What is Microfinance: A View from the Field

They were village women in braids, highland hats and tiny pumps. Some even had babies slung to their backs. But they all made their way about the makeshift soccer pitch at pace, kicking around a half-deflated ball. We — of hiking shoes, branded outdoor clothing and little to weigh us down – were getting our butts kicked.

Pick Up Soccer Game with Ecuadorian Microcredit Group
A Game of Soccer with Kiva Borrowers in Rural Southern Ecuador

We had just come from a mountaintop meeting between borrowers and loan officers from Espoir, an Ecuadoran microfinance field partner of Kiva. The borrowers’ homes were tucked in the hills of southern Ecuador in a little village, the road to which was often washed out and impassable.

But this day was a dry one and the women invited us all – the loan officers, a Kiva Fellow and us, the photographers – to see their village. What we didn’t expect was that they would beat the breath out of us on a makeshift soccer pitch perched along rolling fields at over 10,000 feet.

For us, this was another glimpse of the human side of the developing world – and into a growing practice called microfinance.

Note: We field a lot of questions about microfinance and what it’s all about. Although we do not consider ourselves experts, we have spent a considerable amount of time in the field working with local microfinance institutions (MFIs), photographing borrowers and listening to their stories. This article is an attempt to answer some of those questions.

Photo Essay: Faces of Microfinance Slideshow

Note: If you don’t have a high speed internet connection or you would like to read the photo captions, check out the Faces of Microfinance photo essay.

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Microfinance: An FAQ from our Experience in the Field

What Is Microfinance?

Our hand-crafted definition: microfinance (or microcredit) refers to the practice of lending small amounts of money – usually for small business development — to moderate or low income individuals in developing countries who otherwise do not have access to capital.

In many countries, people who are not already wealthy or have collateral find capital very difficult to obtain through the formal banking sector. Traditionally, poorer people had to rely on loan sharks if they needed credit; many of these loan sharks charged exceptionally high interest rates and often resorted to violence to recover their money. We met families in rural West Bengal, India stripped of their land because of predatory loan sharks who took advantage of their desperate circumstances.

Who gets the money? What do they do with it?

Microloans can go to some rather clever people who otherwise would have a very difficult time starting or growing their small businesses because of their lack of access to capital. Sometimes, it’s a case of not having enough inventory to run a business, for others, it’s not having the proper equipment to start the business at all.

Woman at her Small Business - West Bengal, India
A small shop started by a microfinance loan in West Bengal, India.

From India to Bolivia and a few places in between, we’ve met recipients who run from mothers-of-9 making homemade ice cream in the Peruvian highlands to Nicaraguan grandmothers running corner stores, to a young man running a weaving loom from his one-room house to a woman making cakes in the slums of Guatemala City to a group of Indian women growing starter seedlings in the hills of Northern West Bengal.

Why encourage people to have a small businesses? Why don’t they just get a job?

The more we travel, the more we realize that having a 9-to-5 job is something that many people in the developing world do not have the luxury of embracing or rejecting. The only option for many people to support their family is a small business.

Microfinance provides capital — and sometimes training — to help people grow these businesses from something more than a subsistence living.

Why is microfinance saturated with stories of women borrowers? Where are the men?

Sorry guys, but statistics show that women are more likely to pay back their loans and more likely to use the additional income they receive on their children (school, food, etc.).

Guatemalan Mother and Baby - San Pedro Sacatepequez, Guatemala
A microfinance borrower with her baby outside of Guatemala City.

Additionally, we’ve seen some pretty incredible “knock on” effects from microfinance programs that have increased women’s role in society because they are earning as much money as their husbands — and they have a support network of other women.

How much money are we talking about here?

As the name suggests, the amount of capital involved is anywhere from small to micro. In more traditional models, we’ve seen loans ranging from $66 every 4 months to as much as $1200 every 6 months and more. Loan amounts depend on the local circumstances and needs of borrowers.

Is microfinance better than traditional aid?

Certain circumstances – natural disaster relief in developing countries – call almost exclusively for traditional aid.

However, if we had a nickel for every artifact of failed large-scale aid we’ve encountered on our travels, we’d be rich. Empty buildings, chairs emblazoned with branded stickers, marketing materials collecting dust, and signs long since blown over and ignored litter the “we-hoped-to-do-good” landscape of the developing world we’ve seen.

And we haven’t even visited Africa yet where we hear this is even more evident.

Perhaps the director of CIDRE, a Kiva partner in Bolivia, said it best. When we asked Alvarro why CIDRE had changed from being a grants based organization to microfinance in the last decade, he explained:

We used to give money as grants, but the communities never were invested in the projects and nothing really happened. Once we began loaning the money, the communities organized themselves, took ownership and the projects were really successful.

Why are the interest rates on microloans so high?

It is not unusual to see interest rates on microloans run as high as 20-30% and even higher. Microloans carry high interest rates to cover the costs associated with their administration (imagine loan officers spending hours each week on foot or in a vehicle to reach their clients). Also, MFIs incur additional expenses when they offer personal and professional skill-building classes and seminars to loan recipients.

Group Meeting on the Hill - Outside Cuenca, Ecuador
A group of borrowers meet on a central hillside outside of Cuenca, Ecuador.

Can microfinance solve all the world’s poverty problems?

There’s no more effective way to kill a good idea than to view it as a panacea, be-all end-all solution to the world’s problems. This is the panacea trap. And microfinance – with the help of its most ardent supporters and detractors – sometimes falls into it.

If you do some reading on microfinance, you’ll find that the jury is very much still out as to its effectiveness in alleviating poverty. But alleviating poverty is a lot to ask of one tool.

Microfinance’s biggest challenge is to be properly understood as a tool, rather than as a solution to all the plagues of the developing world and the dispossessed. It’s about loans rather than grants, the amounts are small – but when they are applied in groups, they can be pooled to allow small communities to satisfy their needs on a larger scale.

But perhaps most importantly, microfinance is literally about investing in people. Borrowers understand this. Successfully repaid loans help build and reinforce self-esteem, independence, pride and entrepreneurship in borrowers and communities.

Do you have other questions about microfinance? Do you support microfinance?

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Comments

  1. says

    Great article, and as always, I love your photos and how they transport me to far away places. The way microfinance empowers individuals and creates opportunities where there are so few makes me back it. Thanks for the post!

  2. says

    What a great topic for an article :) I’ve been thinking about getting into / learning more about microfinancing, so I’m definitely looking forward to the next post!

  3. says

    This is something that I have always found really intriguing about your travels- and I am really looking forward to the next in the series; it’s something I have really been interested in pursuing and would love to hear your take on it! And as Bessie said, your photo collection simply transports…

  4. says

    Excellent article you two. We visited a couple of micro finance places when we road through Africa. We were raising money for a charity and found that the micro finance businesses were thriving. It also gives the people such a sense of pride.
    You are right, Africa is littered with failed aid facilities. Maybe more micro finance businesses will help the situation.
    Thanks for explaining why the interest rates are so high. That is important to understand.
    You two have done amazing work raising awareness. You are an inspiration to us to make sure that we keep my focus on helping others and not becoming too wrapped up in our own lives.

  5. says

    @Bessie: We hope our photos both transport people to another place and introduce people to a different reality, but also helps them relate to the subjects as just people with all the similarities that go with that. The empowerment aspect of microfinance is so important – it’s amazing to see what people can do when you invest in them and provide some tools (e.g., capital and training) to create opportunities.

    @Naomi: We’ve met a lot of people who are intrigued by microfinance, but don’t know how to get involved. I hope our next post helps a bit with that and how to find the right match for your interests and values.

    @Shannon: These projects with microfinance programs really help us to get grounded and to understand socio-economic issues on a really personal level. We get a lot out of this work. Although, we are usually emotionally exhausted by the end of the projects after taking in everyone’s stories and understanding the challenges of that area.

    @Dave and Deb: The pride that you’ve seen in people is one of the big differences between traditional aid (hand outs) and microfinance – people are responsible for their own successes and they own that. That’s pretty powerful.

    After spending months in India, I was a bit down on the situation of average women there. Perhaps you had a similar experience with your recent visit. It was such a inspiration to see such pride and confidence in rural Indian women when we visited a microfinance program in rural West Bengal: http://www.uncorneredmarket.com/2009/09/microfinance-diaries-seeing-is-believing-in-west-bengal/

  6. says

    Great article relating about micro finance. We regularly donate to Kiva and find them to be a great company for microfinancing. Liked the pictures and slideshow too. Thanks for posting. :)

  7. says

    Microfinance is the way forward!

    People don’y need handouts, they need a handup and that is the problem not only in developing countries faced with poverty but also in the developed world.

    I am lucky to be in Scotland which is a hotbed of social enterpreneurism ….. Yunis is just setting up a microfinance project: Grameen Glasgow so should be interested to see how that model works here.

    Its great way to travel and broaden your horizons: social enterprise and travel: my two passions!

    Do drop me a line if you’re up in Scotland. Am starting my social enterprise helping match students to social enterprises (called SiSE)

    Best
    Kash aka @budgettraveller (twitter)

  8. says

    @Elise: Yes, Kiva does a great job in connecting lenders with people who need it in the rest of the world. We did a small presentation at their office in San Francisco the other day and we were impressed by the transparency and efficiency of operations.

    @Kash: I love how the Grameen Bank is moving into non traditional markets for microfinance like Glascow or New York City. They go where they see a need, which is how it should be. We don’t have any plans to visit Scotland in the near future, but I’ll be sure to let you know if we come your way!

  9. says

    It is the last paragraph of the post that really connects with me. I’ve always believed that too much effort was spent trying to solve major world problems in one giant sweep or at least trying to create methods to make major changes in short periods of time.

    However, the focus should always remain on the individual, ‘investing in people’ as you stated. It is the individuals themselves who, once given the tools needed to help them create a better life (not merely helping them to maintain their current state), are able to foster a strong community. And then the stronger community helps create a stronger city, a stronger region and so on. I know I’m just repeated what you said, but I really believe in that core idea.

    While I truthfully don’t know as much about micro-finance as I would like (now I know a little more, thank you!), the fact that it focuses on one person at a time, no matter how remote or how disconnected their community may appear to others, has always felt right to me.

  10. says

    @Earl: You summarized well the idea that positive changes in one person soon affect the family and then the entire community. I also believe that incremental changes are more sustainable than sweeping large-scale projects that try to “modernize” without fulling understanding the local culture and economic/political environment.

    Another side benefit of microfinance (which I’ll write more about in the next post in this series) is the social support from lending groups. As we’ve sat in on these lending group meetings and women share their stories, we’ve also realized that many of them never had a supportive peer group outside their immediate family. So while the investment is in the individual, those individuals benefit greatly from the support of their peers – this helps in sharing information about business, children, education and more. It’s a pretty interesting phenomenon.

  11. says

    I’m a big believer in microfinance but I didn’t know those facts about the finance rates. That makes a lot of sense. Even so, default rates are extremely low. I love what it does for the pride of the individual who succeeds as well as the increased social status. Even better, many loan recipients then hire others to help them with the business!

  12. says

    @Jennifer: One of the big goals with microfinance is that people will become successful and hire others. We’ve seen this a bit, but it’s not the norm yet. As in any population, some people are extremely entrepreneurial and will grow their business quickly to take on additional employees. Others are not so entrepreneurial so the business growth is not quite as dramatic, but it’s still growth and an improvement.

  13. Bishnu Dhakal says

    When I read your article i found same types of problem and opportunity of micro finance all over the world.i also believe that micro finance is the one of the greatest instrument in poverty alleviation .

  14. says

    @Bishnu: Thank you for stopping by and commenting. While microfinance will not solve all poverty problems, it is a good option – when managed properly – in working towards poverty alleviation.

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