This article originally appears in Forbes.
7/24/2012 @ 12:26PM
Microfinance as a Tool to Alleviate Poverty
For millions of people without access to traditional banking, the internet is a lot more than a place to share the latest family photos. It’s an opportunity to tell their stories and gain access to small loans that can change their lives.
Just 10 percent of the global population has access to traditional banking, according the Gates Foundation. To bridge the gap, microfinance institutions step in. Microfinance entails loans of as little as $25 to unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services, providing low-income people with opportunities to become self-sufficient.
Back in 1974, a Bengali man named Muhammad Yunus created the concept of microfinance with Grameen Bank, winning him the Nobel Peace Prize in 2006 for the dramatic global impact of his idea. The World Bank estimates that more than 500 million people have benefitted from microfinance to date.
Different than charity, these loans are repaid to the individual lenders. Since 2005, Kiva, a person-to-person microlending organization, has provided more than $329 million from 786,000 lenders in 62 countries, with the astonishing repayment rate of 98.97 percent. Borrowers are able to tell their stories online, along with details of their business idea – say, opening a shop or buying materials to make goods by hand.
Kate Cochran, COO of education microlender Vittana, notes the ripple effect these small loans can have across entire families and even generations. “In India, an education can increase earning power by 200 to 300 percent. In many cases, siblings are able to pay for younger brothers and sisters to complete their education with that extra income, and the upward cycle repeats.”
As success stories flourish, continuing innovations are happening in the space. Numerous entrants in the 2012 Dell Social Innovation Challenge involved creative aspects of microfinance in their business plans. Other microfinance organizations (MFI’s) include ACCION, Microplace, and Grameen America. Many MFI’s also offer microloans in the U.S. for entrepreneurs with solid business plans but who don’t qualify for traditional bank loans.
Global Philanthropy Group partner Maggie Nielson, who helped develop and implement the United Nation’s Year of Microcredit program in 2005, sums it up nicely: “People just want access to the same financial tools we have so that they can help themselves. They don’t want someone else to build them a big project or give them a handout. They are perfectly capable of creating their own success even though they weren’t born into the same circumstances. That is the kind of assistance anyone can give. You can literally change someone’s life.”