The Economic Power of Microloans

Microfinance is helping to kickstart the developing world’s small business economy

Let’s say you’re an entrepreneur with a great product or idea, you have a market raring and ready to buy, and the only thing between you and startup success is the necessary capital to get your business off the ground. If you’re a small business owner in the western world, it’s likely you’ll simply take out a few thousand dollar bank loan and you’re off to the races. But what do you do if you live in the developing world, without access to a traditional bank? Aside from a predatory lender, who would you ever find to give you a loan when there’s no way you could afford a few hundred dollar one, much less the few thousand dollar one?

Enter the world of microlending

Microlending is the issuing of small loans, typically in the hundreds, and even tens, of dollars, to those in poor communities around the world who have simply been ignored by traditional financial institutions. This relatively new phenomenon has been facilitated, in large part, by the rise in mobile technologies, which increasingly allow people from impoverished rural areas to access finances electronically. The development of cryptocurrencies has also played a role, enabling those in countries with defunct currencies to bypass their native systems and participate in the global market. It’s this intersection between new technology and communities in need that has paved the way for what is now the burgeoning industry of microfinance.

One of the pioneers to really set these wheels into motion was Muhammad Yunus, a Bangladeshi social entrepreneur, banker, and economist who saw a deep need in his country for practical and sustainable financial assistance. Alex Counts, an associate of Yunus, described the situation in an interview with National Geographic, explaing that for many of these individuals, “a hundred dollars in capital may be the only thing that stands between them” and escaping poverty. “You give them a fair deal—not a subsidized loan but a market-interest loan—and they’re able to put their motivation, skills, and business savvy to work.”

Yunus’ solution was to set up Grameen Bank, a microlending institution established to serve his long-overlooked community. According Sam Daley-Harris, director of the Microcredit Summit Campaign in Washington, D.C., Yunus would often say: “If the banks lent to the rich, I lent to the poor. If banks lent to men, I lent to women. If banks required collateral, my loans were collateral free. If banks required a lot of paperwork, my loans were illiterate friendly. If you had to go to the bank, my bank went to the village.” It was this philosophy that ultimately provided millions of Bangladeshis, the majority of them women, the ability to purchase the resources necessary to start their own small businesses and lift themselves from poverty. For these efforts and accomplishments, Yunus was awarded the Nobel Peace Prize in 2008. While this came as a surprise to those who expected a recipient more directly involved in a rights movement or peace negotiations, the Nobel committee saw Yunus’ efforts as an essential component to the pursuit of peace, recognizing that “lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty.”

In the intervening years, the microlending industry has taken off, with lenders such as Kiva and 4G Capital leading the way in service to needy entrepreneurs across the globe. There are also businesses like Seeds, a tech company who channels capital to microlenders through revenue made from in-app purchases. Using this approach, Seeds has been able to help fund small business owners like Mary Maina, a baker from a poor area of Kenya who was able to purchase better equipment and hire enough employees to increase profit from $311 to $736 per week (a 136% increase), enabling her to comfortably cover living expenses for herself and her three children (which total $375 per week), while still saving some on top of that. As this industry continues to expand and new players come to the fore, more and more people like Mary will be able to pull themselves out of poverty and run successful businesses of their own.

A key role in the sustainable alleviation of global poverty

While the issue of global poverty in many ways seems insuperable, the latest reports from the World Bank indicate that from 2012 to 2013 alone, extreme global poverty went down from 12.4% to 10.7%, which is also a 35% reduction from 1990 (a total of 1.1 billion people). And as the fight to eradicate poverty presses on, the role of the microlending industry will become ever more important, as access to even modest amounts of capital can be the difference between thriving and barely surviving for millions around the world.

If you’d like to get involved in the world of microlending, and perhaps even support a microloan yourself, here are just a few notable companies and organizations that might pique your interest:

Kiva is a San Francisco-based nonprofit microlender with a mission to alleviate to problem of poverty around the world. They use a crowdfunding model that allows users to browse categories they care about (e.g. education, refugees, women, etc.) and contribute to borrowers directly.

Accion, with 50 years under its belt, is one of the microlending industry’s pioneers. Their mission is to “build a financially inclusive world,” expanding access to financial services and education to all corners of the globe. Backed by the Bill & Melinda Gates Foundation, as well as a myriad of other highly respected financial organizations, Accion is one of the top players in this field.

4G Capital is based out of Nairobi, Kenya and is one of the top fintech companies in Africa. Along with providing needy entrepreneurs with capital, 4G is also helping to expand the continent’s already blossoming mobile financial infrastructure, allowing individuals from even the most remote locations to participate in the global market.

In the context of this conversation, it’s easy to forget that the western world also has its fair share of impoverished communities. Organizations like Opportunity Fund, Grameen America, and LiftFund help needy entrepreneurs in the United States get their businesses off the ground.

There’s also Seeds, a free software platform for app developers to increase in-app spending by channeling a portion of that revenue to microlending organizations like those mentioned above. Users are 60% more likely to spend in-app if they know it’s contributing to a social good, making for a great way to boost revenue while simultaneously providing a sustainable contribution to those in need.

Joe Siebert is President and CEO of Sandwich Entertainment, a film production company based out of Cleveland, OH. The company’s most recent film, The Sax Man, toured the US festival circuit in 2014 and is set to be released to the public by the end of 2017. Joe is also a content contributor for Seeds.