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Microfinance’s Secret Weapon: Girl Power Sebastiana, a mother of nine, lives in a rural region of the Andes in Peru. When she lost her husband a few years ago, she became her family’s sole financial supporter. They were already living in extreme poverty when Sebastiana’s husband died, so his passing left them with dismal financial prospects. Now, however, Sebastiana successfully runs a livestock business. All of her children have survived and she works to improve, not just maintain, their quality of life. What spurred this turn of good fortune? A sixty-four dollar microfinance loan.
Microfinance comes from institutions that loan money to poor people for self employment and business start-ups when traditional banks will not. These loans start as low as twenty five US dollars. They provide people with funding to open shops, raise goats, sell beads, or start any other type of income-generating business. In Latin America, men often run such businesses and the word “entrepreneur” typically describes males. However, microfinance challenges this tradition by allocating the majority of microcredit loans to women. Latin American women like Sebastiana reap the benefits of microfinance as they become financially independent, break gender stereotypes, and gain social and economic power. Theoretically, Latin American microfinance will reduce poverty by giving business opportunities to the poor. However, its current actual economic impact is minimal, which suggests that microfinance may combat poverty indirectly. Although microfinance does not improve economies in the present, by empowering poor women it lays the groundwork for future economic growth. Thus, we should contribute to microfinance in Latin America today and watch as economies grow tomorrow.
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Illustrating the long-term implications of microfinance requires a systematic approach. First, I will outline microfinance’s history and examine the factors that minimize microfinance’s economic impact, focusing on present day economies. I will then address its impact on women, projecting the future benefits of women’s economic empowerment. This will lead into a study-based explanation of female tendencies that make women strong financial investments. Undermining arguments that oppose femalefocused microloaning, I will encourage the financially able to give their social and monetary support to microfinance.
Micro-financial concepts have existed for centuries; however, microfinance did not gain widespread popularity until the late 1900s. Latin America sponsored one of the earliest official micro-lending institutions, ACCION, which opened in 1961 in Carcas, Venezuela (Krieger). ACCION created small microfinance establishments that lent money all over Latin America. The funds helped poor people bring their entrepreneurial dreams to life, providing them with business capital. Microfinance organizations similar to ACCION soon followed, and micro-lending became a global practice. These institutions thrive off of social funds created by donors in first world countries. Religious groups and other charity organizations also support microfinance through donations. The Multilateral Investment Fund’s most recent microfinance data survey reveals that 12.5 million Latin American clients have benefited from micro-loans and that the total loan portfolio of the Latin American and Caribbean (LAC) microfinance industry is approximately 40 billion US dollars (Gutierrez 5). Its recent growth suggests that it functions effectively for both donors and receivers.
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As microfinance expanded, micro-lending institutions began to focus their loans on women. Organizations like the Self Employed Women’s Association and Pro Mujer, or “Pro Woman,” distribute loans to single and unemployed women across Latin America. Over the past few decades, Latin America took strides to promote women’s rights. In the United Nations, every Latin American country ratified the Convention on the Elimination of All Forms of Discrimination Against Women (UN Women). Many established legal gender equality standards and even amended constitutions. Nevertheless, these countries still lack complete social and economic gender equality. Women’s traditional gender roles often confine them to housework. What’s more, societal standards limit their access to agricultural, economic, and social resources. Hence, even though microfinance traditionally targets poverty, women’s social situation also welcomes its assistance.
Before we can address this social change, we must acknowledge that despite microcredit lenders’ intentions, microfinance has not yet significantly reduced poverty. By definition, micro-loans contribute to small businesses. But how small is too small? A group of MIT development economists conducted a study on micro-loan recipients and suggested that the businesses’ small scales make their economic impact void (Tozzi). This reveals that while an in-house store or street-side jewelry stand may support a woman and her children, its monetary exchanges do not influence the larger economy. Even Kiva, a leading microfinance coordinator, admits, “There are cases where microfinance cannot be made profitable, for example, where potential clients are extremely poor and risk-averse or live in remote areas with very low population density” (About Microfinance). Because the majority of Latin American microfinance recipients live in poor, rural areas, microfinance’s rapid profitability seems unlikely. Hopefully this
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pattern will change with time, but currently micro-funded businesses do not monetarily alter economies.
Even if micro-funded businesses were larger, they could not single-handedly change economies because they lack sustainability. The businesses are new, individually created, and privately run; ergo they struggle to expand. Sarah Guntz, a researcher at the Georg Simon Ohm University of Applied Sciences, argues that only a small percent of microfinance businesses achieve full sustainability because they fail to obtain commercial funding from outside sources (Guntz 29). Micro-funded businesses provide money to families for survival, but they do not have large infrastructures and their founders lack experience. As a result, traditional banks often refuse to loan them money and they only grow as large as the micro-loan permits. Hence, many businesses that support women retire alongside them, leaving few economic effects.
Despite its lack of immediate economic influence, we should not disregard microfinance because it affects women by socially and economically empowering them. Without microfinance loans, women have little access to monetary capital. McKinsey & Company, a global management consulting firm, estimates that in Latin America at least sixty five percent of the population does not access bank loans (Chaia). Out of the remaining thirty-five percent, few are women. Moreover, an anti-poverty organization entitled Global Citizen apprises that women own less than one percent of the world’s property (Introduction). This reveals that they lack necessary resources for power and economic influence. Microfinance gives women the funding they need to become financially independent. By sponsoring their business startups, it permits them to
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generate income and thereby frees them from men’s economic control. Microfinance also promotes women within their communities. As they join markets, participate in transactions, and create necessary goods, women gain societal power. This permits them to assume socially influential roles because they actively control communal resources. Thus we see that microfinance increases women’s social and economic weight.
Understanding that microfinance promotes women, we must now review how this empowerment lessens poverty. Fundamentally, by empowering women microfinance directly assists impoverished individuals. According to the World Health Organization (WHO), Women constitute approximately 70 percent of the world’s poorest people (Introduction). Consequently, when microfinance gives women the tools to support themselves, it economically elevates a percentage of these poor. Even if women’s businesses do not expand for future generations, they create steady incomes large enough to sustain families. Women use these incomes to provide shelter, food, medical care and other necessities for their families. As it assists those who are most likely to be without income, microfinance minimizes the effects of poverty.
In addition to benefiting individual households, microfinance contributes to economic communities by adding women to the workforce. Currently, in developing regions of Latin America, only about 58 percent of women participate in the labor force (Women Are). However, microfinance gives homemakers and unemployed women selfemployment opportunities. When these women join the workforce, the economy grows. If women had paid employment rates equal to men’s, the United Nations estimates that countries’ gross domestic products would increase by 9 to 14 percent (UN). Such an
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increase in GDP would raise living standards in countries across Latin America. Thus, by drawing women into the business community, microfinance can benefit the entire economy. Furthermore, women’s entrepreneurial businesses contribute to economic innovation. As they create self-sustaining occupations, women increase the variety of goods and services produced in any given market. By providing women with the money necessary to start working, microfinance broadens economic communities.
As these economic communities grow, female-directed microfinance ensures that families benefit because women typically channel their income prudently. The United Nations conducted studies on the Latin American region revealing that as women gain access to land, property, income and other resources, their families gain productivity and they reduce poverty (Rural Women 4). Furthermore, Pitt and Khandker, empirical researchers, believe that program credit improves the quality of life in poor households more significantly when women receive micro-credit instead of men (Brau 11). New York University’s Center for Global Affairs concurs, claiming that men tend to spend their money on personal interests, which include drinking and gambling. They explain that women, on the other hand, are more likely to direct their earnings towards their children’s health, nutrition, and wellbeing (Regmi). These trends imply that as women gain economic relevance, they will use their power to help society progress. Female recipients of micro-loans either support families or share financial responsibilities with their spouses. In both situations, when women become full or partial breadwinners through microfinance they will actively and effectively combat poverty by allocating their incomes productively.
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Another significant result of women’s micro-loans is that they promote education. Households that struggle financially cannot afford to send their children to school because they need their assistance working. But when women can self-sufficiently run businesses, their children can attend school. Take Sebastiana for example. All nine of her children may have been forced to scavenge for food, beg, or farm if Sebastiana had not started her livestock business. Thankfully, her microfinance loan provided economic stability. New York University’s researchers assert that when women’s financial independence increases, they spend more money on education (Regmi). This reveals that if women gain economic power, educational levels will increase and economic wellbeing will subsequently increase. According to the Global Partnership for Education, an additional year of schooling raises average annual gross domestic product (GDP) by .37 percent (Global). This demonstrates that a direct relationship exists between education and poverty alleviation. The United Nations Educational, Scientific and Cultural Organization approximates that by providing all students in poor countries with basic reading skills, 171 million people would escape poverty. In other words, education could decrease poverty by at least 12 percent (Education 8). What’s more, educated communities are less susceptible to future impoverishment because school equips people for higher tier jobs, increases innovation, and improves economic management. By giving micro-credit loans to women, we not only help them succeed financially but also help their children prepare for a prosperous future.
Women’s monetary trends also bode well for investors because female micro-loan recipients are trustworthy investments. People often avoid donating to microfinance because they fear losing money. This fear is needless, however, because according to
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Sarah Guntz, microfinance has a 98 percent repayment rate, which is higher than those of traditional lending institutions (Guntz 19). This is particularly applicable to women because when microfinance institutions focus their loans on females, repayment rates increase (D’espallier 1). By demonstrating their financial responsibility, women prove that they deserve donations. Moreover, Professor Mohammad Yunus, a researcher and microfinance pioneer, conducted a study concluding that women repay lenders more punctually and reliably than men do. So do not hesitate to donate out of fear; microfinance offers favorable, sound investment opportunities.
Despite these positive impacts, some disapprove of microfinance and its focus on women. The Journal of Entrepreneurial Finance argues that women’s microfinancebased businesses are ineffective because they do not fit within gender stereotypes, leading to business discrimination. It also claims that women lack sufficient training in microfinance fields (Brau 11). However, we cannot expect women to contribute to the economy until we break these stereotypes. It may take a few years of slow startups and unsuccessful business attempts, but if we continue to promote microfinance among women, they will gain training and experience. They will also assume entrepreneurial roles and thereby alter their traditionally domestic image. This will make women permanent members of the workforce and permanent proponents of economic growth.
Microfinance opponents also unnecessarily denounce the system for failing to reach the entire spectrum of impoverished people. Oxford journalists John Weiss and Heather Montgomery explain that these opponents claim that the “core poor,” or the poorest group of people in economies, suffer exclusion from small lending groups and
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microfinance institutions that require a minimum savings amount for loan eligibility. These journalists also believe that because microfinance does not directly impact the extremely poor, it does not effectively combat poverty (Weiss 1). Global Citizen claims that women represent 70 percent of the world’s poor (Introduction to the Challenges). Females therefore constitute a majority in both mid and low levels of poverty. By giving loans to moderately poor women, microfinance institutions elevate the middle standard of living. This will subsequently increase economic activity, which creates job opportunities and charity resources for the extremely poor. So although microfinance may be unable to give out free loans to all in need, it will indirectly benefit all members of a society.
Such indirect benefits capture the significance and value of microfinance in Latin America. As microfinance’s minimal economic impact evidences, it is not the businesses themselves that will foster change but rather the pathway they provide for women and their dependents to boost economic growth. By empowering women through microfinance, we set social precedents that will enable economic communities to develop efficiently. The American Research Group estimates that in the United States this year consumers will spend an average of 861 dollars on Christmas gifts (2014 Christmas). For just 61 dollars, those same consumers could save a family like Sebastiana’s from starvation, help start a business, and enact social change that will diminish poverty for generations to come. So next time you get cash at an ATM or feel charitable during the holidays, consider donating to microfinance in Latin America and help women build a healthy financial future.
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