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Kadita Tshibaka Headshot

Yes, Microfinance Does Work. Here's How...

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By now, anyone with an interest in microfinance or poverty alleviation has read the criticism. There are tragic crises in Andhra Pradesh, the regrettable stepping-down of Muhammad Yunus from Grameen, and provocative headlines in the media claiming to refute microcredit's effectiveness. However, I feel strongly that if readers listen only to the white noise, they'll do themselves and the microfinance industry a disservice and, more to the point, they'll be misled.

It's true that a few microfinance institutions and microlenders have behaved irresponsibly and, at times, negligently, locking already-vulnerable people into a cycle of financial dependency and over-indebtedness. But I strongly urge you not to paint all MFIs with the same brush. Most nonprofit organizations, including Opportunity International, are committed to using microfinance -- microcredit in combination with a diverse portfolio of financial tools tailored to people at the base of the economic pyramid -- to alleviate global poverty and build permanent financial independence. These organizations do not ignore their clients' tenuous financial situations or trap them into a cycle of dependency that makes any economic advance unsustainable without the organization's ongoing help. Opportunity International offers a long-term approach to microfinance that avoids over-indebtedness, and provides financial training and education, as well as safe places for clients to save and earn interest on their savings. We're committed to sustainability, not profitability. Our clients are able to build viable businesses that grow, employ their neighbors, and strengthen their communities. In addition, 93 percent of our clients are women. Though both our male and our female clients are hardworking and responsible, we know that when women earn an income they contribute more to the nutrition, education and welfare of their children, improving life for the next generation of a community. This is not just talk; these are real results that Opportunity and other organizations have found. Here's how we do it...  

Microloans

A Trust Group is the first point of entry for loan clients with very small businesses who have never before accessed formal credit. The members co-guarantee each other's loans, eliminating the need for collateral. And because groups choose their own members, they select the (mostly) women in their community whom they know are trustworthy and responsible. If for some reason a client can't make a payment one week, the rest of the group will chip in or dig into a group emergency fund to cover her -- but the social structure means that a client will only ask for help when absolutely necessary so as not to risk disappointing the group. Our clients have a 95 percent repayment rate in four-month loan cycles.

Savings

Organizations do not need to tell clients to save. Many have been saving for years through informal savings collectors in their villages, by hiding it in each other's homes, or by burying it in their backyards. (For an eye-opening look at the complex but risky informal financial strategies employed by people in poverty, read Portfolios of the Poor by Daryl Collins et al.) To help clients avoid risky savings strategies, we offer a safe place to save with our regulated deposit-taking banks where they earn interest. In addition, many of our MFIs require that clients make a small savings deposit as a condition of getting a loan. This protects clients for whom one unexpected expense can trigger a slip back into extreme poverty. Opportunity is in these countries for the long haul and we develop long-term relationships with clients. Enabling them to weather difficulties without resorting to unsafe borrowing or saving practices is not only in keeping with our mission, it creates stronger clients who grow their businesses and become success stories we're proud to share with our contributors. These results matter to us.

Insurance

Whether it's through our banks in a particular country, or through our microinsurance subsidiary MicroEnsure, we know that offering insurance is crucial not only to protect our clients from personal and economic disaster, but to ensure their long-term financial health and resiliency. We know that for people at the bottom of the economic pyramid, one disaster can tip them back into poverty. We're constantly working to develop new insurance products carefully tailored to the needs and requests of our clients -- whether it be health, credit life, funeral, weather index crop insurance for farmers, or other products that help preserve families' financial stability.

Training

Training is a critical and permanent element of our work with clients. It's not enough to give people a small loan; it's not enough to give them a safe place to save or insurance to protect them. We must offer education in financial literacy and planning. Some of our clients are illiterate and some have never had access to formal banking before, so enabling them to increase their financial knowledge is crucial to their success. We also offer non-financial training with a goal to improve overall quality of life, which may include health, HIV/AIDS prevention, domestic violence, and more.

There's no doubt that the global problem of poverty and its solutions are complex, which is why the microfinance industry needs to approach them with eyes wide open and insist on transparency and results. We're committed to being open with clients and the industry. We treat clients as equal partners because we know the extraordinary amount of wisdom, ingenuity, dignity and courage it takes for them to work their way out of extreme poverty. We are with them throughout that struggle, offering the tools they need to permanently create a better life for themselves and their families. An end to global poverty does not happen overnight -- it takes time and a patient adherence to a strategy and mission. President Bill Clinton once said of poverty alleviation: "Our goal should be to work ourselves out of a job." For microfinance institutions in business for the right reasons, that is all we want.