A Little Goes a Long Way: How Microfinance Effects Women in Poverty

In 1976, a twenty-seven dollar loan radically changed the lives of forty-two impoverished women in the village of Jobra, Bangladesh. The financier, Dr. Muhammad Yunus, an economics professor at a nearby university, was astonished to find that his meager investment enabled the women to avoid the usurious loans offered by greedy moneylenders and buy enough supplies of bamboo to make and profitably sell stools in their marketplace. Encouraged by the results of this economic experiment, Yunus formed the first microfinance institution, Grameen Bank, based on the idea that the poor could use credit to lift themselves out of poverty. Over the years, the bank has lent more than $900 million in the form of small loans to seven million people and its success is undeniable: 98.4% of loans have been repaid and 64% of borrowers have left the poverty bracket. In 2006, Yunus received the Nobel Peace Price (see photo at right) for his efforts, which have motivated, to date, over 3,000 economic and political institutions worldwide to experiment with microfinance. This trend has even expanded into mainstream investment channels with last week's lauch of MicroPlace, an eBay sponsored website that pairs everyday investors with impoverished individuals. While microfinance is surely not the only viable poverty solution, its use of simple financing principles has helped citizens of developing countries, especially poor women, to take control of their own economic and social situations.

Historically, women in most nations have been excluded from the market economy and forced to work in the home, while cash income was generated by their husbands. Although these gender roles have significantly changed in developed countries during the last century with the expansion of women’s rights and economic power, poorer, less educated nations have not similarly advanced. Of the 1.8 billion people living in extreme poverty, seventy percent are unemployed women who have little hope of finding good work in their male-dominated societies. However, microfinance organizations have begun to attract these jobless women by offering loans that fund self-employment endeavors—currently, 84% of borrowers are women hoping to find financial success in some little market niche. Although the lack of education and the size of the loans often inhibit entrepreneurs from pursuing fancy schemes, home-based businesses and street vending have flourished in informal economies, enabling women to save and invest small amounts of money. For example, Auxiliadora Soza (pictured below), a single mother from Diriamba, Nicaragua, with the help of microfinance organization FUNDESER, was able to start her own cheese stand ten years ago in the local market with a $250 loan. Since then, she has taken out and fully repaid ten different loans and has grown her inventory to include other food items and makeup. With the money earned and saved, she has financed her five children’s educations and today, the two eldest are professionals while the other three are college students.

Soza’s accomplishments are not uncommon in the world of microfinancing. For many women it would have been near impossible to start profitable businesses or educate their children without loans provided by different organizations. However, as much as women are dependent on microfinance institutions for money, the success and longevity of such programs are direct results of women’s responsible financial management. Statistically, women are more likely to save and repay their loans on time than men, and according to Mary Ellen Iskederian, head of the nonprofit organization, Women’s World Banking, “women tend to invest in three things: health, their children’s education, and their home while men, on the other hand, put more back into the business.” Business reinvestment is an intelligent economic decision, but the factors that really work to end the cycle of poverty on a micro level are changes in the home. A greater disposable income increases the ability to purchase more expensive food items such as meat and milk, ensuring better nutrition and longer life expectancies. And, educated children are more likely to enter the professional workforce and make a steady income. The Global Campaign for Education reports that “just one year of schooling increases a woman’s future earning potential by 10 to 20%.” If the profits made from the short-term loans are wisely reinvested in the home, they can provide years of valuable, long-term returns.

Despite its recent success and popularity, not all economic experts are convinced that microfinance is the key to effective poverty eradication. Critics point out its inability to foster broad development, as it focuses on improving community, rather than national, economies. Michael Strong, founder and CEO of pro-entrepreneurial organization FLOW, says that microfinance represents a great effort in improving living standards, but “is often promoted at the expense of multinational and corporate investment” that are needed to expand developing nations’ economies. Studies conducted by the World Bank further indicate that microfinance is not a panacea solution to poverty and that infrastructure development of better roads and bridges is a more effective long-term investment. All these are valid counterarguments, yet they ironically focus too much on the big picture. Of course, world poverty is far too complex of a social problem to merit one solution, but the appeal of microfinance lies in its ability to reach out on an individual level and actually change lives. Each story of personal success echoes this concept and substantiates the use of microfinance in developing nations. And, whether economists admit it or not, providing poor women with access to capital, savings and education, are truly macro results.