Microloans are a powerful form of small business empowerment that, according to MIX Market, supplied 120 million borrowers with around a total of $112 billion in 2017. Microloans typically do not require collateral to take out and have small interest rates, so they are much more accessible for poor and more non-traditional borrowers. And while this may seem like a risky investment for the organizations and individuals that lend out this money, according to one international microloan nonprofit, Kiva, they have an impressive 96.2% repayment rate.

 Although individuals may have been able to borrow small-scale from friends and family for centuries, the concept of an institutional loan was inaccessible for many until the 1970s. In 1983, Muhammad Yunus established the Grameen Bank, setting out to empower borrowers to gain the necessary capital to raise themselves out of poverty (Yunus began investigating this approach in the 70s, formalizing the bank in ’83). One of the key features of this approach is that around five individuals are grouped for moral, group-centered guarantees, which substitute collateral. With such an imperative to repay the loans, many were paid back in full and subsequently empowered small business owners. Muhammad Yunus and Grameen Bank shared the 2006 Nobel Peace Prize for this insightful approach.

  Additionally, women are vast benefactors of this approach. Grameen Bank claims 97% of their members are women, while Kiva claims 81% of their borrowers are women. At least one study suggests that microfinance has little to no impact on female financial empowerment. Still, this study was only conducted in one city in south-central India. The argument against microfinance is that these loans encourage small businesses with little opportunity for them to develop into larger enterprises.

  That being said, there is still so much good that can be done to lift individuals and those small businesses out of poverty. Take one of the testimonials from Kiva as an example. A woman named Lindiwe from Zimbabwe used to go to school without shoes, anything to write with, and nothing in her stomach. With a microloan and business training and mentoring provided by a partner of Kiva, she created an umbrella investment company called Lee Investments. Instead of paying monetary interest, Lindiwe contributes social interest to other women in her community as a volunteer mentor. One of the businesses, Lee Juice, went from bottling ten bottles of juice and soda per week to 200, hired someone for the first time, and created her savings account to save $10/month.

  In all, microloans have some incredible potential to empower individuals to take control of their financial future. However, it is not the answer to everything, as there are a significant number of reasons that any business or individual might not succeed. But, as Lindiwe says, “success is in our hands.”

Written by Zoe Bibik

Citations:

Banerjee, A., Duflo, E., Glennerster, R., & Kinnan, C. (2009). Measuring the impact of microfinance in Hyderabad, India. Massachusetts Institute of Technology. Jameel Poverty

Action Lab (J-PAL).

Editors of Encyclopædia Britannica. (n.d.). Microcredit. Encyclopædia Britannica. https://www.britannica.com/topic/microcredit.

Grameen Bank. (n.d.). Introduction. Bank for the Poor - Grameen Bank. https://grameenbank.org/introduction/.

Hayes, A., & Brock, T. (2021, April 13). What Is Microlending and How Does It Work? Investopedia.https://www.investopedia.com/articles/personal-finance/040715/what-microlending-and-how-does-it-work.asp.

Kiva. (n.d.). About Us. Kiva. https://www.kiva.org/about.

Market, M. I. X. (2018). Global outreach & financial performance benchmark report-2017-2018.

Miller, T. (n.d.). She's 22, from rural Zimbabwe, and a mogul in the making. Kiva. 

https://www.kiva.org/blog/shes-22-from-rural-zimbabwe-and-a-mogul-in-the-making.