“Give a man a fish, he eats for a day. Teach a man to fish, he eats for a lifetime.”

Chinese ProverbBy

Emily Zender & Suhn Lee

MicrofinancingMicrofinancing The act of providing loans to the poorest people

in the world typically $10-$50 ◦ Lending◦ Insurance ◦ Savings Accounts◦ Leadership Training

History of MicrofinanceHistory of Microfinance

First Microfinance Institution (MFI)◦Grameen Bank 1976◦Founded by Muhammad Yunus ◦Today—Total Number of Branches:

2481◦Today—Number of members:

7,970,616

Abandoned By Abandoned By Normal Financial Normal Financial

InstitutionsInstitutions

Economic Scholar Jeffery Sachs: “The extreme poor are chronically hungry, unable to access health care, lack the amenities of safe drinking water and sanitation, cannot afford education…and perhaps lack rudimentary shelter…and basic articles of clothing, such as shoes.”’

1billion people live in extreme poverty, struggling to survive every day. An additional 1.5 billion people are classified as “poor” lacking the basic necessities to live

Over 1/6 of humanity currently lives in extreme poor

The Extreme Poor

The extreme poor are considered “unbankable” and left to survive in the slums

Barriers to Entry

Lack of Research High interest rates Market Sector Divide Credit Limitability Screening Loan Applicants Monitoring Borrowers Writing/Enforcing contracts Poor Infrastructure Transportation/

Communication Obstacles High Literacy Levels

Microfinancing vs. Normal Financial Institutions

Accessibility. Credibility. Sustainability.

Accessibility: Geographical

Poor Infrastructure Little-No Technology Frail Electricity Lack of Research Little Transportation Lack of Education Low Literacy Rates Government Corruption Disease

Number of MFIs by Country Asia: 1,727 Africa: 935 Latin America/

Caribbean: 614

Largest Amount of MFIs

Credibility

MFI collective default rates are

approximately 3% beating out default rates of the United

States

Obstacles:◦ No past credit history◦ Risky borrowers◦ High Interest Rates◦ No borrowing

experienceSolutions:◦ Group Lending◦ Individual Lending

Group lending◦ Groups consist of 3-8 members◦ 8-20 groups per community◦ Each member runs a

microenterprise

Individual Lending◦ Lending directly to an client◦ Must have credit history◦ Not all MFIs have individual lending◦ Collateral ◦ Incentives to repayment

Lending to the Poor Lending to the Poor

MFI Success:◦ Lowers interest Rates

◦ Increases credibility

◦ Increases payback returns

◦ Encourages responsible borrowing

“Safe customers will more likely group

together with other safe customers, leaving the

risky types to form groups by themselves” (Sengupta and Aubuchon 2006,

12).

Business Sustainability

Problems: Small loans Low interest rates High accessibility

costs Credibility Costs Client relations

Solutions: Emphasis on returning a

profit Grants Subsidies Other government

support FDI

“philanthropy is not a requirement of microfinance

—not all MFIs are non-profit organizations”

(Sengupta and Acubuchon 2008, 15)

Microfinance: Poverty Alleviation Tool?

Quick Facts There are approx. 3,552 MFIs worldwide

There are currently154,825,825 serviced clients

68% of clients are classified as extreme poor

Helping the poor, help themselves

Impact:Microfinance loans increase capital which increases labor for themselves and

sometimes others and gives them the opportunity to access technology

Accion. “Meet Microentrepreneurs from Africa.” Accion International.2007.http://www.accion.org/Page.aspx?pid=1373

Ghatak, Maitreesh. “Group Lending, Local Information and Peer Selection.” Journal of Development Economics. Chicago, IL. 1999.

Daley-Harris, Sam. “State of the Microcredit Summit Campaign Report 2009.” 2009 Microcredit Summit Campaign. Washington, DC. 2009.

Leonard, Herman & Epstein, Marc & Tritter, Melissa. “Opportunity International: Measurement and Mission.” President and Fellows of Harvard College. Boston, MA. 2006.

Sachs, Jeffery. “The End of Poverty: Economic Possibilities for Our Time.” Penguin Press. (2005)

Sengupta, Rajdeep & Aubuchon, Craig. “Microfinance Revolution: An Overview.” The Federal Reserve Bank of St. Louis. 2008.

Young, Robin & Drake, Deborah. “Banking at the Base of the Pyramid: A Microfinance Primer for Commercial Banks.” Development Alternatives, Inc. 2005.

Further Reading and References: