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The World Bank estimates that 1.2 billion people live on less than $1.25 per day. These very poor people do not have access to traditional financial services–instead of using banks and insurance companies, the poor often have to rely on informal options that take advantage of their situation and take too much of their hard-earned income. In fact, it is estimated that 2.5 billion people around the world still lack access to safe, reliable, and well-priced financial services. Microfinance provides financial opportunities for the very poor so they can work to pull themselves out of poverty.
Since the 1980s, RESULTS has been a leading advocate for microfinance for the very poor. We were instrumental in passing key laws that mandate that half of all U.S. foreign aid spending on microfinance must benefit the very poor and continue to work to ensure it is fulfilled. We are the leading advocacy group requesting that Congress increase funding for microfinance in our annual appropriations (foreign aid spending) bill.
As part of this work, RESULTS has teamed up with allies around the world to defend the pioneering microfinance institution Grameen Bank in Bangladesh from attempts to take over control of the bank from its poor women borrower-shareholders by the government of Bangladesh.
What is Microfinance?
Microfinance includes microcredit as well as other financial services (such as a safe place to save money and insurance) to the very poor so they can pull themselves out of poverty. Microfinance began as a way to finance self-employment ventures in places where poor people could not find satisfactory employment or obtain needed credit. It has since expanded to cover all the ways poor households can manage their finances through credit for such things as enterprise, education, housing, and health care, as well as through protective services such as savings and insurance.
Microfinance is an economically sustainable method of fighting poverty. In developing countries, the rate of repayment of well-established microfinance programs can be in the 90 percent range. Repayment rates are high because, through a system of peer support and pressure used in many microfinance models, borrowers are responsible for each other’s success. They help ensure that every member of their group is able to pay back their loans.
Microfinance programs are often cost-effective and financially self-sufficient. With support to grow, microfinance programs in developing countries need less grant money, can utilize loans and loan guarantees, and eventually are linked into the formal financial system. Many well-run microfinance organizations in developing countries are eventually able to sustain their operations through interest income.
Why Does Microfinance Matter?
Microfinance provides the poor with the tools they need to reap the benefits of their skills and hard work. It gives people the capacity to improve the quality of their lives and the futures of their children. Both borrowers and non-borrowers need a safe place to save their incomes, and insurance programs are critical to helping protect the poor from falling further into poverty should an unforeseen event financially impact their lives. Extra money earned is often used by families to obtain better food, housing, and education. As a result, the returns increase the impact of other development programs and benefit the entire community.
Where Do We Go From Here?
As we work to expand appropriate and sustainable financial opportunities, including microfinance, to the poorest households, the international community must follow key principles that will allow the poorest communities to truly lift themselves out of poverty.
RESULTS is working to ensure that U.S. government microfinance programs follow these principles. Legislation is needed to increase the effectiveness of U.S. microfinance and microenterprise programs by ensuring that funding is directed to those who need it most – the very poor, women, and communities in sub-Saharan Africa – by setting new targets, supporting the full range of financial services, promoting cross-sectoral and integrated approaches to development, and investing in innovative programs that reach the very poor and marginalized.