Microfinance – The Positive Ripple Effect

Fehmeen blogs at Top Money Hacks.

Microfinance spread across the global economy like a gentle yet noticeable wave a few years ago and led to empowerment of the lower class in more ways than one could imagine. Since microcredit is a financial tool, one would imagine the benefit delivered would be limited to monetary gain, but the social nature of this tool has created value in numerous ways.

A few studies claim the financial benefit of microfinance is not as grand as its champions claim it to be. They support their argument by drawing attention to the poverty rate in the birthplace of microfinance, Bangladesh, which hasn’t budged significantly despite widespread use of microcredit and other financial tools for the poor. Granted, the monetary benefit is minute in terms of absolute gain, but if the gain is calculated as a percentage of initial income, the results are commendable.

As an example, if a barber goes from earning Rs.1,000 per month, to Rs.2,000 per month, a 100% increase in income is recorded, though in our eyes, the extra Rs.1,000 may not be a large sum at the end of the day for various reason. Granted, the difference is minor, but at least the difference is positive. In this light, all policy makers need to do is to think of new ways to improve the financial results.

If we look at the social angle, the benefits of microfinance are much more impressive.
Microcredit encourages borrowers to be financially disciplined by setting up repayment schedules that are linked to penalties if negative deviations were to occur. If debtors wish to continue receiving loans, they learn to manage their funds efficiently and responsibly, which are necessary qualities for financial independence.

Furthermore, microfinance users gradually save enough cash to bring about other forms of social change into their family:

  •  Their children can now attend schools,
  •  Basic health standards improve (they can afford medicines, adopt hygienic lifestyles that they were previously unable to pursue,
  •  Practice family planning, etc.

These can make a big difference when it comes to breaking the poverty cycle.

A few years ago, a small study conducted by a development agency, revealed that female borrowers showed remarkable performance across different social and financial measures:

  • Female borrowers were more prompt with their repayments (indicating better financial discipline)
  • These borrowers were more willing to mobilize themselves for social causes (indicating a strong/better social fiber)
  • Female borrowers took greater care of their families by investing in healthcare, clothing, schooling, etc.

Of course, this is not to imply any negative comparison with men, but just goes to show the ripple effect of this financial tool.

About Fehmeen Khan

Hi, I'm a finance blogger who is interested in how different financial tools, including microfinance, can deliver real value to consumers.