Updated: Feb 15
In an increasingly unequal world in terms of income, wealth, and equity, many are working to converge these vast disparities. The poorest half of the global population possesses just 2% of the world’s total wealth. Furthermore, the World Bank estimates that 1.6 billion people do not have access to secure financial services. This vast “unbanked” population, or people in the world without a bank account, do not have the ability to receive loans that can be used as capital for starting a business.
Without access to traditional banking services, economically marginalized communities in the US and around the world were historically forced to rely on loan sharks or payday lenders in order to fund their businesses. These types of lenders charged immensely high interest rates, often over 100%, and used a variety of other methods such as damaging customer’s credit scores and withdrawing money from bank accounts. Because minorities are more likely to rely on these payday loans, such methods exacerbate the racial wealth gap.
This is where the microfinance movement emerges into frame, serving as a vital avenue of social entrepreneurship to address contemporary issues such as racial and gender inequalities. Similar to all social movements, microfinance ushers in a new style of leadership within the younger generations and aims to ameliorate the financial situation of traditionally disadvantaged households as well as cultivate innovation and socially responsible businesses.
While most financing institutions in our modern world understandably evaluate the collateral of a borrowing party to cover a loan, microfinance organizations are usually more inclusive. There is still a requisite credit assessment within micro-loans to ensure that borrowers are trustworthy and reliable sources for repayment. Microfinance organizations also take pride in educating impoverished communities about basic financial literacy. Hence, there are improved loan repayment rates within microfinance because the unbanked community is incentivized to pay back their dues. Underprivileged communities benefiting from microfinance realize that they have a coveted opportunity and if they do not pay back their loans, there will be fewer stable borrowing options in the future.
Microfinance also targets women borrowers, who are less likely than men to have access to traditional banking services. In fact, women are actually more likely to repay their loans and invest the income that they generate into their family, prioritizing education for their children. Microfinance also promotes women's empowerment, specifically to start businesses in areas around the world that have historically suppressed the efforts of females in the workforce. Likewise, in both developing and developed nations, the microfinance movement has worked to uplift marginalized men as well, such as ex-prisoners with no violent history and others who have been left behind by traditional banks.
The primary debate surrounding microfinance currently is its efficacy, considering that for-profit microfinance businesses dominate the loan domain. For-profit microfinance companies have doubled their lending over the past decade and account for around 75% of the microfinance loans in circulation, when compared to their non-profit counterparts. Many argue that for-profit microfinance businesses are missing the point of microfinance entirely. As these companies intentionally increase their interest rates in order to maximize profits, they can push recipients of these loans into crippling debt. In many cases their interest rates exceed those of traditional banks and can leave their recipients in dire financial conditions. One must question whether these for-profit microfinance businesses are defeating the altruistic mission that should remain at the heart of microfinance.
However, this remains a very complex topic because the more altruistic microfinance organizations have struggled to scale their services to reach more people in need. Conversely, the more commercialized microfinance organizations have been able to better scale and integrate fintech to allow more people to gain access to micro-lending. The solution to this paradox may be very nuanced, such as implementing more collaboration between the commercialized and altruistic organizations, in order to maximize reach and positive impact on the world.
The Zero Interest Microfinance Bank (ZiM), started at Santa Clara University as a faculty-student microfinance venture, serves as a lending program for those in need of starting capital for their businesses. The variable rates and absurd commission fees imposed by other for-profit microfinance lenders is not a concern; ZiM is solely interested in the growth of micro-entrepreneurs and provides them with financial education in addition to loans. The zero interest rate is truly a miracle and genuinely empowers entrepreneurs in underserved communities around the world to break the cycle of poverty.
For ZiM, zero interest is like 0% APR that people with good credit get from their credit card for a period of time. ZiM's zero interest is like applying 0% APR to the poor in which for a period of time, they can better build their micro-businesses, along with training from ZiM’s partner organizations. With a few rounds of zero interest loans, they will be more ready to take on reasonable interest rates from credit unions or community banks. Right now, the extreme poor usually start with high interest loans of 90%, 40% from traditional microfinance organizations, and then 20% from the more ethical microfinance organizations. Thus, ZiM is trying to disrupt this structure to better address racial and gender inequalities.
By Ryan Sullivan
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