The End of Poverty? The Role of Microfinance
By Jillian Cookinham ’24 Associate
The wealth gap is increasingly demanding attention. It is present in the United States and the entirety of the world. Internationally, the world bank identifies that one billion people live on $2.15 or less per day. This is the international poverty line. Often people under this poverty line face obstacles in receiving financial help. For example, those that live in severe poverty in rural areas may not be close enough to a financial institution. However, most often, those in poverty require smaller loans, but often do not qualify for the smallest loans banks are willing to lend. The introduction of microfinance institutions (MFIs) has established available lending to those that previously did not have access. MFIs provide microloans, which typically are under one hundred dollars. Microloans have been proven effective; research shows a near 98% reimbursement rate. More importantly, a recent study for 60 Decibel’s Microfinance Index, found that 88% of borrowers agree that the microloan improved their quality of life.
MFIs choose entrepreneurs to provide a loan with the goal of raising them out of poverty and creating financial stability. An example of microfinance loan may include lending a new entrepreneur funds to purchase fabric, so that the entrepreneur may sew and sell clothes. As the entrepreneur begins making their own clothes, they generate their own income. This demonstrates how MFIs may provide financial stability to the borrower.
Perhaps the most widespread of MFIs is Grameen Bank. Grameen Bank is known for revolutionizing the microfinance industry to empower those in severe poverty. Most often its recipients are women. In fact, nine out of ten borrowers of Grameen Bank are women. By acquiring microloans, women can become financially independent. Often in developing nations, women are dependent on the income of a husband or other family member. MFI loans may provide women the freedom to decide where, and with whom they would like to live. Grameen Bank has been successful in changing lives and reducing global poverty.
Where can those interested in microloans give? Microfinance firms include Asian Development Bank, Microcredit Foundation of India, and Partner. However, more recently, microfinance firms have come to America. Grameen America was launched twenty years after its parent company initially emerged in Bangladesh. However, since its inception, other firms such as Justine PETERSON, and Accompany Capital have also emerged in the United States. Some of these institutions have a focus on supporting a certain group of people. Accompany Capital, for example, provides loans for immigrant and refugee households.
How can investors become involved? Most often, investors can provide funds on the website of the MFI’s provided above. Investors will know who they are providing a loan, and when the money will be paid back. However, MFIs do not only exist as nonprofits, although they are historically more common. MFIs that are for-profit are on the rise…and investors are needed. Prominent funds have yet to emerge as for-profit MFIs are still in their infant stages. Investment banks such as Citigroup and Morgan Stanley are becoming involved in microfinance. In 2007, for example, Morgan Stanley introduced the microfinance-backed bond. Microfinance seems to have risen around the world.
Although microfinance has been established for decades, it remains an evolving space. Its success is supported by many — including the United Nations. It is applauded for creating an avenue to generate a sustainable income. The success of microfinance sheds light on the feasibility of reducing local and world poverty.
Jillian is a junior from Gilmanton, NH pursuing a degree in Economics, with minors in French and Biomedical Science. Outside the fund, Jillian is a Paul Scholar and part of the University’s Honors Program. Her freshman year, she was a part of Student Senate where she worked with the Academic Affairs Council and First-Year Life Committee. This past summer Jillian coached young gymnasts attending the Lakes Region Gymnastics Academy’s summer camp. Jillian looks forward to learning more about investment in private equity with the Fund.