The Poor are Bankable (and profit is good for non-profits:)

The Net Impact Conference 2006 conference held in Chicago at the Kellogg School of Business, was an in-depth introduction for me to the concept of Microfinancing. Accion International María Otero President & CEO, ACCION International and panelists Ken Appenteng and Beth Houle from Opportunity International Bank added to my knowledge of Microfinancing. I have integrated what I learned at the conference with the article by Muhammad Yunus who won the 2006 Nobel Peace prize for his work in Microfinancing with Grameen Bank

There are two presumptions about the poor within banking/financing industry.

1. Poor people don’t need banking services
2. Poor people are not bankable as they lack collateral
   

Microfinance works on the basis that character acts as collateral. First, groups choose members based on the degree of trust they place on each individual. Second, a loan to an individual is not given until the other member within the group has paid up what has been borrowed. Thus, social pressure acts as a deterrent against defaulting on loans. Additionally individuals who repay in time get higher loan amounts next time.

What is the advantage of small aid with terms of repayment vs. large financial aid provided by developed nations? Why not just give money out free? The article says, governmental aid leads to people inflating their needs, amounts received by the people who really need it is low and there is less room to react quickly to needs as time is required to get aid authorized.

The low default rates and the large potential market in the microfinance industry is attracting a lot of new entrants. There are potentially a lot of shake-ups in the horizon for this industry.

Recent developments in the industry is the introduction of a smart card that has complete data about the borrower on the card. Using biometrics technology, the fingerprint is embedded and so benefits the uneducated poor. In the past that thumbprint signed away their lives to the moneylenders but now it saves them.

Connotations of the word "profit" and its association with nonprofits should not be looked at negatively. Microfinance companies need to make a profit for long-term sustainability, i.e. to stay in business. The major criticism is directed towards the rate of interest charged. Interest rates can range from 4% and above (however, I have yet to research into the range of interest rates charged by various Microfinance providers).

Growing up in India I have seen the backlash of moneylenders who demand decades of free labor (bonded labor) in addition to very high interest rates. Local moneylenders also charge high interest rates for safekeeping money of the poor. That is where Microfinance companies come in by providing basic banking services and help prevent the poor from being exploited. The biggest contribution of Microfinance has been towards the empowerment of women. Teach a woman to stash money away not under the pillow but in the bank and you would lower the probability of food for the family being lost to the local bar in the village.