Microfinance 101

"So...what exactly is microfinance?"
Say you are in a country where there are no jobs available, and I don’t mean the state of the US right now…think worse. If there are no jobs, then you have to make your own jobs. This means being employed by yourself, AKA starting a business. In order to start a business you need money. But where does this money come from? There are two options: you either save the money or receive a loan. Here in Moldova there are savings accounts available, but in other parts of the world saving is a problem.

Problem with saving:
Living Conditions: Imagine living in a “house” where you don’t own furniture let-alone a lock on your door or windows. There is nowhere to hide your money and people are desperate enough to steal anything lying around. So maybe you opt to bury it then. Rain, fire, or other natural disasters don’t care where your money is. If something happens, your money is gone.
Social demand: In many developing countries, familial and communal ties are so strong that it would be social suicide to deny someone money if you had some to spare. This puts a person in an awkward position - giving up money for your friend’s relief efforts instead of their own development. (Which is why a lot of people don’t like giving money to beggars – development verse relief.)
Lack of Alternatives: In poor communities, banks exist to serve the wealthy and have barriers that keep the poor out. They require minimum balances, fees, or deposits which are sometimes double the average annual income in that area. The poor are too risky for banks to help. Instead of a bank a village might have a “Savings Collector”. But instead of having a “free saving account” the poor are paying in order to keep the collector employed. 30% APR isn’t affordable just to save a small amount of cash. Many people don’t even have a savings collector.

Saving money can not only help in gaining capital for a person's business. It also provides reassurance that if an unexpected expense comes up they can pay for it. For example, if your son got extremely sick one might have to choose between getting medical care or feeding her other children. Something as small as having a savings account could easily save a life.

Instead of saving, loans are the alternative, but what if the person doesn't have good credit? If you ran a bank, would you risk giving money to someone who had nothing in the form of collateral. How would you reassure the loan will be paid back? It seems like a risky business endeavor. Instead of getting a loan from a bank, people must find other ways to get money. They might go to someone down the street who has some extra cash. Not knowing what they're getting themselves into, they might fall into the trap of a loan shark. A loan shark is a person that will loan them the money they need and then charge them extremely high interest so that they are always indebted to this person. Thus, the loan shark is always receiving money because the poor person can never pay back the interest with the small wage he/she makes.

MFIs try to change this very thing. They can not only provide saving accounts, but also give legitimate loans with reasonable interest rates. MFIs are basically banks that use other ways of deciding whether or not a person is eligible for a loan. They also use education, social pressure, and other alternative ways to guarantee repayments. These institutions give the poor an opportunity to be good businessmen in order to care for their family, create jobs for others, and eventually help the economy of a country as a whole. Instead of just giving a hand out to people, giving a loan to people restores their dignity as human beings. It acknowledges that these people's poverty is due to something they are personally lacking. It is in fact a lack of opportunity.

Check out this video it'll make more sense:
http://www.youtube.com/watch?v=OrKQZeoAzyI&feature=channel

The next time I blog, I'll start giving more specifics to the MFI I'm working at and to MFIs in general. Also, some of this blog was taken from a book entitled The Poor will be Glad by Peter Greer and Phil Smith.