How Microfinance Can Help People Living in Poverty

How Microfinance Can Help People Living in Poverty

Wanting to help people living in poverty and knowing how to do so effectively are two very different things. If you’ve been researching ways to help those in poverty, you’ve likely noticed that many nonprofits and humanitarian initiatives offer support to people in underdeveloped nations through something called microfinance. But what exactly is microfinance, and how does it work?

Essentially, microfinance is a type of financial service that helps people with limited financial resources to support themselves and their families without getting deep into debt. Microfinance can involve small loans, banking services such as savings and checking accounts, financial education, and more. 

Read on to learn more about microfinance and how it helps people in underdeveloped nations improve their daily quality of life.

What Is Microfinance?

Also known as microcredit, microfinance often takes the form of a small business loan with a low interest rate. It’s designed to provide low-income individuals with the necessary capital to start up a small business and pay the loan back as their income increases.

The concept of microfinance has existed for centuries but was popularized by Professor Muhammad Yunus, whose first microcredit loan was to female bamboo weavers in Bangladesh. These women were unable to pay for their supplies due to their extremely low income, but Professor Yunus’s loan allowed them to buy supplies, start earning more, pay back the loan, and improve their working conditions.

Professor Yunus’s continued humanitarian work and microfinance institution, Grameen Bank, earned him a Nobel Peace Prize in 2006. 

How Does Microfinance Work?

Microfinance efforts can help people living in poverty by providing a number of resources, opportunities, and financial services, including:

  • Small loans with low interest rates for people who can’t qualify for regular loans
  • Group loans that allow multiple people to borrow and pay back the amount together over time
  • Banking services that provide a safe place for people in underdeveloped countries to keep their savings
  • Education and resources that teach people to manage their finances well

Microfinance aims to empower people living in poverty to begin supporting themselves and their families. Instead of receiving charity, these people receive tools that help them to create and improve their work opportunities, enabling them to maintain dignity while improving their overall quality of life

What Are the Potential Pitfalls of Microfinance?

As with any human-made system, microfinance is not perfect. Some common criticisms of microcredit include: 

  • Many microfinance institutions charge extremely high interest rates
  • Microfinance borrowers may not see the significant increase of income needed to rise out of poverty completely

However, studies into the effectiveness (or ineffectiveness) of microfinance do show positive impacts, even if those impacts aren’t completely transformative. 

How Can I Support Low-income People in Underdeveloped Countries? 

Helping people in need involves a lot more than simply donating money, and educating yourself on the various types of aid that go into low-income countries is a great way to start. Hope International is a great place to start learning as it has several great resources to help you learn more about microfinance and the role it plays in helping those in need.

Understanding microfinance and the various types of aid organizations can help you to make informed decisions about where to donate.

Along with supporting nonprofit organizations, you can also support small businesses and individuals in underdeveloped countries by purchasing their products through fair or direct trade initiatives. These businesses give workers ethical wages and frequently provide other resources like microfinancing options and other forms of financial and educational assistance. 

At Anchored Purpose Box, we believe in empowering people to live lives of dignity and hope. That’s why for every box purchased, we donate $3 to Hope International to support microfinance.

Ready to dive deeper? Visit Anchored Purpose Box to learn more and get involved.

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