Microfinance's Usefullness Should Not Be Underestimated

Yes, it is important to note that microfinance, or small loans designed to jump start small businesses for the disenfranchised with the aim of poverty alleviation, are not a "cure all" for world poverty. But that doesn't mean that they can't do a whole lot of good. Microfinance has been gaining traction in recent years, and many small banks and nonprofit entities offer such loans to poor populations in Latin America, South and Central Asia, the Americas and Asia.

As part of a project with Ohio University's Global Leadership Center, my team investigated microfinance as a poverty alleviation strategy in Haiti by examining the efficacy of microfinance organizations in the nation as well as the history of microfinance practices in the country. Later, we compared our research with that of teammates we worked with at the University of Liberia in West Africa in order to evaluate the potential of microfinance loans to assist in poverty alleviation and postwar reconstruction.

Along the way, we spoke with experts at various think tanks in the D.C area as well as university professors and diplomatic personnel. From my own research and consideration,I have reached the following conclusions about microfinance practices:

1. Microfinance loans offer assistance to those in the in the "mid-level" poverty range to enter the lower middle class. Microfinance loans are especially good at giving these populations just the boost they need to get their business off the ground, and have led to huge improvements in quality of life for said individuals. However, it is important to note that by the same token these loans are almost universally considered inappropriate for the poorest of the poor--the last thing such populations need is a large piling on of debt that they may or may not be able to return to creditors.

2. Cell phone banking in developing nations provides huge opportunities for the spread of microfinance practices.

3. There has been a trend toward offering more services than just loans, such as microinsurance and savings options. These are suitable for the poorest of the poor, and such offerings should be increased in many countries offering microfinance services.

4. There is also an industry trend toward privatization of the microfinance industry, as private banks are beginning to offer microfinance loans to underprivileged populations, and many nonprofit providers are stepping down. I notice on distinct disadvantage here, as well as one distinct advantage. The disadvantage here is obvious: these providers will likely charge higher interest rates to such clients, and the potential for client abuse here is high. However, a more subtle advantage to such systems is that a for-profit business model is likely to be far more sustainable in the long-term than a nonprofit model.