Microfinancing: What It Is and Why It Matters

By Allie Eklund

Allie Eklund
Allie Eklund

Microfinancing.

The first time I heard the terminology was from a friend who was studying at Harvard. My initial thoughts were “this sounds too complicated for me to understand.”

“Regular” financing versus Microfinancing

Since that time, I have learned that getting “regular” financing is what is really hard and that microfinancing is actually a very simple concept. 

Kiva, a nonprofit dedicated to online lending for low-income entrepreneurs, describes microfinancing as “a financial service to low-income individuals” or to persons without “access to typical banking services.”

Ultimately, this is a means for individuals who cannot receive traditional business loans to start an enterprise. Anyone can become a lender, and people from all over the globe are applying to benefit from these loans.

Often times these loans are small sums of money, as small as $25.00. Now, $25.00 doesn’t do much for an individual in the United States. That may just cover a day’s worth of food in some regions. Yet, when stepping outside of more developed regions, $25.00 dollars can be a much larger sum when exchanged into a currency with less value than the USD. Compound that $25.00 loan with a dozen other $25.00 loans, that sum could be the catalyst to propel entrepreneurs forward.

Microloans are not issued or funded by banks or traditional financial institutions. Generally, it’s small business owners, entrepreneurs, and many farmers from underdeveloped nations that seek this type of financing. Kiva claims that more than 470,000 farmers have been supported in lending practices.

Real returns

Opportunity International, a microfinancing firm, claims they are 94% women, and that 98% of their loans are paid back. Kiva states similar success rates, claiming a 97.2% repayment rate. Yet, this lending concept goes beyond the dollars and cents of making a return. Poverty reduction and progression of our global economy are key elements driving lenders and borrowers to microfinancing.

The Hunger Project affirms that “microfinance has become a real means of reducing poverty by improving both people’s standard of living and economic self-sufficiency.” Further, The Hunger Project connects the need for microfinancing as one of the links to end hunger in Africa because African women are the “most important but least supported food producers on the continent.”

Is it enough to lift poverty?

The microlending community has received widespread attention in the two decades, and thus economists and analysts came out of the woodwork to challenge whether such tiny loans to those in the most need is really working, and reducing poverty. Critics have called microfinancing a failed venture.

Ending poverty is an ambitious goal. Thinking on a global scale, let’s put our world’s population of poverty into simplified terms: there are 7 billion people on the planet, and more than 3 billion of them are living on less than $2.50 a day. To end poverty, it will take continued concerted efforts, to say the least. Microfinancing allows lenders and borrowers to foster an economy that literally thinks global and acts local.

To learn about the many lives that have been uplifted through microfinancing, read here, here, and here.

Allison Eklund is a Financial Advisor with Tridea Advisors, offering securities and advisory services through KMS Financial Services, Inc.

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