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.

Out of the Darkness, into the Light: Africa's Quest for Illumination and Progress

Viewed from space, the image of the earth illuminated at night is truly astounding. Twinkling lights scattered across the globe cluster in brilliant patches in the Americas, Europe and Asia while the remainder of the unlit lands shirk in the shadows. It is a striking contrast that, at first glance, may be attributed to population variations throughout the earth—the densely populated areas appear to produce tremendous amounts of light while the uninhabited regions remain dim and starkly bare. While this theory can generally be considered true, one blatant exception remains.

The African continent, home to nearly one billion people, shows almost no electric activity when compared to other similarly inhabited areas. As one of the most populated regions in the world, Africa should be a beacon of light, yet is as dark as the all-but empty Siberia and Antarctica. The visible lack of electricity gives testament to Africa’s severe poverty and technological deficiencies; currently, only the wealthy areas of South Africa, Egypt and Morocco show any sign of civilization. However, this grim situation has recently caught the attention of the international community and Sub-Saharan Africa is on the brink of a major and deeply needed change.

The World Bank, a global organization that provides financial and technical assistance to developing countries, has partnered with the International Finance Corporation (IFC) to launch a revolutionary program that will provide modern lighting to 250 million people in Sub-Saharan Africa. The initiative, aptly titled Lighting Africa, will enlist the help of businesses, universities, governments and organizations worldwide to develop market conditions for the “supply and distribution of new, non-fossil fuel lighting products” throughout rural and urban Africa. Although the project seems very ambitious, it is definitely manageable. Enabled with a well-organized, realistic and collaborative plan the international community will effectively guide Africa not only out of darkness, but poverty as well.

The cooperative nature of the Lighting Africa initiative will be a major contributor to its success. Partnership amongst various African governments, global businesses, and Non-Government Organizations (NGOs) will ensure that both innovation and regulation are given equal attention. The entire project is based on a competition that will award grants to organizations that submit the best proposals for the design and delivery of the low cost, environmentally-friendly lighting. Since the contest’s commencement on September 4, 2007, more than 350 companies, from African-based small businesses to multinationals such as Philips, have expressed interest in participating. The project’s success depends heavily on the intellectual contributions from these private sector participants. Furthermore, the competition encourages efficiency and cost effectiveness, two characteristics that bureaucratic organizations and slow-responsive governments often lack when addressing problems. Nevertheless, government and NGO involvement will definitely play a vital role in this large-scale project. The Lighting Africa initiative will be a lengthy process with the final stages of completion set for 2030. Although this twenty-three year time frame is realistic, it is also daunting and will require firm leaders to enforce deadlines and maintain focus. This leadership role will be allocated to governments and organizations that will help regulate, assist and motivate the participants. These actions, coupled with those of the private sector, will help to ensure the completion and success of the initiative.

Perhaps the most important characteristic of the program, however, is the role of the free market in the process. Recent debate over the ineffectiveness of simple monetary aid provides insight on how the World Bank’s campaign may provide the best solution to eliminate poverty. In a book published in 2006 titled The White Man’s Burden, New York University economics professor William Easterly argues that development aid cannot work because it is unable to replicate the complex market mechanisms that make countries rich. Another supporter of this argument, Gurcharan Das, former head of the multinational sector of Proctor and Gamble, also claims that economic growth can only be achieved through the free market when competition and enterprise are allowed to flourish.

Of course there are opponents who argue that more aid, not less is actually needed. Jeffrey Sachs, an economist involved with the United Nation’s Millennium Goals argues in his book, The End of Poverty, that the amount of developmental aid that actually reaches the poor is too small to make a difference. The average per capita amount of aid given in 2002 was only $12—hardly enough to buy anything. While Sachs makes a valid point by suggesting that more charity be given to the poor, he avoids addressing the real issue: in order to escape perpetual poverty and reliance on others, African states will need to learn to support themselves.

So how can African nations get the training they need to become economically independent? The answer can be found in the Lighting Africa program that gives African governments and businesses the opportunity to experiment with the lighting market. Surprisingly, even the “energy poor in Africa” spend about $17 billion a year on expensive, inefficient lighting sources such as kerosene. For these consumers there is a need for more affordable and safe lighting materials, indicating the presence of a largely untapped market for modern lighting products.

In addition to simply servicing customers, the new market created through the Lighting Africa program will boost local commerce and investment, create jobs and improve the overall quality of life. Productivity levels will rise with the advent of longer workdays, health services will improve with better lighting, students will be able to study longer and safety and security will be enhanced. If the World Bank’s Lighting Africa initiative proceeds as planned—focused on bolstering the free market—Africa may soon be taking an independent step out of the darkness and into economic stability.