Are you someone driven by social work? If yes, then chances are you are already familiar with the concept of Microcredit.
For those who may still be unfamiliar with the idea, microcredit is the money lending system that helps create opportunities for underprivileged people to lift them out of poverty.
However, microcredit today is more than just an idea. It is a part of a growing industry. Small financial institutions are now giving competition to the big players of the banking sector.
Where commercial banks deny marginalized households basic financial services, microfinance institutions and microfinance banks exist to provide the underprivileged their fundamental human rights.
How Does Microcredit Make an Impact?
First introduced as a modern microlending system in Bangladesh, the home of Microfinance, this novel approach has since been taken up by many globally today.
Over the last two decades, in Bangladesh alone, microfinance institutions have helped alleviate approximately 2.5 million Bangladeshis out of poverty. In other words, rural poverty in Bangladesh went down by 10 percent.
However, the target is to reach 1.7 billion people in the world who require such support, and microcredit is one way to provide that.
By offering microcredit, i.e., small loans, with feasible interest rates, microfinance institutions are lending financial support to those who are denied any otherwise. This allows individuals to use cash to start their own microbusiness.
Therefore, microcredit is one means of helping to bring long-term sustainability in the lives of such people.
One such individual is Azra Bibi.
A struggling mother of five, left off-guard when her husband became too ill to provide. Taking matters into her own hands, Azra Bibi landed herself amongst the list of many other microfinance clients of Khushhali Bank Ltd, the first Microfinance Bank in Pakistan.
Starting a small shop with an initial microloan from the bank, she developed a business that, after seven years of struggle and hard work, now invests in sewing to sell embroidered clothes.
With periodic microloans and timely repayments, she eventually expanded her business to employ 4 other people working for her.
That one brave decision to make something out of microcredit when she had no other resources, set the ball rolling for better secured days:
Microentrepreneur, Azra Bibi was able to send her children back to school and created a source of income for four other families.
Stories like this are helping to change the landscape for many at the bottom of the economic pyramid. Firstly, it is connecting people like Azra Bibi to the formal society, thereby bringing them into the “financially included” bracket.
Secondly, it is empowering them to work towards being financially independent.
The Multi facets of Microcredit
While the primary goal of microcredit has been well defined from the start, there is more to microcredit than what meets the eye.
While the world continues to work towards poverty alleviation, it is important to pause, reflect, and acknowledge some of the other wonderful but seldom recognized fruits microcredit has bared in the process.
Let us have a look at what are the different ways in which microcredit is helping beyond the obvious.
The Three Underrated Impacts of Microcredit
1. Helped to Strengthen Civil Society
What is life without hope? Where all else fails, the microfinance industry comes forward to give the poor more than just financial services such as microcredit. They also offer a ray of hope to the socioeconomically vulnerable families in having a better life.
Where no commercial banks are catering to them, MFIs fill that void.
This not only provides financial support but acknowledges their existence by recognizing their needs and returns them that lost dignity in the process. It allows them to be a part of the formal society by giving them a chance that is otherwise difficult for them to find.
A Community that is not left in the dark
A lot of microfinance institutions are not just providing microcredit. Keeping the ultimate goal in mind, they are also following through with it.
Many such MFIs understand that the borrowers of microcredit will need to be guided along the way as many remain unaware of what to do with the resources. A self-sustainable family gives rise to a healthy generation.
Hence, financial education is provided to them alongside the microloans. So we are now essentially building up a financially literate community, even if they lack a basic high school degree.
By preparing the borrowers to manage the loans smartly, microcredit industry has helped instill a sense of confidence in these borrowers with regards to starting their own microbusinesses.
2. Empowered People to Innovate
Borrowers of microfinance are generally willing to make use of financial services to the best of their abilities. Real-time pilot studies have shown that when provided with digital services, borrowers find innovative ways to optimize on that service.
A well-known mobile phone operator Safaricom came in partnership with Faalu, an MFI in Kenya. Together ran a pilot for six months in 2005, during which time Faulu customers used the mobile service to repay loans.
What started as an experiment revealed a fascinating fact about the clients. The microfinance clients used the service in creative ways to do more than just repay the microloans.
They used it to pay for goods and services between other pilot participants. Not stopping there, they also converted the e-money to airtime. Thus remitting money to friends and family living far away in Kenya.
This was what gave rise to the super successful mobile banking service in the world today known as M-PESA.
No later, BRAC Bank Ltd., one of the four shareholders, helped build bkash, one of the leading Bangladesh-based mobile financial services in the world alongside M-PESA.
This goes on to show how innovation and opportunity together have given rise to resources earlier unavailable, and gradually presented a global market of previously untapped consumers.
This proves that people simply need a chance. When you give them a medium, they are willing to utilize that as an opportunity.
3. Enriched Workforce
If we talk about microcredit, then we must speak of the developing economies. These economies cannot boast about a trained workforce as they are often plagued by a lack of employment opportunities.
Moreover, even though corruption is not foreign to any land regardless of their economic standing, it is usually found more rampant in the developing world.
Surprisingly or unsurprisingly, a growing microfinance industry has, by default, lead to increased employment opportunities. If you think about it, there are over 700 registered MFIs in Bangladesh alone. This means that the number of people trained there, solely on the job, is significantly high.
The majority of the time, there is no prior formal training provided to them. So if you come to think of it, thousands and thousands of people have been trained in the most cost-effective way.
How Close Are We to the Main Goal?
While microfinance institutions have been running in order to help those at the poor, it is necessary to understand how close we have come to achieving it.
Unfortunately, it is a far more complex operation than it sounds. i.e., to measure the impact of microcredit.
Firstly, to understand the true reflection of its effectiveness, one must look at long term results.
Secondly, different institutions have different ways to measure the impact. All the available data are based on random tests done by various groups on the success of microfinance, each with their own way of gauging the end-result.
In 2015, American Economic Journal had shared seven case studies to give an idea about how microcredit had (or had not) transformed the lives of the borrowers.
It concluded that while microcredit increased borrowers’ income, the increase was not significant, and there was little groundbreaking data to prove that families were lifted out of poverty.
Should This Mean We Disapprove Microcredit All-together?
Surely, poverty still exists, and many remain unbanked in the world. Some microfinance has failed and lead to indebtedness on the contrary. However, there still remains some positive sides coming out of microcredit, which have promising long-term effects.
Sometimes, we need to look deeper and beyond. However, they are worth looking into because even if slowly, they are leaving behind a significant footprint.
Are We Better Without Microcredit?
Imagine a world where the poor have no way to seek loans. They, too, have similar needs as everybody else, irrespective of the amount of money they make.
Without the modern microlending system, they would have to continue to turn towards loans. There are conflicts about how microcredit is a burden on the borrowers, then loans from the loan sharks are even worse.
Disbursing microloans in a regulated way has in fact helped to establish discipline, accountability, and trust in the lives of these borrowers. Take it away, and you have an entire generation growing old with nowhere to turn to.
Let’s not forget that the majority of the developing countries’ populations are fighting to climb the socio-economic ladder.
So by ignoring this community, you not just waste a part of your population, also risk their next generation. You ultimately waste an excellent opportunity to help the economy.
Do Regulations Have Any Part to Play in This?
Furthermore, regulatory bodies also provide sustainability we all look for. This brings us to the key point: Did having an institutional environment providing regulations increase transparency and minimize abuse?
That leads us to another question: What happens if there is no regulation or simply no microcredit system?
Poverty Alleviation vs. Poverty Reduction
Many argue that microcredit has failed to alleviate poverty. That is true. Poverty still exists. And microfinance specifically has not given us mass transformation stories as such that we can really point out.
It did. In that context, there are many stories to tell where families were able to do more than just make ends meet. So yes, microcredit has had a significant impact on poverty, only not eradicated it all.
So the impacts are not talked about enough. Does it REALLY matter?
Yes. It actually does. The underrated impacts mentioned above have one thing in common. When you combine them together, they all reflect one thing- A well-informed mass of people.
You see, nothing is more pointless and dangerous than having half-knowledge.
When you show these families the way out, hand them the technology and tools that they leveraged on. This will secure their trust (i.e. run a regulated MFI) so they know you are here to help, you have empowered them not just financially for that particular ‘X’ amount of loan, but you have enabled them for a lifetime.
You enable one client, and you have set the ball rolling to empower millions of families before you know it.
We are planting the seeds today with bigger and better ways to offer microcredit. However, microcredit is not the only way to reduce or alleviate poverty. Introduction of other financial products such as microsavings, microinsurance in combination with microcredit is what can bring about optimal results.
Considering how this is a subject that requires long-term evaluation, one can only presume that efficiency is going to double down in no time.
And when you tie the impacts mentioned, one can see how this can easily transform into something powerful.