• Blog

    Microcredits, the ultimate tool to end poverty?

    In a paper called “Microfinance is a possible tool to alleviate poverty in developing countries. Case of analysis: the Grameen Bank of Bangladesh”, the social scientist Marban reviews the historical aspects of microfinance, which dates back to the 1996 Millennium Summit in which 189 countries participated, setting out a series of objectives and goals aimed at improving the quality of life of the planet’s inhabitants. Among the objectives that were established at the summit, the most remarkable is to eradicate extreme poverty and hunger. According to data from the Food and Agriculture Organization of the United Nations (FAO) in 2006, extreme poverty continues to be a reality for more than 1 billion human beings who subsist on less than a dollar a day. Faced with this reality, countries are immersed in the need to search for viable alternatives for the reduction or alleviation of poverty in the world.

    It is important to mention the origins of this system, which dates to the initiative of Muhammad Yunus, winner of the Nobel Peace Prize in 2006. He found that local people from his country, Bangladesh, didn’t have access to the traditional banking system to get a loan because they didn’t have anything valuable to offer a guarantee of payment. This guarantee was the first thing they were asked for when they went to the banks and if they couldn’t fulfill this requirement, they were openly excluded.

    The origin

    Due to this situation, Yunus’s idea was to give people “little” amounts of money, without any guarantee, with the sole promise that they would pay and, to ensure the repayment of the loans, the bank uses a system of “solidarity groups ” (small informal groups that apply for loans together and whose members act to guarantee the repayment of the loan and support each other in the effort to improve economically). Interestingly, he got a 98% money back; therefore, it is considered to have a very low default in the payments.

    This is the origin of microfinance programs, which can be a strategy to support the fight against poverty in developing countries. A good example of these is the various organizations that promote and create microfinance systems that are having significant success in the international arena. Moreover, in recent decades, some international organizations, such as the World Bank, the International Monetary Fund, or the United Nations Development Program (UNDP), have promoted the microcredit system to solve poverty problems in developing countries.

    What is Microfinance and how does it help people?

    One definition of microfinance is financial intermediation at the local level. This refers to the provision of financial services such as loans, savings, insurance, or transfers to low-income households or people living in poverty, including consumers and self-employed. Broadly speaking, microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high-quality services, (as could be done by large companies that have the necessary solvency to be an excellent credit prospect for financial institutions), to finance their income-generating activities, create assets, stabilize consumption and protect against risks. Derived from the term microfinance, there is another new term called “Microcredit”, which consists of the name assigned to the credit granted by these financial institutions.

    According to Marban (2005), in her work called “The microcredit within the Grameen Bank. Comparative analysis between the Classic Microcredit System and the Grameen II System ”(2005), among the definitions of microcredit found there, is the one developed at the International Conference on microcredit in Washington DC, (1997) at the 1997 Microcredit Summit, which establishes microcredits as programs for granting small credits to the neediest of the poor so that they can start small businesses that generate income with which they improve their standard of living and that of their families. Based on the foregoing, it can then be said that microcredits are small loans for all those non-salaried individuals who lack some guarantee, or of a little amount of money and that they are provided of a loan by legally constituted institutions in the country

    Most Microfinance Financial Institutions started as non-governmental organizations (NGOs), credit unions and other financial cooperatives, state-owned development banks, and savings banks. A growing number of microfinance institutions are organized as for-profit entities, often because this is a requirement to obtain a license from the banking authorities to offer savings services. For-profit MFIs can be organized as non-bank financial institutions, commercial banks that specialize in microfinance, or microfinance departments of full-service banks.

    In recent years, some microfinance institutions (MFIs) have begun the development of a range of products to meet the needs of the most vulnerable sectors of the developing countries. Some MFIs provide services required by their clients that are not necessarily financial services, offering training related to money or credit management, or on business issues, marketing, health or social development, the use of microinsurance, or home insurance.

    What are the weaknesses of microfinance’s approach?

    Nevertheless, the real number of their impact shows that only half or less of the credit procedures are used for business purposes. The rest support a wide range of money management needs in their homes, ranging from the stabilization of consumption, education, medical expenses, or special events. This is because in these countries there is a lack of financial culture. Microfinance experts observe that loans are not appropriate for all kind of people, since they are not a good option for poor people if they do not have the ability and willingness to meet the repayments of their previously programmed payments and it is necessary to point out that the risk of not recovering these credits is very high. All the above is explained because in the developing countries there is a need for adequate financial education, which helps to understand and avoid getting involved in financial operations that could be harmful.

    Adequate financial education will allow people to have bases or tools on how to optimize their financial resources. Likewise, this type of education should begin at secondary levels (in some countries they do it in primary school). Educating in this field will give to the people the power of decision and the capability to obtain monetary resources that will help their growth, to have a better standard of living, and to be able to access every one of the services offered by the financial system, using the resources for what they were requested and not for another kind of concepts. Therefore, the use of microcredits granted by microfinance institutions is and will be an excellent option if they are used for the business purposes they were asked for.

    What kind of people benefits most of this system?

    The target user of this tool considers all those low-income people who do not have access to other types of financial institutions such as independent workers and some entrepreneurs who work from home. Among them we could find: small shops, street vendors, artisans, and some service providers, but surprisingly, professionals recently graduated from educational institutions, who do not have the capital to be able to start their offices, their businesses, etc., that require financial support, are also considered within this classification. to begin their professional development.

    An interesting fact is that, curiously, in the clients of microfinance institutions, the female users predominate, as well as in the Grammer Bank Model. It is important to mention that the model does not have a gender focus, rather it has a focus on the head of the family since it is a bank for the poor and generally the head of the poor family is a woman. Due to the lack of a way to prove their income, because they do not have stable cash flows (they do not have financial statements, bank accounts, etc.) within financial institutions recognized as formal, they are not likely to be considered suitable to exercise credits because they cannot guarantee the repayment.

    The female public constitutes most of the clients served by institutions known as microfinance institutions since it is considered an unprotected sector. To corroborate the information previously established, the use of microfinance for women was analyzed. According to the 2001 Report of the Microcredit Summit Campaign, 14.2 million of the world’s poorest women currently have access to financial services through specialized microfinance institutions (MFIs), banks, non-governmental organizations (NGOs), and other non-bank financial institutions. Women make up nearly 74% of the world’s 19.3 million poorest people who now receive services from microfinance institutions.

    Helping minorities empower themselves

    Most of these women have access to credit to invest in the businesses that they operate. Most of them have an excellent payment record, despite the daily shortages they face. Although women’s access to financial services has increased substantially over the past 10 years, their ability to benefit from this access is often still limited by the disadvantages they suffer due to gender. Some differences in the number of loans may be the result of the greater poverty of women or the more limited capacity of women’s businesses to absorb capital. But they can also indicate broader social discrimination against women, which limits the opportunities available to them, which is why it is questioned whether development programs through microcredit should make more of an effort to address these issues.

    The conceptualization of what microfinance represents is based on the provision of a set of financial services to sectors of the population with low-income levels that cannot access the formal circuit of financial intermediation to develop or expand their productive activities.

    Likewise, it is important to comment that there are programs focused on entrepreneurship projects and not on individuals who develop entrepreneurship, such is the case of the creation of business incubators, supported by higher-level educational institutions, where projects are supported with financial resources of innovation and improvement as long as these are considered viable. In this case, these programs aim to simplify loan processes and reduce traditional requirements, offering quick credit approval. Finally, the strategy of creating microfinance institutions is an excellent option for growth, if the resource obtained from microcredits is applied for expansion, growth, investment, generation of self-employment, as well as for creating more wealth. Unfortunately, the reality is not always like this, because the loan is sometimes used to pay debts contracted previously, this derived from the scarcity of financial resources and the lack of adequate financial education. It is recommended that financial institutions and educational institutions, at all educational levels, promote and deepen financial education in children, youth, and adults, which will promote savings and investment, to give a better use of the little resource available. A phrase from the director of the pro-development group, Francisco de Hoyo, states that “Microcredits are not going to lift the country out of poverty, but they are an instrument that has allowed many families to improve their situation and keep a job ”.

    What are the main threats to the microfinance system?

    In Brazil, clients can access their accounts aboard a floating bank on the Amazon River. In Mexico, rural residents find banking services inside stores like Walmart, 7-Eleven, or at their local pharmacy. Mobile technology and regulatory reforms have made it easier and cheaper for private and public companies around the world to offer banking services to the poor, young, women, and rural residents and others.

    But in a new report released in 2019, the World Bank warned that while some services, like low-cost accounts, clearly benefit the poor and small businesses, others – like microcredit, microinsurance, and debt relief – can do more harm than good.

    The World Bank encourages governments to reduce regulatory barriers, legal hurdles, and other factors that make financial services too expensive for some, such as fostering competition and protecting the rights of creditors.

    Access to financial services helps the world’s poorest to save so they can invest in education and improve their standard of living and enables small companies to borrow so they can grow. It also makes it easier for governments to direct subsidies and financial aid to the bank accounts of those most in need.

    Microcredit, or small loans to the poor, became fashionable in the late 1990s to provide financial services to the world’s most deprived to combat poverty and foster entrepreneurship. But the World Bank said that India offers a cautionary tale on over-extension of credit, following reports of dozens of suicides by poor debtors in 2010 in the southern state of Andhra Pradesh. India lacks appropriate consumer protection and legal provisions for personal bankruptcy, the bank said.

    In general, governments should avoid direct credit and loans through state banks, as these interventions can become politically related, according to the World Bank.

  • Blog

    The poverty enigma: is it self-imposed or is it determined by the environment?

    Poverty is not genetically transmitted, nor a cosmic destiny imposed on people, regions, or countries. However, we have long known that traditional strategies to combat social exclusion, well-intentioned as they are, do not offer lasting results, nor do they tend to be of significant scope. It is therefore advisable to pay attention to those contributions capable of suggesting other approaches.

    Aside from the obvious difficulties of overcoming a status quo based on long-established political and economic relations between countries, recent research provides a revealing new perspective: poverty feeds itself. The psychological burden derived from living in a context of scarcity affects the human brain, producing a cognitive deterioration that translates into worse life decisions and, consequently, in a perpetuation of the state of poverty.

    Dave Nussbaum, in his blog on social psychology Random Assignment, perfectly sums up the gist of this study:

    “One of the obstacles preventing the poor from overcoming poverty is the tendency to make costly financial decisions – like buying lottery tickets, borrowing at high rates, not enrolling in welfare programs – they only make your situation worse. In the past, these poor decisions have been attributed to the personality of low-income citizens or the environment in which they live, with little access to education and substandard living conditions. Research published in Science by Behavioral Sciences professor Anuj Shah offers a new answer: living with scarcity changes people’s psychology. When resources are scarce – when people have little time, money, or food – every decision about the best way to use those resources is made with greater urgency than when such resources are available in abundance. This approach can have positive effects in the short term, but it is done at the cost of neglecting other less urgent demands. For example, when they are under pressure from urgent expenses like rent or food, people can neglect routine maintenance on their vehicles and end up paying for expensive (and avoidable) repairs later”.

    For those of us who have been lucky enough to be born above the extreme and moderate poverty lines set by the World Bank, an extraordinary effort of empathy is necessary to glimpse, even superficially, what it means to live from day to day without having the most needs covered. basic. From the comfort of a relatively predictable future, it is easy to question those poor spending and consumption decisions of the poorest. Who has not been surprised by the images of shacks and slums with satellite dishes? Entrepreneur and writer Jim Rohn put it lapidary:

    “The poor have big televisions. Rich people have large libraries”.

    Still true, Shah’s study reminds us that, in general, such choices are not the cause of poverty, but its consequence. In other words, people are not poor because they mismanage their resources, but poverty reduces their ability to manage them better. This change in perspective can significantly modify the focus of financial inclusion initiatives: in addition to “showing” the recipients other alternative possibilities that would provide them with greater well-being, it is necessary to understand the mental process that leads to making such decisions.

    Is your “financial audacity” a matter of personality or a matter of privilege?

    This approach can undoubtedly raise numerous objections. We would never have those self-destructive behaviors! Even if there were a radical change in our circumstances (a perspective that terrifies most of us to a greater or lesser degree), we are convinced that common sense would come to our aid and we would use our scarce resources wisely. Since nothing is as enlightening as direct experimentation, and in order to help us to put ourselves in the shoes of people who live in a precarious way, the Durham (North Carolina) Department of Social Care has designed an extraordinary “poverty simulator” , which we recommend to everyone.

    The program begins by reporting that Durham provides welfare to 6,000 people each year “even though you will never be one of them, will you?” It then challenges the user to prove that they can optimally manage their scarce resources for a month, without having to resort to the help of social services or third parties. Throughout a series of daily situations we are checking how many of the savings and consumption alternatives that we take for granted under “normal” conditions, do not seem to be at our disposal when we operate “in scarcity mode”.

    After each election, the program inflexibly communicates to us what the likely outcome of the election will be. It is shocking to realize that making bad decisions is very easy when we do it with our mind set on the scoreboard that, on the left of the screen, warns of the little money we have left to end the month. I finished the experiment with a stomachache and with the conclusion that, in our society, being poor consumes so many resources that it is very difficult to stop being so, which is what this program really wanted to demonstrate.

    To end on an optimistic note, and as an example that “difficult” is not synonymous with “impossible,” let’s recall Will Smith’s film Pursuit of Happiness, which tells the true story of millionaire and philanthropist Chris Gardner. Will Smith’s character, in a situation of extreme precariousness, living off public charity and with a young son in his care, made a series of courageous and very risky decisions with which he not only left the streets, but also became a very rich man and a benchmark of personal development. Following the reasoning of this article, it can be concluded that the decisions of the true protagonist of the story were correct because they did not reflect a mentality of poverty, but a medium-term vision that excluded the misery of living from day to day. How many people would be willing to sleep in homeless shelters while attending a multi-month training seminar, in exchange for the possibility (not security) of later landing a well-paid, skilled job? Exact. Not many.

    So… social mobility is just a myth?

    Well, first it’s important to know what the concept means. In this article, we will define it as the changes that the members of a society experience in their position in the socioeconomic structure. If people improve or worsen their socioeconomic condition with respect to that of their origins, then they are said to move. On the other hand, if their achievement is like that of their parents, then it is concluded that they remain immobile. The existence of significant social mobility implies that a society can recognize and reward the effort and talent of its members.

    From this perspective, social mobility and its study are linked to the analysis of inequalities and inequities in access to opportunities for well-being and development. If we consider it, what the real world shows us is shocking: people who come from poor strata will hardly be able to get out of it, for the middle classes the opportunities are very limited, and that for those born in households with high income and well-being, more likely, throughout life they will remain at that level; In other words, we are a country with very low social mobility.

    In countries with a long tradition of welfare states such as Sweden, Finland, Norway and Denmark, the proportion of individuals who come from the lowest quintile and who remain there is practically half that of the developing countries. On the other hand, if the proportion of children who started from the lowest quintile and who reached the highest is observed, the proportion in the Scandinavian countries practically triples that of developing countries. With regard to the proportion of those who come from the highest quintile and that remain there, that is, they do not experience downward mobility, the proportion in Scandinavian countries is lower and represents 60% of the corresponding developing countries proportion.

    Even inequality is unequal among the less-privileged strata

    Data show that 48% of those who are part of the lowest income quintile remain in it throughout their lives; in other words, 48 ​​out of every 100 poor people remain in the same status intergenerationally; at the opposite pole, 52% of those who are part of the households in the highest income quintile do not move from that position throughout their lives. Only 12% of those who have completed higher education have mothers and fathers with primary schooling while 59% of those who completed a University degree have mothers and fathers with high-level training.

    In terms of the wealth dimension, 8% of the people who started from the lowest quintile reached the highest quintile of the distribution. In terms of perceptions, people do not invest additional efforts in capacity building when perceiving that these do not generate long-term gains.

    Mobility by gender shows that the mobility processes between women and men are unequal. Mobility is greater in women than in men. However, women also have greater certainty of staying in the lower strata when their origin is there, and fewer options than men to stay in the higher sectors even though their origin is also there.

    The never-ending debate: poverty is a consequence or a cause?

    The difficulty in explaining social mobility and its causes is not too far from the problems to account for any other social phenomenon such as inequality, poverty, or social justice. In fact, mobility and social inequality are deeply interrelated with each other in what is known as the Great Gatsby Curve: the greater the inequality, the less intergenerational social mobility. For example, if we ask anyone if they consider that there is poverty in their country, the vast majority will answer yes. People, regardless of their political or ideological orientation, are aware that poverty exists. It is a socially perceptible fact and tremendously difficult to deny.

    However, when we ask about the causes of why this poverty or inequality exists and, ultimately, about how fair our society is, the plurality of opinions is triggered. Those opinions are biased ideologically, but also by social class. While the popular classes, smallholders and blue-collar workers have their opinion much more defined, with a tendency to consider poverty and inequality as the result of our unjust social order, the more privileged, middle and upper classes of white collar, don’t have it so clear. They have less confidence in how the debate on the causes of poverty is polarized, a debate sometimes raised between two possible causes, to choose one: I) People are responsible for their own actions and, therefore, for their own situation ; or II) People start from different social origins that subjugate them and condition the rest of their lives.

    These privileged classes consider, in a greater proportion than the rest, that they are none of those reasons. We do not know which ones, but they seem to find the debate uncomfortable. To some extent, it is normal. Many of these people have experienced upward social mobility that has led them to improve their social position compared to that of their fathers and mothers. This social phenomenon has a particular psychological effect. These people are aware of the difficulties their parents had to go through for them to improve their social position and, being aware of their own efforts, they cannot consider their origin to be an impediment either. Therefore, compressing the debate to whether success or failure depends either on individual effort or on the constraints suffered by disadvantaged people is too reductionist.

    Naturally, we turn to our memory, our trajectory, that of our family, to judge a macro sociological phenomenon that spans several generations. Any empirical result on the matter will be questioned because, after all, it ascribes us as individuals in different groups: a) privileged people who inherit the social class of their ancestry, b) people of privileged origins who have suffered a decline in the social ladder, c) people who have managed to improve their position and d) people who have not managed to improve their low social position and either have maintained it or have degraded it. It is for this reason that, in certain circles, of course, discussing social mobility at a dinner party can become uncomfortable. Talking about social mobility, understandably, supposes an exercise in critical judgment about our mothers and fathers, about the opportunities we had or were deprived of, as well as the degree of success of our own decisions.

  • Blog

    Benefits of supporting local communities with microfinancing

    What is microfinancing?

    Micro financing is a broad term used for describing a diverse number of products of financial aid such as microloans, micro savings and micro insurance. It was originally conceived to take finance to people who do not have access to banks, have no credit history or collateral, or have no financial education and live in developing countries or in extreme poverty. Does microfinance really alleviate poverty? The 34-billion-dollar ...

    The idea is simple: by giving a very small loan to someone living in a poor country, you could help them lift a small business that would eventually help their family move out of poverty. When that loan was paid, the money would be reintroduced to help another borrower, thus, getting more families out of their difficult situations. 

    According to Plan International, “over 2 billion adults and 800 million young people worldwide do not have access to formal financial services and in sub-Saharan Africa less than 30% of women have an account with a financial institution”.

    This concept was introduced by pioneer Muhammad Yunus, a Nobel-Prize winner, who thought it could help financially marginalized people, by providing them with the necessary capital to start a business and work toward getting themselves out of poverty. 

    How does it work?

    Many people all over the world, live in a circle that does not always allow them to find resources to improve their living situations. They struggle to find work or have very low wages, they hardly ever finish basic education and find o other solution than to have children as another person represents another chance for income, but unfortunately most children that are born into those conditions, never brake the circle, and it is a story that repeats itself over and over again.

    Microcredit institutions provide the resource, such as the loan, as well as products like savings accounts with no minimum balance and insurance, at a much lower rate with lesser premiums. With these opportunities, small families have a way of breaking the never-ending cycle, even when they don’t use them to run a business. Only by having more options, like not needing any more children or the chance to send them to school instead of work, they already perceive a greater benefit than before they got the loan.

    What are its benefits?

    People are also most likely to pay because they are grateful to be given an opportunity they normally wouldn’t have gotten. Microfinancing has the highest payment rates, since people rely on the small amounts of money they are lent to, and paying it back allows them to get another loan and so forth.

    Yesterday, today, and tomorrow of MicrofinanceAnother benefit is that most of the time, taking out a micro loan requires the person to receive training, with courses that span from book-keeping to cash flow management. Eventually, this education intends to help people not only repay the loan, but to maintain a healthy business through a long period of time. With expert business training and planning, more start-ups can avoid costly mistakes and are more likely to be successful in repaying their microloans and building a solid credit history in the process.

    How has the concept of Microfinancing evolved?

    Yunus thought that people would use their money to start a business, however, evidence nowadays shows that often, borrowers use the loan to meet their day to day needs. In case of an emergency, to put food on the table, and even pay for their children’s education. 

    Then, microfinancing appeared to be the solution to ending poverty around the world. But has it really been as successful as economists thought it would be?

    From its original conception to our current date, the conception of Microfinancing has completely changed. Although it has occupied researchers minds over the past decade, the findings have not supported the first hope for microcredit, as it has not created real evidence that it lifts families out of poverty. Then, how come it is still not viewed as a failure in economic history?

    Financial diaries of people living on $2 or less per day have shown that microcredit helps many families deal with emergencies, make critical purchases that they couldn’t otherwise afford, and put food on the table in times of scarcity.

    In the end, Microfinance became a key strategy to expand options for poor people by offering more reliable financial services. It is a way for families to build or rebuild a credit history, to become financially independent, resilient and more able to provide for this families in times of scarcity or need.

    And it has proven to be helpful not only in small communities or Third World countries, but also with small entrepreneurs all over the world in any economic situation. Microfinancing supports the talent of students, young business people, retired people, immigrants, women, among others who would normally struggle to get lines of credit or loans from traditional banks, as well as investments or funding for any size of project. Inclusion of Disabled People in Microfinance Institutions: Where ...

    This is the way many unexperienced filmmakers, artists, chefs, etc. are financing their projects. And the same rules apply for these kinds of microloans, as people feel grateful to be given the chance and to be able to continue funding their business ventures, they rarely fail paying the money back.

    The history of microfinancing is fascinating, as it presents an unexpected lesson that applies to many things in life: bringing more opportunities to people helps them become more ingenious, cunning and better equipped to deal with the difficulties they may be presented with. Rather than not trusting people, or by giving them things for free, we should be working on creating more initiatives to give people the right tools and teach them to make the most out of what they can get.