunus and his micro-credit-focused Grameen Bank a Nobel Peace Prize.
Since then, various forms of micro-lending programs have been introduced in many countries, from India to the United States.
In 2017, the market for microfinance investments in micro, small and medium enterprises, as well as the provision of financial services to those businesses, is projected to grow by an average of 10% to 15%. Even stronger growth is expected in India and the Asia-Pacific region.
Access to credit enables poor people to become entrepreneurs, increasing their earnings and improving their quality of life. Many lenders accompany their small loans and financial services with peer support, networking opportunities and even health care to improve their clients’ odds of building a successful small business.
In doing so, many economists submit, they show that micro-finance has a powerful potential to reduce poverty.
But evidence that micro-finance actually works is mixed. Studies examining its impact in rural Pakistan, urban Kenya and Uganda, among other developing countries, have both confirmed and contradicted the premise of Mohammud Yunus’s innovation.
Evidence from Around the World
My study aimed to make sense of this inconclusive evidence, taking a macroeconomic approach that pulls information from many countries together to provide a clearer picture.
Officially, poverty is measured using two World Bank indicators: the poverty headcount ratio (which measures the percentage of the population living below the US$1.25 a day mark) and the poverty gap (which assesses how far below that line people fall, on average, and is expressed as a percentage).
The key variable of significance in my analysis is participation in micro-finance programs. I defined this in two ways for each country studied: the proportion of total clients as a share of national population, and the average size of loan (gross loan portfolio over total clients), using microfinance data from the Microcredit Summit Campaign and MIX Market), a micro-finance auditing firm.
I also found that micro-finance reduces the depth of poverty, shrinking the gap between a person’s daily budget for living and the current US$1.25 per day definition of extreme poverty (the non-poor have a 0% shortfall).
Policy implications
Micro-finance is no panacea. Numerous studies have shown that country-specific and cultural factors are determinants in how micro-finance will interact with poverty, and there are occasionally devastating tales of failure in which the inability to repay a very small loan has plunged households further into desperate penury.
Overall, however, my study suggests that more micro-credit would benefit poor countries. National governments and international development agencies can continue to promote microfinance as a tool for reducing poverty, while bearing in mind the limitations of any single strategy in tackling an entrenched global problem.
Micro-financing schemes have proved successful in developing countries. But what about closer to home? Can the idea thrive without the currency differences?