Poor people are able and willing to save money, and if they do not do so, it is more a consequence of a lack of opportunities. For many people, this claim is surprising, since the concept of microfinance (particularly microloans) is still a relatively new and unfamiliar term in our country. However, microloans and other services can be an effective tool in the fight against poverty.
Microfinance institutions (MFIs) ensure that poor people can access financial services tailored to their needs. Thanks to MFIs, poor people do not have to rely on various informal providers, such as loan sharks. So how do poor people manage their finances, and what makes microfinance services special?
Poor people and financial services
People in developing countries have very few opportunities to access the formal financial services sector. In the case of unexpected expenses, poor people most often borrow money from relatives, loan sharks, shop owners, or various prominent figures in the community. These informal loans typically carry high interest rates, particularly due to the absence of contracts and the difficulty of collecting money from the debtor. Even more problematic is access to savings and insurance services — these services are nearly inaccessible to the poorest people.
Despite limited options, poor people are resourceful and have many informal strategies for dealing with this problem. Well-known are the so-called "savings clubs," in which all group members contribute an equal amount to a common fund, and the money is then distributed at regular intervals and in a predetermined order. Similarly, various associations operate in which members borrow money at a pre-agreed interest rate. Today, there are also many formal banking institutions that provide financial services to poor people suited to their needs. The most famous such institution is Bangladesh's Grameen Bank, followed by Indonesia's Bank Rakyat Indonesia and Badan Credit Desa, as well as the nonprofit organization FINCA. These institutions are highly formal yet operate on principles observed in the informal sector.
Modern microfinance was launched in the mid-1970s in Bangladesh and Latin America. Since then, it has experienced enormous growth, and various microfinance products are used in both developing and developed countries around the world. However, the very idea of helping the poor through low-interest or interest-free microloans dates back to the 14th century. Subsidized or interest-free loans were provided by churches in, for example, England, France, and Italy.
The beginning of modern microfinance is most often associated with the Bangladeshi economics professor and Nobel Peace Prize laureate Muhammad Yunus. Professor Yunus studied the causes of poverty in the Bangladeshi village of Jobra. He found that due to a lack of capital and excessively high interest rates charged by loan sharks, poor people had no chance of increasing their production and escaping poverty. Based on this finding, Professor Yunus decided to provide loans at minimal interest at his own expense. The great success that followed led to the establishment of the renowned Grameen Bank in 1983.
Grameen Bank and other modern microfinance institutions are based on principles observed in the informal financial services sector. People form groups (typically five to eight members), receive investment loans (e.g., for rice cultivation and processing, animal husbandry, or handicraft production), and regularly meet with other groups and bank representatives. Typical features include more frequent and smaller installment amounts. Members are responsible for repaying other loans in the group. Microfinance institutions very often focus more on women, who according to Yunus are more vulnerable than men, more frequently live in poverty, and more often use income for the benefit of the entire family.
Microfinance today
In the 1990s, microfinance institutions experienced enormous growth. High loan repayment rates and moderate interest rate increases provided microfinance institutions not only with long-term sustainability (and less dependence on donors) but also expanded their reach to larger numbers of people. Indonesia's Bank Rakyat Indonesia, for example, achieved great growth during these years, becoming the largest MFI in developing countries. The independence gained by many MFIs led to the introduction of new products — microsavings, insurance, and money transfers. Since microloans were no longer the only product offered, the term microfinance began to be used more widely.
The popularity of microfinance continued to grow after 2000. Evidence of this can be seen in the fact that 2005 was declared by the UN as the International Year of Microcredit. The UN thus wished to express its support for the further development of inclusive financial sectors. Alongside the growing popularity of microfinance, however, criticism also began to emerge. Microfinance institutions are often criticized for it being immoral to provide poor people with loans at interest and with fees. On the other hand, the interest and fees charged by MFIs are far from as high as those in the informal financial services sector. At the same time, the profits of MFIs are important to ensure these institutions remain sustainable, independent, and able to continue expanding their activities — that is, to help larger numbers of people.
Currently, modern technologies are being successfully integrated, making it even easier for poor people to access financial services. For example, through the linking of mobile phones with financial institutions, the cost of financial services has dropped significantly, and the money transfer process has been greatly accelerated. Microloans (and other services) can be considered a good tool for reducing poverty, as they have a long-lasting and generally positive effect on the standard of living of the borrower and their family. However, the problem of poverty in rural areas is multidimensional, so it is also necessary to address other causes of poverty, such as insufficient education or healthcare.
Microloans as a form of development aid and the Czech Republic
The Czech nonprofit organization Maendeleo also operates on the concept of microloans. The organization was founded by students of the International Development Studies program at Palacký University in Olomouc. Maendeleo operates in Tanzania (Utengule/Usangu district), which ranks among the least developed countries in the world. The organization combines purpose-driven agricultural microloans with practical education. Farmers form eight-member self-help groups and receive interest-free microloans for rice cultivation. Through practical workshops, they learn new methods that are also more environmentally friendly. The project helps farmers strengthen their market position and contributes to better food security in the region. More about the organization's activities can be read at www.maendeleo.cz
Text: Adéla Hemelíková The author is a student at the Department of Development and Environmental Studies, Faculty of Science, Palacký University in Olomouc Photo: OZ Maendeleo www.maendeleo.cz