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Abstract

This literature review contains two parts. Part 1 describes microfinance, the broad types of

microfinance institutions that exist, and briefly touch on the reasons microfinance organizations

kick start. Part 2 aims at aiding a microfinance organization with deciding between which

location to create or extend its organization. Due to the advising direction of the CEO of a

successful Minnesota microfinance organization, the literature review focuses on market

segment, market niche, or targeted clients research, along with their corresponding obstacles.

The thought is those making the strategic microfinance location decisions can gauge and

compare the location’s available resources and characteristics with the research data listed.

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Table of Contents

Abstract ...............................................................................................................................2

Introduction ........................................................................................................................4

Part 1 – What is Microfinance? ........................................................................................4

Introduction to Microfinance ...........................................................................................4

The Multiple Categories of Microfinance ........................................................................5

Why are Microfinance Organizations Created? ...............................................................6

Part 2 – Who do Microfinance Organizations Target? ..................................................7

Microfinance Organization Clients ..................................................................................7

The Poor: Targeting Poor People is not as Simple as it Sounds .......................................7

Women ............................................................................................................................10

The Youth: Specifically College Students ...................................................................... 11

Muhamad Yunus’ Presence in the U.S. ..........................................................................14

Research Limitations .......................................................................................................14

Conclusion ........................................................................................................................14

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Introduction

Microfinance, or lending to small businesses, has been helping entrepreneurial mindsets

globally since the 1980s. Although given mixed reviews by media, microfinance has a strong

footing, as more and more funders become convinced of its benefits (Yunus, 2003). According

to employees of a successful microfinance organization in Minnesota, anyone on the path of

emulating a successful microfinance organization in a U.S. state is advised to be clear on

successfully targeted clients in the field and the underlying obstacles. This market niche data can

help gauge the optimal location and gleam the effort required to move forward with the creation

or expansion of a microfinance cause or organization. This literature review introduces

microfinance, then attempts to support the expansion of microfinance by providing details on

three common market niches with their accompanying nuances.

Part 1 – What is Microfinance?

Introduction to Microfinance

Microfinance was founded by Muhamad Yunus (2003), the head professor of Rural

Economics Program at the University of Chittagong, with a $25 loan experiment. Yunus (2003)

used the fexperiment to show that individuals deemed too poor for traditional bank loans (also

referred to as unbanked) can be successful lending clients. He was right. Yunus’ company,

Grameen Bank, boasts of over 90% loan recovery rate, the rate in which the borrowed money is

repaid (2003). Since then, hundreds of organizations, across multiple countries, have extended

or changed Yunus’ model to provide loans to the poor and small businesses.

Yunus (2003) has remained a vocal proponent of microfinance and does not necessarily

accept all of the other organizations as equal to his own. He has publicly denounced some public

microfinance organizations, such as The World Bank, as wastefully using the donations on travel

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or employee administrative details rather than purely on the clients. Mohamad Yunus’ loan

providing institution included an activity called group lending where a group of borrowers were

brought together to keep all members honest during loan recovery. Yunus’ institution also

provided other activities to instill and create business-minded networks in the impoverished area.

He denounces organizations who do not provide social and human capital aids, such as group

lending. He does not feel that organizations that purely provide financial aid are effectively

helping clients (Yunus, 2003). However, some organizations prefer individual loans because

they are easier to update the life cycle, and amount, based on specific emergencies that come up

for the client (Frankiewicz, Churchill, & International Labour, 2011). Regardless of his approval

or lack thereof, to date more than 10,000 microfinance organizations exist worldwide

(Armstrong, Ahsan, & Sundaramurthy, 2018). The monetary amount that microfinance

organizations lend depends on the country. Some sources state that a country is deemed a micro

lender if the formal loan amount provided equals less than 2.5 percent of the country’s GDP

(Chiu, T., 2017).

The Multiple Categories of Microfinance

Although the main goal is to reach out to the unbanked, microfinance institutions fall

within multiple categories. Overall, “microfinance institutions are comprised of a range of

institutions, such as cooperatives and banks, NGOs, public-private partnerships, for-profit

institutions, and government entities that vary in size, product offerings, and profit goals”

(Armstrong, Ahsan, & Sundaramurthy, 2018, p. 147). Specifically, three types of microfinance

institutions, thus far, exist.

The first and one lowest in the process is labeled the interactor (Armstrong, Ahsan, &

Sundaramurthy, 2018). Similar to Yunus’ group, this microfinance organization knows the

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culture of its borrowing client and works very closely with them to supply their exact

microfinance needs and incorporate their intricacies to ensure repayment. Since they work

closely with the clients, interactors tend to expand their roles to training the group or helping to

build their self-esteem, health, literacy as well as other positively building activities that the

group needs, such as Yunus’ group lending (Armstrong, Ahsan, & Sundaramurthy; Yunus,

2003). Interactors also provide client data to the other two groups, since they are the most

intimate and knowledgeable.

The second and middle group (in proximity to the clients) is the connector (Armstrong,

Ahsan, & Sundaramurthy, 2018). These organizations simply exist to connect small businesses

or borrowers (such as interactors) to financial firms, donors, or funders. These groups focus on

leveraging their financial knowledge and vocabulary to educate and raise awareness on behalf of

the clients and borrowers. They list the borrowers and categorize them (such as green, startup,

fair trade borrowers) so that funders can donate to their specific values, as desired (Armstrong,

Ahsan, & Sundaramurthy). They also vet borrowers, validate the quality of their work/outreach,

and attempt to keep up-to-date information on them (Armstrong, Ahsan, & Sundaramurthy).

The last, and highest, group is the institutionalizers (Armstrong, Ahsan, & Sundaramurthy,

2018). These are the financial institutions who funnel resources into the other two groups to

support the cause. Due to their breadth and high distance from the clients, institutionalizers

receive a lot of data from various sources within the two other groups, rather than sharing close

interactions with the end clients (Armstrong, Ahsan, & Sundaramurthy). They, therefore, have

the distinct ability to share best practices and new innovations across all microfinance

institutions as well as embodying trust in the microfinance ecosystem overall.

Why are Microfinance Organizations Created?

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Reasons for helping the poor or small businesses vary. Just like Yunus, some organizations

are called by the noble deed of helping these misfortune clients obtain a better life. Some

organizations join the space following their peers or competitors’ actions (Chiu, T., 2017).

However, other organizations are nudged by local laws or peer pressure from associations to help

(Chiu, T., 2017). Even certain organizations, typically international ones, leverage these works

as ways to join impoverished international markets and gain an avenue to learn from them by

performing small culture studies (Chiu, T., 2017).

Part 2 – Who do Microfinance Organizations Target?

Microfinance Organization Clients

During interviews of the CEO and other staff of a long-standing and successful

microfinance organization in Minnesota, there was a strong emphasis that in order for a new or

extending microfinance organization to be successful, it must clearly dictate the specific market

niche that it serves. Sources actually advise microfinance organizations to find specific

marginalized groups within the poor because it allows the organization to tailor help to that

specific group and differentiates the organization from others, increasing its chances of getting

donations (Frankiewicz, Churchill, & International Labour, 2011). It is important to figure out

the causes of microfinance success and sustainability because some sources cite that only 1% of

microfinance organizations have been sustainable, with other sources claiming up to 30%

success (Richardson, M., 2008). Therefore, significant readings and research are conducted to

flesh out whom has successful microfinance organizations historically served. The research

shows a varying list of individuals that fall in the three categories of the poor, women, and the

youth.

The Poor: Targeting Poor People is not as Simple as it Sounds

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Although it seems obvious for new or expanding organizations to target the poor, there are

specific characteristics that microfinance organizations look for within this group. In 2005,

Grameen Bank defined 10 proxies to gauge an individual’s poverty (Frankiewicz, Churchill, &

International Labour, 2011). The proxies included number of kids in the household who

attended school, the quality of the household’s drinking water, the household’s ownership of

appliances, land ownership, number of adults living in the household with salaries, type of

transportation available to the household, and so on (Frankiewicz, Churchill, & International

Labour, 2011). Grameen’s poverty metric and any metric is heavily based on the country and

culture’s definition and perception of poverty. For help with defining poverty for a particular

country and culture, sources advise to include varying types of the country/culture’s experts,

such as academics, workers, NGOs, community groups, and employer associations (Frankiewicz,

Churchill, & International Labour, 2011).

But in general, the poor target market are those who require small amounts of money, again

skewed towards how the country defines small. The clients are targeted because traditional

financial firms deem these borrowers too expensive or too time consuming to lend to (Yunus,

M., 2003). To find these individuals, often discriminated against by society’s norm, reduced

self-esteem from financial and social strife, and at times heavily-relied on non-needed

expenditures (alcohol), traditional financial firms may need to add relationship-building

resources, time, or processes not required for higher-incomed clients. Since these individuals do

not have the means, in some instances, it is up to the financial firms to find these individuals

rather than the individuals to seek the financial firms themselves. Further complication,

depending on the country, is location, where small chunks of poor people are scattered location

wise, instead of all being conveniently centrally located (Yunus). Other complications are that

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once the poor receive micro-lending help, they are sometimes declined much-needed government

assistance or charity based assistance (Yunus), putting them in more financial risk than they were

before.

Characteristics of the targeted poor people tend to include people with a lack of skills,

opportunities, or influence over their own financial well-being. Specifically, those with no or

little credit history, a lack of data for proper financial risk assessment, an no property or assets to

be used as collateral. Those who are from a crisis-affected community, are in households with

low food intake, are in households built with poor materials or roof, in households where the

main male is disabled or unable to work. Also those who do not trust traditional financial firms

or do not know how to use the standard financial system fall in the category (Frankiewicz,

Churchill, & International Labour, 2011; Leong, C., Tan, B., Xiao, X., Tan, F. C., & Sun, Y.,

2017). Specifically in the U.S., it has been cited that foreign-born individuals living tend to not

trust financial firms (The Foreign Born Population in the US). Therefore culture and country

based generalizations such as these are required to find the groups that fit the behavioral with

little physical indicatio. The organizations that focus on the poor are advised to have cheap and

visually observable tools to target these individuals. The reason is if targeting these individuals

cost money, then these organizations are not getting as much return on their, already limited,

donations as they could (Frankiewicz, Churchill, & International Labour, 2011).

Some microfinance organizations have targeted groups that are even more marginalized

than the poor, such as the ultra-poor (those whose basic needs such as nutrition are not met), the

disabled, individuals living with HIV/AIDs, and individuals thrust into forced labor. As can be

imagined, targeting these groups bring even additional resources, tactful strategy, country and

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cultural based intelligence, and challenges than what has been listed above for the poor

(Frankiewicz, Churchill, & International Labour, 2011).

Women

For multiple reasons, women are cited as a good group to target as a microfinance firm.

Although Muhammad Yunus’ organization did not start out by targeting women, overtime, they

noticed that their female lenders more successfully repaid their loans than their male

counterparts, and so they started focusing women as a market niche (Armendariz, B. & Morduch,

J., 2010; Yunus, M., 2003). Some sources mention their behavior patterns; that women are less

overall less mobile than men, so they cannot easily disappear to get rid of outstanding debt

(Frankiewicz, Churchill, & International Labour, 2011). They have less access to credit than

men and face more restrictions unique to their gender (Frankiewicz, Churchill, & International

Labour, 2011). They are fifty percent of the world’s population, which easily makes them one of

the world’s largest market niche.

The reason is, although that are not the only roles that women play, they majorly are the

“child-bearers and…caretakers in most societies” (Frankiewicz, Churchill, & International

Labour, 2011, p. 333). Women own one percent of the world’s property such as land title and

household assets. They earn less income, are less educated and have less time to devote

enterprise activities. It, therefore, takes them more time to accumulate wealth. They have

restricted mobility due to certain religions, even restricting their ability to network or negotiate in

business settings. They do not have the same rights as men due to certain cultures and have

more amount of physiological vulnerability, which greatly reduces their bargaining power.

Sometimes, giving women access to microloans puts them at risk to being pressured by the men

in their family to take out loans on their mens’ behalf. Or in some instances, men, due to

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paranoia, tended to overestimate the amount of money that women were getting through the

loans and purposely retributed by contributing less to the household.

Microfinance organizations combat challenges that women face with the following. In

cultures where men become suspicious of women’s lack of time or increased funds, they invite

men to also take out loans as well, that way the men have an accurate grasp of the work and

money that women are getting. The organizations allow women to provide more flexible items

as collateral, such as jewelry or household items, since women only own 1% of property

worldwide (Frankiewicz, Churchill, & International Labour, 2011). The organizations update

the repayment cycle to match the women’s trades, so that they do not have to sacrifice their

mother and wife responsibilities on behalf of the loan. They provide women training to enter

businesses that are traditionally seen as men owned or provide training to increase women’s self-

esteem and confidence. They also supplement the loans with emergency loans or insurance to

prevent them women from using the loans strictly deemed for business to cover emergency or

crisis related issues within the household. Or they offer short-term time deposits, that, let us say,

mimicking crop cycles, where women can take profits and save them over the span of low-crop

yielding months. The organizations provide money transfer to the women, sometimes directly to

their phones, so that not to take them away from their homes and make it convenient for them to

receive their money, without having to unsafely walk the same locations that the male

counterparts do.

The Youth: Specifically College Students

Some statistics on why the youth, although not apparent at first, is a viable microfinance

client. First, in the U.S., 80% of credit invisibles fall within 18 and 19 years old while 40% fall

within 20 and 24 years old (Holland, K., 2015). Some researchers, such as John Ulzheimer,

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president of Consumer Education at Credit Sesame, identified that the Credit Card

Accountability, Responsibility and Disclosure Act of 2009 contributed to the lack of a credit

profile for young people entering the credit world. The Act mandated that, to get a credit card,

people under 21 were required to obtain a cosigner or prove they had an independent income.

(Kelley, Holland). Second, “compared to adults, the youth are three times as likely to be

unemployed” (Frankiewicz, Churchill, & International Labour, 2011, p. 307). Third, some

countries have laws with age limits on when a youth can open their own savings accounts or

when they microfinance organizations can legally start working with them.

Regardless of the obstacles, the youth are viable microfinance clients. They are typically

provided four types of aid in addition to financial aid, financial education, business development

services, mentoring, and the creation of safe spaces (Frankiewicz, Churchill, & International

Labour, 2011). And even though there are some additional risk that comes to lending to youth

than to adults, organizations have found a variety of ways to appease these risks. Organizations

have given them loans in second year of high school based on first year attendance, have only

provided business loan to kids took business plan training. Also facing the same risk that women

do, loans are strategically to be priced as the same price as adults to reduce the risk of adults

borrowing through youth in order to get better pricing. Organizations have had to gain the trust

and buy in of the community so that there is little doubt that the organization has the youth’s best

interest and this also help safeguard the kids from being misused as financial pawns by family

members. Organizations have had to employ staff, even young people, that have a skill and

excitement to work with the youth and can advocate for them rather than taking the easier route

of recycling staff who are used to adult clients. Similarly, organizations have found that

leveraging processes used for adult micro-lending has not worked for youth. Organizations have

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had to develop a clear code of conduct between all adults that interact with the youth since they

can be more vulnerable to authority figures. Organizations have created partnerships by

interacting with organizations that are already working with youth. Organizations have had to

involve the teachers or schools to increase financial education for the youth. Organizations have

leaned on marketing to create a tag line, logo, or brand that the youth would find catchy,

attractive and fun. Below is a specific example of an organization, 007fenqi, who targets college

students and their ways of supporting them.

In China, 007fenqi is one of the top five companies that focus on college students. School

purchases, for these limited-wealth students, such as laptops are seen as necessities and not as

luxuries, to complete their education. One reason cited for focusing on this group is even though

these kids lack wealth, they still receive or generate a stipend to motivate them to their successful

graduation. Due to 2015/2016 public news of a student committing suicide for owing money,

007fenqi collaborates with nearby hospitality other applicable organizations to more easily

facilitate part-time jobs for their clients. 007fenqi also expanded by helping its clients to

knowledgeably invest in the markets. To obtain their success, 007fenqi created their own in-

house risk assessment process and tool (that includes more than 500 data points) and deliberately

built business strategies by leveraging gray-area legislations caused by the availability of new

technologies. Another factor of their success is the students buy laptops and other required items

via the 007fenqi website, therefore 007fenqi has buying history data of its customers that borrow

their loans. Also, the profits from the website can financially back the loan if they default.

Another reason for their success is 007fenqi do not lose their clients after they graduate, if their

clients become involved in their investment sector. Other companies ensure their successful

interaction with youth by allowing longer repayment times. In Bolivia’s, educational loans from

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EDUCA-PRO, do not have to be repaid until after the students graduate, knowing that the

students’ financial stability is unknown up until then (Frankiewicz, Churchill, & International

Labour, 2011).

Muhamad Yunus’s presence in the U.S.

Although U.S. resisted the implementation of microfinance, stating that the U.S. did not

share the dire poverty problems as countries as India and those in South America, Yunus’ ideas

did penetrate (Yunus, 2003). Between the 1980s and 1990s, numerous states hosted Muhamad

Yunus (2003) so that he can provide blueprint on how to successfully implement a micro-lending

organization. The state of Arkansas under the governorship of Bill Clinton, South Dakota and

Oklahoma under the leadership of Native American chiefs, as well as Chicago, Illinois under the

leadership of financial gurus (Yunus). All of these examples included a leader that saw a

significant group of U.S. citizens in need of help and strove to solve their financial issues with

Yunus’ Grameen methodology.

Research Limitations

This research paper does not include specific federal and local policy or budget criteria that

can deem a U.S. state more successful for an increased microfinance presence.

Other than the suggested market niche, this research paper did not pursue any other

alternate reasons of successful microfinance implementation

Conclusion

Microfinance organizations have been alleviating poverty worldwide since the 1980s. A

brief introduction is provided on how microfinance started, the types of organizations that fall

under that umbrella, as well as some reasons why these organizations are created. In order to

create or expand a successful microfinance organization in a location, research is conducted to

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display the market niches that strong microfinance organizations have pursued, as well as the

obstacles and nuances for targeting these niches. This information is provided to aid any new or

expanding microfinance organization the determination if their sought after location will serve

them well based on its demographics, and the strength of their future client base.

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