Micro Financing: Solutions to World Poverty
The World Bank’s descriptive definition of poverty says “Poverty is hunger. Poverty is lack of shelter. Poverty is being sick and not being able to see a doctor. Poverty is not having access to school and not knowing how to read. Poverty is not having a job, is fear for the future, living one day at a time. Poverty is losing a child to illness brought about by unclean water. Poverty is powerlessness, lack of representation and freedom” (Poverty). Sadly with all of the advances that the human civilization has achieved, one glaring issue that still plagues most of the planet is the amount of human population currently living in poverty. Eradicating poverty requires substantial discipline and innovation. One very innovative solution to assist in poverty elimination is through microcredit lending to the world’s poor. Microcredit lending can accomplish this by empowering women, creating employment, increasing political awareness and participation, and improving the social economic status of the impoverished through social pledges that are tied to the loans. Micro finance lending can improve global society by utilizing the untapped skills of the impoverished, contributing to the elimination of poverty in a successful and beneficial manner. Prior to arguing the substantial benefits that solidarity lending and microcredit can have on global society; a basic uniform understanding of solidarity lending and microcredit will be defined. The specific definition for “microcredit” was constructed at the Microcredit Summit in February of 1997. The Micro Summit defined microcredit as, “programmes extend small loans to very poor people for self employment projects that generate income allowing them to care for themselves and for their families” (Srinivas). Large lending institutions generally will not come near areas of low income and poverty. The risks are too substantial and the loans that they offer are generally too large for the poor potential entrepreneur. The micro financing institution’s tiny micro loans are usually all that is needed for a very poor individual to cover the initial costs of starting a business.
Solidarity lending serves as a unique method of lending funds to groups of people instead of a single individual. A financial institution can lower costs such as assessing, managing and collecting loans, and can eliminate the need for collateral (Solidarity). Solidarity lending accomplishes this by allowing a group to manage the loans and usually contain about five individuals, mostly woman. According to the Nobel Lecture given by Grameen Bank founder, father of microcredit, Muhammad Yunus, of the loans given to approximately 7 million impoverished people, 97 percent are woman (Yunus). Solidarity lending to women is believed to be beneficial over men. NOW, a weekly magazine by PBS, reports that woman have proven to be much more responsible in paying back the small loans than men (Whos). Additionally, women are generally the caretakers of their respective family unit so by directly lending to women, the entire family can equally benefit.
Women make up about half of the world’s population. This equally means that women contain half of human kind’s brainpower. This brainpower includes entrepreneurship, innovation, ideas, and also a very beneficial sort of temperament. The fact is most of this brainpower goes wastefully untapped. Solely the male population does a majority of decision-making, policymaking, and income earning. When institutions such as the Grameen bank place money into the hands of women, part of the usually overlooked human population can contribute their brainpower to society and overall facilitate in poverty elimination. The family unit also benefits. By a woman raising her own standard of living, the entire families’ standard of living will increase because she is the sole fabric of the family unit. For example, women who borrow money from the Grameen bank in Bangladesh have a birthrate about half of the national average (Ghista). This effect has placed an incredibly substantial reduction on overall poverty. Stated in a United Nations report on the effectiveness of microcredit lending, the United Nation’s found that, “many studies have concluded that these programs have significantly increased women's security, autonomy, self-confidence and status within the household” (General). The fewer children that a woman will conceive correlatively increases the attention, education, and healthcare of the few children that she does provide for. An additional benefit amounts to what she may spend the borrowed money on. The woman understands that in order to maintain a thriving business, the household must also maintain order. For example, the money should be spent on household goods and food. Alternatively, it has been shown that men will generally spend the money on themselves (Ghista). Men realistically do not have any concrete ties to the functionality of the household. Allocating money in the most beneficial way possible does not always happen.
Microcredit lending institutions help eliminate world poverty by not only allowing women entrepreneurs to cover the initial start up costs of starting a business, but also creates a substantial rise in the employment levels of both women and men. According to the Foreign Aid website, using Bangladesh as an example, microcredit institutions have created employment for about 70,000 people; about 20% of these people are women (Ahmed). These figures further show the residual effects that are generated by allowing poor women to borrow money for entrepreneurial purposes.
Raising individuals out of poverty, micro credit lending increases individuals’ political activity and awareness. The Foreign Aid website illustrates this increase, “In the 1997 Union Parishad (the grass-roots level administrative unit of the country) election, about 4,483 women participated in the election of 4,283 Unions. Out of this, 110 women were elected as members, and, of these, 20 women were elected Union Parishad Chairmen” (Ahmed). This type of political participation has an undeniable effect in the lives of these otherwise overlooked people. The once invisible people can now participate on decisions made that will influence their everyday wellbeing. The expansion of microcredit lending can raise living standards of more and more poverty stricken people, especially poor women, with this type of political participation.
The Grameen bank, as well as other micro financing institutions, has implemented further poverty reduction strategies on top of just lending money. These additional strategies come in the form of social development programs that are integrated into the micro finance delivery. Specifically, Grameen bank’s social development program is referred to as the “16 decisions” (Grameen). The “16 decisions” are pledges that the Grameen bank encourages the borrowers to abide by. They are meant to form an outline that will raise the borrower’s standard of living. For example, decision number three states, “we shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest” (Grameen). This decision provides encouragement for the borrower to maintain his/her home and to not validate poor living conditions. In some instances, many poor communities do not have access to acceptable water sources or they may not realize that the water they do have to be unsafe. Decision ten states, “we shall drink water from tubewells. If it is not available, we shall boil water or use alum” (Grameen). The other decisions include pledges to educate children how to grow vegetables year round. With the high rates of loan payback, poor woman take the responsibility of micro financing very seriously. If the same seriousness is applied to social development programs, the towering wall of poverty will be taken down and destroyed brick by brick.
The recent trend of micro financing to the poor has not been free of criticisms. The loans that are made have much higher interest rates than a typical loan from a traditional commercial bank. Some governmental and private citizens have become critical that although micro financing institutions receive concessional funds to finance lending, interest rates remain high (Fernando). The concessional funds come from private donors as well as some governments. Micro finance institutions make interest rate decisions based on four factors: the cost of funds, operating expenses, loan losses, and profits that are needed to expand capital (Fernando). These factors are similar to commercial banks, but micro financing institutions are operating on a much different scale. For one thing, these institutions are usually operating in areas with high inflation rates. “Inflation adds to the costs of micro finance funds by eroding micro lender equity” (Fernando). Another difference between loans offered by commercial banks and loans offered by micro finance institutions amounts to the money spent on personnel costs. In order to run a micro financing institution, personnel costs are dramatically higher (Fernando). Critics of the high interest rates attached to micro loans have legitimate reasons to be suspicious. It is important for these critics to educate themselves with the reasons of why micro financing institutions might have to charge such high interest rates on loans. It is additionally crucial that there is some sort of regulatory establishment to keep a watchful eye on these institutions. As beneficial as they might be, it could be easy for a micro finance institution to take full advantage of the poor to make their own personal wallets thicker.
The majority of Earth’s citizens are unfortunately living in poverty and it becomes the duty of the more privileged population to come up with innovative ways to tackle this glooming crisis. The impoverished population should not assume any guilt that they are living in such awful conditions. When given a chance, the untapped skills and brain power of these people can be used to make life on Earth enhanced for everyone. Micro financing serves as just the type of innovative solution that is critically needed to realize this. Micro financing accomplishes this type of innovation by empowering women, creating employment, increasing political awareness and participation, and improving the social economic status of the impoverished through social pledges that are tied to loans. Although micro financing may not entirely eliminate poverty issues that our planet faces, this is an enormous step in the right direction.
Works Cited
Ahmed, Kaniz Fahmida . "Microcredit as a tool for women empowerment." ForeignAid Ratings - We know social value when we see it.. 2 Apr. 2009
Fernando, Nimal. "Understanding and Dealing with High Interest Rates on Microcredit." Asian Development Bank May 2006: 2-4.
General Assembly, United Nations. " A/53/223 Role of Microcredit in the Eradication of Poverty." Welcome to the UN. It's your world.. 6 Apr. 2009
Ghista, Garda. "Bangladesh: Towards Economic and WomenÂ’s Liberation Via Grameen Bank, ." ProutWorld, teaching Prout, presenting a viable socio-economic alternative and activists. 2 Apr. 2009
"Grameen Bank | Banking for the poor - 16 Decisions." Grameen Bank | Banking for the poor Home. 5 Apr. 2009
"Poverty Analysis - Overview." The World Bank. 2 Apr. 2009
"Solidarity lending: Facts, Discussion Forum, and Encyclopedia Article." AbsoluteAstronomy.com. 2 Apr. 2009
Srinivas, Hari. "So, what is "microcredit" ??." GDRC | The Global Development Research Center. 2 Apr. 2009
"Who's Making Money From Microcredit?." NOW. PBS Online. PBS, Online Video. 21 Sep. 2007.
Yunus, Muhammad. "Muhammad Yunus - Nobel Lecture." Nobelprize.org. 2 Apr. 2009
3 comments
I love the paper it is thoughtful and in depth on the issue of eliminating poverty. I am confused on how these women are supposed to overcome their social standings in a society that views them as second class citizens.
April 26, 2009 10:53 PMThe view that woman are second class citizens, I believe, is a relatively new one. I think if women were given the same status as men, if not more, then society would be much better off.
April 29, 2009 12:51 PMDo you believe that the "free markets" would create an atmosphere where women will have the same status as men? If not do you think the free markets can create this utopia of fairness, then do you think government should intervene.
May 8, 2009 11:52 PMPost a Comment