Microfinance benefits developing nations

Two years ago, Mama Monique and her six children were evicted from their home in the Democratic Republic of Congo. Now, after getting an initial $50 loan, she owns and runs a local bread and sweet roll company out of her home, rents an...
By
  • Courtney Sinner
March 10, 2008

Two years ago, Mama Monique and her six children were evicted from their home in the Democratic Republic of Congo.

Now, after getting an initial $50 loan, she owns and runs a local bread and sweet roll company out of her home, rents an apartment and can afford to send her children to school.

Mama Monique is just one success story of microfinance, a business model that helps people in developing countries work their way out of poverty through small loans - anywhere from $50 to $1000 - with little or no interest rate and no collateral.

They use the loan money as capital to start small businesses to sustain themselves and, over time, pay back the loans.

At the University, the Microfinance Alliance, a student group that promotes awareness of the economic model, attended and participated on panel discussions at the Nobel Peace Prize Forum this weekend at Concordia College in Moorhead, Minn.

Mohammed Yunus, who won the Nobel Peace Prize in 2006 for his pioneering work in microfinance, was one the forum's featured speakers.

Although the group traveled to Moorhead for the event, it was also held at the Hubert H. Humphrey Institute of Public Affairs at the University the next day.

Yunus founded the Grameen Bank, one of the first microfinance organizations, in Bangladesh in 1976. According to Grameen Bank's January figures, the bank lent money to 7,440,000 people with a full loan recovery rate of 98.28 percent.

The high return rate on the loans, despite no collateral incentive and low interest rates, makes the system unique and almost completely self-sustaining. Because most of the money loaned out is repaid in full, it can then be reloaned to others in need.

Jonathon Newhouse, a board member for the Microfinance Alliance, learned of Mama Monique's story when he was on a student trip to the Democratic Republic of Congo with Hope International, a nonprofit group that does microfinance work.

"She was just so grateful," Newhouse said. "You take someone who's just so dispirited and without any hope for improving their situation, and now they're empowered to take charge of their own life. It's a really amazing thing."

Since people in poor countries don't typically have assets for collateral on a traditional credit model, they would otherwise be subjected to loan sharks who sometimes charge 200 percent interest a day, Newhouse said.

Microfinance Alliance President Adrienne Peirce said the high microfinance loan return rate is partially because of the flexible structure of small, weekly payments, but also out of community support.

"Clients are also enthusiastic about repaying loans in many cases because they appreciate the opportunity they've been given to improve their income," she said.

Dan Kaskubar, who is involved in Microfinance Alliance, said he's amazed how little it takes to impact someone's life through microfinance.

"You give an initial piece of capital, and that's enough to jump-start an entire virtuous cycle of income generation in developing countries," he said. "There is no other way that you and me or anyone else can make such a dramatic impact in another human's life, ever."

While microfinance is usually done through large organizations like Hope International or the Grameen Bank, individuals can put money toward a loan for someone, too.

Kiva is an online organization for individual citizens to invest money in specific recipients, listed on its Web site.

Investors can sometimes keep in touch with the business' progress and then eventually they get the money returned to them, depending on the terms of the loan.

Felix Meschke, an assistant professor of finance in the Carlson School, isn't involved in Microfinance Alliance, but knows how little it takes to change a person's life through the microfinance model.

"Microfinance is something where you say, 'OK, I've got those $25 and instead of earning half a percent in my checking account, I'm going to lend this to somebody who seems to have a decent plan,' " he said. "It's a relatively easy way for people in the developed world to help out."

Peirce, of Microfinance Alliance, said she's excited about the strides the group is making.

"It's great to be a part of something that helps people's lives and can inspire you to put in a lot of effort when you see how it makes people's lives better," she said. "You could easily argue that ending world poverty is coming within reach, and it's an interesting challenge."

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