Imagine applying for a loan at a bank. Easy enough you may think, but wait. You have no job, no credit card history, no income, no education, and no assets. What are your chances of getting a loan? Not going to happen, or as Barbara, Australia’s most beloved bank manager would say: “Go away.”

That’s why the first time I learnt about microfinance a massive light bulb went on in my brain. Microfinance institutions (MFI) lend small amounts of money exclusively to poor people in the third world so that they can start or grow a business to help them get out of poverty.

The would-be entrepreneurs may use the money to start a bakery, buy livestock, supplies for a food stall, or make handicrafts. The business then gives them a livelihood so they can repay the loan and generate a long-term stable income.

So why microfinance and why should I care?
Statistics serve to highlight the gross imbalance of global economies and wealth distribution. Statistics like: almost half the world (over three billion people) live on less than US$2.50 a day*; and that the poorest 40% of the world’s population account for just 5 percent of global income*.

Often statistics fail to paint the picture for me – the figures being too big or too overwhelming to comprehend from the comforts of a first world living room.

That changes though whenever I go travelling and I get to meet the human faces behind a statistic. Like the time I met 12 year old Jyotika (pictured), who makes a living everyday in Goa, India selling bracelets to tourists on the beach. She’s never been to school, can’t read or write Hindi but speaks very good English, and even a little bit of French and German which she learns from the tourists. Jyotika finds her life on the beach “boring”, but like her four other siblings, must work to help the family.

One of the reasons why microfinance appeals to me is that it does more than increase a household’s income, but gives women and their children greater control of their life. In addition to poverty, disease or war, being born female is a double burden in some cultures. By providing women in poverty with loans and savings, microfinance is one way to empower women by giving them more control over household assets, more freedom, decision-making power and greater access to participate in public life.

The views on Microfinance – Pros and Cons
Bill Gates raised some important issues in a Smartplanet video in April 2010 that highlights the pros and cons of microfinance. He states that microfinance alone will not eradicate poverty, but “is an important element in letting poor people improve their condition.” He further explains that microfinance as a single strategy will not solve poverty but must be done alongside other strategies such as a savings plan, improved health care and female literacy to name a few.

Gates further states that perhaps the most measurable or ‘provable’ benefit of microfinance amongst women is in not the economic but rather the behavioural or social factors. It is the act of getting the women together as a group and getting them to act on issues like birth control that makes the work of microfinance worthwhile. Microfinance serves to be an important vehicle in which women can come together as a collective to discuss issues and be politically active when their needs are not met.

Gates has made some really interesting points and you can view the short video here

One of the things to keep in mind if you want to support the work of microfinance institutions is to be aware of bad microcredit, as not all MFIs or programs are the same.

Although microfinance can raise borrowers’ standard of living and help reduce poverty, it has been criticized in situations where money is used to support a person’s current consumption rather than to start or grow a business as a long term solution out of poverty. For example, some loans are used by entrepreneurs on general household expenses or even to purchase goods like a television etc.

An important issue or question to consider when choosing a MFI to support is whether they have a set of clearly defined measures of success, eg. Does the MFI measure the income growth of household over a period of time, quality of housing, school enrolment and improved nutrition/ health?

Why lend – the collective power of micro.
When I learnt about the pros and cons of microfinance it lead me to the question of why lend?

In the end I decided that the pros far outweighed the cons. Microfinance is simply one strategy and not the only strategy in which we can help alleviate the complex problem of poverty.

Most importantly, microfinance is a real way to enable women to improve their quality of life and the children they care for. I also believe that the ‘hand up not a hand out’ philosophy is a powerful way to bring positive social change to third world communities.
And finally, the reason why I lend is because it is so easy to stop watching from the sidelines and get involved. With a few clicks at the computer I can make a very small loan (e.g. $25) yet make a big impact with thousands of other people making small loans – the collective power of micro.

For example, Kiva is an organization that offers an online platform where you can lend US$25 to entrepreneurs or MFI’s from around the world. Once you have made your loan, the money is repaid directly back to your account over a period of time. You then have the choice of re-lending the money to another MFI or entrepreneur. It’s a real kick to watch your money work its way around the world – from India to Mongolia to Palestine. It’s addictive and you can learn more about Kiva here: www.kiva.org

10thousandgirl has partnered with a MFI called Opportunity International – find out more: http://www.opportunity.org.au/

*Source: www.globalissues.org

Photo by Ida Ng

Ida Ng is a blog contributor for the 10thousandgirl project, and has worked in various communications and marketing roles. She learnt the hard way that her crazy spending habit was the only thing keeping her from her dreams.