Microfinance institutions are bankers and lenders who provide microfinance services, such as deposits, loans, payment services, money transfers, and insurance.

The importance of microfinance is that it provides much-needed financial services to poor and low-income households, entrepreneurs, and nascent businesses, who would otherwise not have access to such services and this result in poverty alleviation.

• What Is the Purpose of Microfinance?
• What Are the Benefits of Microfinance?
• Poverty Alleviation
• Microloans for Poverty Alleviation
• The Top 10 Solutions to Cut Poverty and Grow the Middle Class

What Is the Purpose of Microfinance?

The purpose of microfinance is to provide financial services to people “generally excluded from traditional banking channels because of their low, irregular and unpredictable income,” according to ING, a global financial institution with a strong European base.

Read Also: The Important Traits of a Successful Microfinance Institution

In other words, the purpose of microfinance is to help disadvantaged households and entrepreneurs gain access to affordable financial services to help them finance income-generating activities, accumulate assets through savings, provide for family needs, and protect themselves against the risks of daily life, such as illness, death, theft, natural disasters, says ING.

Whether for-profit or nonprofit, microfinance seeks to assist the poor, and indeed, microfinance institutions seek to be the bankers of the poor. For-profit microfinance companies see this sector as underserved and a great way to make a profit. By contrast, nonprofit microfinance companies seek to help the poor for altruistic reasons.

Microfinance was developed by a Bangladeshi economist Muhammad Yunus, says ING, adding that he came to be known as “the banker of the poor.” In 1976, Yunus established Grameen Bank in Bangladesh, which provided “microcredit,” literally the extension of loans to impoverished borrowers.

Before that, banks had generally concentrated only on lending to middle- and upper-income clients, as well as the very rich, of course. Yunis’ idea of microcredit caught on quickly. It was so popular that it led to similar microfinance institutions springing up all over the world, eventually evolving into what is today known as microfinance.

For his efforts, Yunus won the 2006 Nobel Peace Prize. In awarding Yunus the peace prize, which was actually awarded jointly to Yunus and his bank, the Nobel committee noted that it was honoring Yunus and his bank “for their efforts to create economic and social development from below.” In other words, the committee paid homage to Yunus’ concept of creating economic opportunity from the ground up.

What Are the Benefits of Microfinance?

There are literally dozens of benefits for microfinance, but the key pluses involve the role of microfinance in economic development. Vitanna.org and Plan International provide possibly the top benefits of microfinance:

1. It allows people to provide for their families. Through microfinance, more households are able to expand their current opportunities so that more income accumulation may occur, says Vitanna.org, a financial services website.
2. It gives people access to credit. “By extending microfinance opportunities, people have access to small amounts of credit, which can then stop poverty at a rapid pace,” says Vitanna.org. Plan International, a global organization dedicated to advancing children’s rights and equality for women, agrees, stating: “Banks simply won’t extend loans to those with little or no assets, and generally don’t engage in the small size of loans typically associated with microfinancing. Microfinancing is based on the philosophy that even small amounts of credit can help end the cycle of poverty.”
3. It serves those who are often overlooked in society.  About 95 percent of some loan products extended by microfinance institutions are given to women, as well as those with disabilities, those who are unemployed, and even those who simply beg to meet their basic needs, Vitanna notes. Microfinance services can help recipients take control of their own lives.
4. It creates the possibility of future investments. Microfinance disrupts the cycle of poverty by making more money available. When basic needs are met, families can then invest in better housing, health care, and even, eventually, small business opportunities.
5. It is sustainable.  There’s little risk with a $100 or loan, says Vitanna, adding: “Yet $100 could be enough for an entrepreneur in a developing country to pull themselves out of poverty.” Plan International agrees, stating that a $100 loan can be enough to launch a small business in a developing country that could help the benefactor pull herself and her family out of poverty.
6. It can create jobs. Microfinance is also able to let entrepreneurs in impoverished communities and developing countries create new employment opportunities for others.
7. It encourages people to save. “When people have their basic needs met, the natural inclination is for them to save the leftover earnings for a future emergency,” says Vitanna.
8. It offers significant economic gains even if income levels remain the same. The gains from participation in a microfinance program including access to better nutrition, higher levels of consumption, and eventually, growing economies, even in small and impoverished communities.
9. It leads to better loan repayment rates. “Microfinance tends to target women borrowers, who are statistically less likely to default on their loans than men. So these loans help empower women, and they are often safer investments for those loaning the funds,” says Plan International. 
10. It extends education. Families receiving microfinance services are less likely to pull their children out of school for economic reasons, says Plan International.

Microfinance, then, may involve very small loans and financial services, but it has a worldwide impact over the last four-plus decades. For a small business that needs just a bit of extra cash or credit to secure a new opportunity, microfinance may be just the ticket.

And for a small lending or banking business looking for new opportunities, microfinance literally offers a world of opportunities – one small loan or financial service at a time.

Poverty Alleviation

Poverty reduction, poverty relief, or poverty alleviation, is a set of measures, both economic and humanitarian, that are intended to permanently lift people out of poverty.

Measures, like those promoted by Henry George in his economics classic Progress and Poverty, are those that raise, or are intended to raise, ways of enabling the poor to create wealth for themselves as a conduit of ending poverty forever.

In modern times, various economists within the Georgism movement propose measures like the land value tax to enhance access to the natural world for all. Poverty occurs in both developing countries and developed countries. While poverty is much more widespread in developing countries, both types of countries undertake poverty reduction measures.

Poverty has been historically accepted in some parts of the world as inevitable as non-industrialized economies produced very little, while populations grew almost as fast, making wealth scarce. Geoffrey Parker wrote that
In Antwerp and Lyon, two of the largest cities in western Europe, by 1600 three-quarters of the total population were too poor to pay taxes, and therefore likely to need relief in times of crisis.

Poverty reduction occurs largely as a result of overall economic growth. Food shortages were common before modern agricultural technology and in places that lack them today, such as nitrogen fertilizers, pesticides and irrigation methods.

The dawn of the Industrial Revolution led to high economic growth, eliminating mass poverty in what is now considered the developed world. World GDP per person quintupled during the 20th century. In 1820, 75% of humanity lived on less than a dollar a day, while in 2001 only about 20% did.

Today, continued economic development is constrained by the lack of economic freedoms. Economic liberalization requires extending property rights to the poor, especially to land. Financial services, notably savings, can be made accessible to the poor through technology, such as mobile banking.

Inefficient institutions, corruption, and political instability can also discourage investment. Aid and government support in health, education, and infrastructure helps growth by increasing human and physical capital.

Poverty alleviation also involves improving the living conditions of people who are already poor. Aid, particularly in the medical and scientific areas, is essential in providing better lives, such as the Green Revolution and the eradication of smallpox.

Problems with today’s development aid include the high proportion of tied aid, which mandates receiving nations to buy products, often more expensive, originating only from donor countries. Nevertheless, some believe (Peter Singer in his book The Life You Can Save) that small changes in the ways people in affluent nations live their lives could solve world poverty.

Microloans for Poverty Alleviation

One of the most popular of the new technical tools for economic development and poverty reduction are microloans made famous in 1976 by the Grameen Bank in Bangladesh. The idea is to loan small amounts of money to farmers or villages so these people can obtain the things they need to increase their economic rewards.

A small pump costing only $50 could make a very big difference in a village without the means of irrigation. A specific example is the Thai government’s People’s Bank which is making loans of $100 to $300 to help farmers buy equipment or seeds, help street vendors acquire an inventory to sell, or help others set up small shops.

The International Fund for Agricultural Development (IFAD) Vietnam country program supports operations in 11 poor provinces. Between 2002 and 2010 around 1,000 saving and credit groups (SCGs) were formed, with over 17,000 members; these SCGs increased their access to microcredit for taking up small-scale farm activities.

Empowering women for Poverty Alleviation

The empowerment of women has relatively recently become a significant area of discussion with respect to development and economics; however it is often regarded as a topic that only addresses and primarily deals with gender inequality.

Because women and men experience poverty differently, they hold dissimilar poverty reduction priorities and are affected differently by development interventions and poverty reduction strategies. In response to the socialized phenomenon known as the feminization of poverty, policies aimed to reduce poverty have begun to address poor women separately from poor men.

In addition to engendering poverty and poverty interventions, a correlation between greater gender equality and greater poverty reduction and economic growth has been illustrated by research through the World Bank, suggesting that promoting gender equality through the empowerment of women is a qualitatively significant poverty reduction strategy.

Gender equality

Addressing gender equality and empowering women are necessary steps in overcoming poverty and furthering development as supported by the human development and capabilities approach and the Millennium Development Goals.

Disparities in the areas of education, mortality rates, health and other social and economic indicators impose large costs on the well-being and health of the poor, which diminishes productivity and the potential to reduce poverty.[68] The limited opportunities of women in most societies restrict their aptitude to improve economic conditions and access services to enhance their well-being.

Mainstreaming gender

Gender mainstreaming, the concept of placing gender issues into the mainstream of society, was established by the United Nations Fourth World Conference on Women as a global strategy for promoting gender equality; the UN conference emphasized the necessity to ensure that gender equality is a primary goal in all areas of social and economic development, which includes the discussion of poverty and its reduction.

Correspondingly, the World Bank also created objectives to address poverty with respect to the different effects on women. One important goal was the revision of laws and administrative practices to ensure women’s equal rights and access to economic resources.

Mainstreaming strengthens women’s active involvement in poverty alleviation by linking women’s capabilities and contributions with macro-economic issues. The underlying purpose of both the UN and World Bank policies speaks to the use of discussion of gender issues in the promotion of gender equality and reduction of poverty.

Strategies to empower women

Several platforms have been adopted and reiterated across many organizations in support of the empowerment of women with the specific aim of reducing poverty. Encouraging more economic and political participation by women increases financial independence from and social investment in the government, both of which are critical to pulling society out of poverty.

Economic participation

Women’s economic empowerment, or ensuring that women and men have equal opportunities to generate and manage income, is an important step to enhancing their development within the household and in society. Additionally, women play an important economic role in addressing poverty experienced by children.

By increasing female participation in the labor force, women are able to contribute more effectively to economic growth and income distribution since having a source of income elevates their financial and social status.

However, women’s entry into the paid labor force does not necessarily equate to the reduction of poverty; the creation of decent employment opportunities and movement of women from the informal work sector to the formal labor market are key to poverty reduction.

Other ways to encourage female participation in the workforce to promote decline of poverty include providing childcare services, increasing educational quality and opportunities, and furthering entrepreneurship for women.

Protection of property rights is a key element in economically empowering women and fostering economic growth overall for both genders. With legitimate claims to land, women gain bargaining power, which can be applied to their lives outside of and within the household.

The ability and opportunity for women to lawfully own land also decrease the asset gap that exists between women and men, which promotes gender equality.

Political participation

Political participation is supported by organizations such as IFAD as one pillar of gender equality and women’s empowerment. Sustainable economic growth requires poor people to have influence on the decisions that affect their lives; specifically strengthening women’s voices in the political process builds social independence and greater consideration of gender issues in policy.

In order to promote women’s political empowerment, the United Nations Development Programme advocated for several efforts: increase women in public office; strengthen the advocacy of women’s organizations; ensure fair legal protection; and provide equivalent health and education. Fair political representation and participation enable women to lobby for more female-specific poverty reduction policies and programs.

The Top 10 Solutions to Cut Poverty and Grow the Middle Class

The Census Bureau released its annual income, poverty, and health insurance report yesterday, revealing that four years into the economic recovery, there has been some progress in the poverty rate as it fell from 15 percent in 2012 to 14.5 percent in 2013, but there was no statistically significant improvement in the number of Americans living in poverty.

Furthermore, low- and middle-income workers have seen little to no income growth over the past decade, as the gains from economic growth have gone largely to the wealthiest Americans.

With flat incomes and inequality stuck at historically high levels, one might assume that chronic economic insecurity and an off-kilter economy are the new normal and that nothing can be done to fix it. But there is nothing normal or inevitable about elevated poverty levels and stagnant incomes.

They are the direct result of policy choices that put wealth and income into the hands of a few at the expense of growing a strong middle class.

The good news is that different policy choices can bring different outcomes. When the government invests in jobs and policies to increase workers’ wages and families’ economic security, children and families see improved outcomes in both the short and long term.

Here are 10 steps Congress can take to cut poverty, boost economic security, and expand the middle class.

1. Create jobs

The best pathway out of poverty is a well-paying job. To get back to prerecession employment levels, we must create 5.6 million new jobs.

To kick-start job growth, the federal government should invest in job-creation strategies such as rebuilding our infrastructure; developing renewable energy sources; renovating abandoned housing; and making other common-sense investments that create jobs, revitalize neighborhoods, and boost our national economy.

We should also build on proven models of subsidized employment to help the long-term unemployed and other disadvantaged workers re-enter the labor force.

In addition, the extension of federal unemployment insurance would have created 200,000 new jobs in 2014, according to the Congressional Budget Office. Indeed, every $1 in benefits that flows to jobless workers yields more than $1.50 in economic activity.

Unfortunately, Congress failed to extend federal unemployment insurance at the end of 2013, leaving 1.3 million Americans and their families without this vital economic lifeline.

2. Raise the minimum wage

In the late 1960s, a full-time worker earning the minimum wage could lift a family of three out of poverty. Had the minimum wage back then been indexed to inflation, it would be $10.86 per hour today, compared to the current federal minimum wage of $7.25 per hour.

Nearly one in five children would see their parent get a raise. Recent action taken by cities and states—such as Seattle, Washington; California; Connecticut; and New Jersey—shows that boosting the minimum wage reduces poverty and increases wages.

3. Increase the Earned Income Tax Credit for childless workers

One of the nation’s most effective anti-poverty tools, the Earned Income Tax Credit, or EITC, helped more than 6.5 million Americans—including 3.3 million children—avoid poverty. It’s also an investment that pays long-term dividends.

Children who receive the EITC are more likely to graduate high school and to have higher earnings in adulthood. Yet childless workers largely miss out on the benefit, as the maximum EITC for these workers is less than one-tenth that awarded to workers with two children.

4. Support pay equity

With female full-time workers earning just 78 cents for every $1 earned by men, action must be taken to ensure equal pay for equal work.

Closing the gender wage gap would cut poverty in half for working women and their families and add nearly half a trillion dollars to the nation’s gross domestic product. Passing the Paycheck Fairness Act to hold employers accountable for discriminatory salary practices would be a key first step.

5. Provide paid leave and paid sick days

The United States is the only developed country in the world without paid family and medical leave and paid sick days, making it very difficult for millions of American families to balance work and family without having to sacrifice needed income.

Paid leave is an important anti-poverty policy, as having a child is one of the leading causes of economic hardship. Additionally, nearly 4 in 10 private-sector workers—and 7 in 10 low-wage workers—do not have a single paid sick day, putting them in the impossible position of having to forgo needed income, or even their job, in order to care for a sick child.

The Family and Medical Insurance Leave Act, or FAMILY Act, would provide paid leave protection to workers who need to take time off due to their own illness, the illness of a family member, or the birth of a child. And the Healthy Families Act would enable workers to earn up to seven job-protected sick days per year.

6. Establish work schedules that work

Low-wage and hourly jobs increasingly come with unpredictable and constantly shifting work schedules, which means workers struggle even more to balance erratic work hours with caring for their families. Ever-changing work schedules make accessing child care even more difficult than it already is and leave workers uncertain about their monthly income.

Furthermore, things many of us take for granted—such as scheduling a doctor’s appointment or a parent-teacher conference at school—become herculean tasks. The Schedules That Work Act would require two weeks’ advance notice of worker schedules, which would allow employees to request needed schedule changes.

It would also protect them from retaliation for making such requests—and provide guaranteed pay for cancelled or shortened shifts. These are all important first steps to make balancing work and family possible.

7. Invest in affordable, high-quality child care and early education

The lack of affordable, high-quality child care serves as a major barrier to reaching the middle class. In fact, one year of child care for an infant costs more than one year of tuition at most states’ four-year public colleges. On average, poor families who pay out of pocket for child care spend one-third of their incomes just to be able to work. Furthermore, federal child care assistance reaches only one in six eligible children.

Boosting investments in Head Start and the Child Care and Development Block Grant, as well as passing the Strong Start for America’s Children Act—which would invest in preschool, high-quality child care for infants and toddlers, and home-visiting services for pregnant women and mothers with infants—will help more struggling families obtain the child care they need in order to work and improve the future economic mobility of America’s children.

8. Expand Medicaid

Since it was signed into law in 2010, the Affordable Care Act has expanded access to high-quality, affordable health coverage for millions of Americans. However, some states continue to refuse to expand their Medicaid programs to cover adults up to 138 percent of the federal poverty level—making the lives of many families on the brink much harder.

Expanding Medicaid would mean more than just access to health care—it would free up limited household income for other basic needs such as paying rent and putting food on the table.

Having health coverage is also an important buffer against the economic consequences of illness and injury; unpaid medical bills are the leading cause of bankruptcy. Studies link Medicaid coverage not only to improved health, improved access to health care services, and lower mortality rates, but also to reduced financial strain.

9. Reform the criminal justice system and enact policies that support successful re-entry

The United States incarcerates more of its citizens than any other country in the world. More than 1.5 million Americans are behind bars in state and federal prisons, a figure that has increased fivefold since 1980. The impact on communities of color is particularly staggering: One in four African American children who grew up during this era of mass incarceration have had a parent incarcerated.

Mass incarceration is a key driver of poverty. When a parent is incarcerated, his or her family must find a way to make ends meet without a necessary source of income Additionally, even a minor criminal record comes with significant collateral consequences that can serve as lifelong barriers to climbing out of poverty.

For example, people with criminal records face substantial barriers to employment, housing, education, public assistance, and building good credit. More than 90 percent of employers now use background checks in hiring, and even an arrest without a conviction can prevent an individual from getting a job.

The “one strike and you’re out” policy used by public housing authorities makes it difficult if not impossible for individuals with even decades-old criminal records to obtain housing, which can stand in the way of family reunification.

Furthermore, a lifetime ban—for individuals with felony drug convictions—on receiving certain types of public assistance persists in more than half of U.S. states, making subsistence even more difficult for individuals seeking to regain their footing, and their families.

In addition to common-sense sentencing reform to ensure that we no longer fill our nation’s prisons with nonviolent, low-level offenders, policymakers should explore alternatives to incarceration, such as diversion programs for individuals with mental health and substance abuse challenges.

Read Also: Microfinance is Empowering Women Across the Globe

We must also remove barriers to employment, housing, education, and public assistance. A decades-old criminal record should not consign an individual to a life of poverty.

10. Do no harm

The across-the-board spending cuts known as sequestration—which took effect in 2013—slashed funding for programs and services that provide vital support to low-income families. Sequestration cost the U.S. economy as many as 1.6 million jobs between mid-2013 and 2014. 

Some relief was provided this January, when Congress passed the Consolidated Appropriations Act of 2014, but many important tools to help low-income individuals and families pave a path to the middle class—such as adult and youth education and training programs, child welfare, and community development programs—were on a downward funding trend even before sequestration took effect.

As Congress considers a continuing resolution to fund the federal government past October 1 and avoid another government shutdown, it should reject further cuts to programs and services such as the Special Supplemental Nutrition Program for Women, Infants, and Children, or WIC, which provides vital nutrition assistance to pregnant women and mothers with new babies.

Thereafter, Congress should make permanent the important improvements made to the EITC and the Child Tax Credit as part of the American Recovery and Reinvestment Act of 2009, which are set to expire in 2017. And it should avoid additional cuts to vital programs such as the Supplemental Nutrition Assistance Program, or SNAP, formerly known as food stamps, which suffered two rounds of deep cuts in 2013 and 2014.

Conclusion

It is possible for America to dramatically cut poverty. Between 1959 and 1973, a strong economy, investments in family economic security, and new civil rights protections helped cut the U.S. poverty rate in half. Investments in nutrition assistance have improved educational attainment, earnings, and income among the young girls who were some of the food stamp program’s first recipients.

Expansions of public health insurance have lowered infant mortality rates and reduced the incidence of low birth rates. In more recent history, states that raised the minimum wage have illustrated the important role that policy plays in combating wage stagnation.

There is nothing inevitable about poverty. We just need to build the political will to enact the policies that will increase economic security, expand opportunities, and grow the middle class.