Microfinance is the probably most important innovation for ending poverty currently being misunderstood. Considered by many as a panacea to eradicate poverty, Microfinance has been implemented in over 100 countries to varying degrees of success.
Microfinance is increasingly seen as a powerful tool to provide a wide range of high quality financial services such as credit, savings, insurance and fund transfers to the poor and near-poor households of the world. It’s proponents believe that it creates entrepreneurs among the poor, helps micro industries grow and provides income generation to poor households. While there are some visible evidences of the above, Microfinance cannot be singularly based on its innate ability to end poverty.
Poverty brings with it a whole lot of issues ranging from health, education, nutrition etc. It’s a vicious cycle where one gets trapped into. While Microfinance is one effort that allows the poor to escape the poverty trap, it would be a stretch to view Microfinance as an economic tool that has the intrinsic potential to alleviate poverty.
While financial inclusion is a significant positive step towards breaking the poverty trap, it has its own caveats. The poor have little to no assets or credit history and hence are subject to high interest rates. Numerous Microfinance firms have witnessed high rates of default. In fact, according to a UN study, only 10% of the global Microfinance organisations are self-sufficient.
The more pertinent problem however is the absence of tools among the poor to benefit from financial inclusion. Lack of financial literacy, vocational skills and a variety of social factors prevent the poor or near poor households to leverage availability of capital. Capital borrowed by the poor from these organisations has often pushed individuals into crushing debt, a problem compounded by high interest rates.
A holistic approach towards alleviating poverty should aim at leveraging financial inclusion of the poor households to provide solutions to the other factors affecting poverty. One of the key reasons why Grameen Bank has been a Microfinance success story in the poverty stricken country of Bangladesh is because they have successfully packaged financial services with financial literacy and social development. The Bank predominantly lends to females with the aim to improve the social standing of women. It also incorporates a set of values embodied by the Sixteen Decisions which the borrowers recite and vow to follow them. As a result borrowers have been encouraged to adopt positive social habits such as sending children to school. These virtuous social values leverage the reach of financial inclusion to enable the poor fight poverty.
Viewing Microfinance as financial tool to eradicate poverty is an myopic view of a complex issue. However, it certainly is a powerful medium to financially include the poor, cultivate positive social habits and provide financial and vocational training to equip them with the tools to fight the poverty trap.
