Importance of Microfinance

Micro-lending involves the extension of very small loans and other basic financial services to impoverished borrowers who typically lack the capital to start their own businesses. It allows them to establish their own enterprise without being dependent on a third party. In recent years, micro-finance has become a popular strategy for increasing financial security all across the globe. Indeed, far from charity, micro-finance enables communities to be self reliant and commercially viable.  The core philosophy of micro-finance is that even a small amount of money can help end the cycle of poverty. A small loan of less than $100, for example, can be enough to launch a small business and pull a neighborhood out of the clutches of poverty.

Micro-finance can be used as a tool to help combat debilitating economic problems that are endemic to the Third World. For example, unemployment and lack of economic diversification in developing countries are two very serious problems that can be addressed through micro-lending. The economies of the third world are largely centered around agriculture, resource extraction, and basic manufacturing. Due to the concentration of economic activities in these areas, jobs are limited and low paying. In certain developing countries, many people live off less than two dollars per day.  In order for these countries to move up the economic ladder, economies must be diversified. Many impoverished nations have very underdeveloped tertiary (service) and quaternary (information) economic sectors and focus solely on the primary sector.  Micro-financing has allowed for the introduction of many different types of businesses. Many take micro-loans to start enterprises that are either centered around manufacturing or providing a service. Whole communities, in some instances, are employed by these newly developed firms.  

What is perhaps the most interesting thing about micro-finance, is that it mainly targets women.  It has been statistically proven that women borrowers are far less likely than men to default on a loan. This is mainly true because women are likely to invest the money in a way that benefits the family unit. Micro-loans have empowered women by providing them with a means to independently provide for themselves and their families. This has led to a decrease in the subjugation of wives to their husbands and an increase in the overall safety of women. Additionally, micro-loans help mothers keep their children in school because new access to capital reduces the need for children to help provide for the family.