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One of the more unique ways of fostering entrepreneurship that has really caught on in the last few years is microfinance. Initially started in 1976 by Muhammad Yunus in India, microfinance is where a financial institution gives a small loan (usually in the $5-50 range) to an impoverished family that otherwise wouldn’t have access to credit. The loan recipient then uses the money to start some form of income generation. Common examples include buying chickens to sell the eggs, purchasing cloth to create garments, or buying a pottery furnace to sell the pottery from it. Theoretically, the person who received the loan will be able to pay back the loan and continue to generate income from their venture- and this seems to be the case most of the time. The industry has exploded in the last five years or so as organizations like Kiva have promoted the good that it does for these families and many schools have their own microfinance organizations (Michigan State University has the Spartan Global Development Fund). For more background information on microfinance, please look at globalEDGE’s module and executive briefing.
However, there are a few problems with microfinance despite the rosy outward appearance. The largest problem has to do with the basic fact that the people microfinance targets are people that traditional finance has passed over as they were deemed unprofitable. That problem still exists with microfinance on the business side. The problem is that microfinance tends to be viewed as more of a social service than a business. As such, 70% of microfinance loans go to women as they have been found to be more likely to pay back and more likely to use the money earned towards their families than their male counterparts. Those two features make them very attractive to microfinance firms. That being said, this overlooks the macro backdrop that these women are working in, as this article from Forbes points out.
These women live in countries that are often patriarchal and have many constraints on women empowerment- such as a lack of education and social stigma. Thus, some microfinance firms are beginning to lend out to men more and more- which is further hurting many women’s access to microfinance. This is a great example of how a private sector business is trying to accomplish a social good while balancing their business needs as well. It also raises interesting questions about how much involvement the government should have in subsidizing microfinance for entrepreneurship. What does globalEDGE think- should microfinance focus more on the business side or the social side of what they do?
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