In January 2018, Vishwakrit Choradia, a 12th grader at Pathways School in Gurgaon, New Delhi, India, visited the 2018 Jaipur Literature Festival, where he listened to a talk by a legendary figure in the global finance world: Muhammad Yunus. Yunus, a Bangladeshi social entrepreneur, is considered the father of microfinance, small loans given to businesspeople who are too poor to qualify for traditional loans. In 2006, Yunus received the Nobel Peace Prize for founding his microcredit financial institution, Grameen Bank.
“In his talk, he called upon the youth to be job creators, not job takers,” notes Choradia, who is 18. “That line inspired me to empower others to become entrepreneurs.”
In May, Choradia launched Project Graafin (short for Grameen Grahak Finance), a microcredit startup modeled after Grameen Bank that provides short-term, unsecured loans of up to INR 30,000 (about $400 USD) to micro-entrepreneurs living in impoverished communities in West India. Choradia says that Project Graafin now has 30 borrowers, from weavers to street vendors, and greengrocers to candy shop owners, and has established a presence in 11 villages across the state of Rajasthan.
“We specialize in giving interest-friendly loans, where a customized interest rate is decided based on a borrower’s economic situation and his ability to repay,” says Choradia. “This has helped our organization to avoid loan defaults and maintain a repayment rate of greater than 90%.” In other words, he claims that most of his borrowers are paying back their loans over time.
“If we want to create a more inclusive society, we need to make people sustainable, not dependent on outside assistance.”
— Vishwakrit Choradia
Graafin borrower Pinki Gupta owns a candy shop in Nayala, Rajasthan, where she sells toffees, chocolates and other snacks to village schoolchildren. In June 2018, she received a loan of INR 30,000 through Project Graafin. She has used that money to expand the variety of items available at her store. Recently, she has also diversified into selling bhujia (a local Indian snack) to adults in the village.
“One of the most important lessons of microfinance is that the poor and financially excluded can flourish given the right resources and opportunities,” adds Choradia. “Also, I don’t feel that simply funding an NGO is the best way to alleviate poverty. If we want to create a more inclusive society, we need to make people sustainable, not dependent on outside assistance. Our goal is clear: to harness the innovative power of the poor through effective and efficient credit delivery.”
Graafin is one of many organizations operating to empower the world’s poorest citizens through microloans. Since the launch of Grameen Bank in 1976, microfinance has grown into a robust – and at times controversial – industry that by some estimates has reached more than 130 million clients.
Here are five truths about the field of microfinance:
- Many believe that the path out of extreme poverty around the world is through entrepreneurship. Opportunity International, a Chicago-based nonprofit that provides access to microloans to the very poor, recently spoke with our sister publication, Knowledge@Wharton. Global Executive Director Robert Dunn described microfinance like this: “Microfinance is usually thought of as microcredit. When people say microfinance, many think of it as a small loan, often to a woman. In Asia, where I’ve spent a lot of time recently, the way this works is that a number of women co-guarantee each other’s small loans. We’re talking about loans of around $200 to $300 to set up or to grow a small business. This loan is repaid over, say, six to 12 months. This model has worked well for a number of decades in Asia, sub-Saharan Africa and Latin America. It has its roots in Grameen Bank. But many others also invented that model around the same time that Muhammad Yunus did, including the founders of Opportunity International.” Like conventional lenders, microfinanciers charge interest on their loans (often at lower interest rates) and work out repayment plans with their borrowers, asking for the loans to be paid back at specific intervals.
- Financial inclusion is at the heart of microcredit. Globally, an estimated 1.7 billion adults are unbanked and unable to access financial services of any kind that would help them build much-needed credit. Therefore, they are excluded from the formal financial economy and the ability to access capital to improve their lives. Two of the major barriers to accessing financial services are a lack of formal identification and a lack of verifiable credit history. Kiva, a nonprofit focused on expanding financial access for underserved people around the world — often through microloans — has been working on the Kiva Protocol, an initiative to give unbanked people digital identity and secure control over their own credit information so that both formal and informal financial institutions (from banks to shopkeepers giving credit) can help contribute to a person’s credit history. Kiva just announced that it would be test-driving the Kiva Protocol in West Africa’s Sierra Leone in 2019.
- Microfinance is controversial. While lifting people out of poverty seems like a mission around which everyone can rally, the microfinance industry has seen its share of controversy. The greatest criticism originates from the idea that the financial world is making money off the poor. Microfinance used to be practiced primarily by nonprofits or NGOs, until for-profit microfinance institutions arrived on the scene. The worry is that large microfinance bankers will raise the interest rates on their microloans and push low-income borrowers deeper into debt because they can’t afford to pay back the loans, plus big interest. Project Graafin, for one, has thought through this issue. “You may know that most microfinance institutions borrow from banks and then lend to their customers,” says Choradia. “This is a main reason for their high interest rates. However, I eventually plan to approach not-for-profits (like the Bill and Melinda Gates Foundation) to receive grants and/or cheap sources of funding. This will mean that the final interest rate charged to the borrower will be substantially lower.” Microfinance critics also question whether a $100 loan keeps its borrower in poverty, rather than becoming a path to stronger self-sufficiency.
- Mobile phones are making a big difference in the microfinance market. Many people have mobile phones, even throughout undeveloped nations. One start-up business that is getting a lot of attention these days is Tala, which was founded by Shivani Siroya, who is on a mission to bring credit coverage to every corner of the globe. She says she wants to expand financial access, choice and control to the underserved globally. In September, Siroya told Nasdaq’s Venture Out, “The global financial system doesn’t work for 3 billion people. Only 31% of the adult population worldwide is covered by a credit bureau, leading to about $2.1 trillion in unmet need for credit. Tala’s innovation is our use of alternative data and mobile technology to understand and reach the underserved. We’ve developed an app that instantly underwrites customers using Android and proprietary data and delivers credit to a mobile wallet or location of the customer’s choosing. Eighty-five percent of our customers receive credit in less than 10 minutes and 92% pay it back.” The Tala app basically uses data on borrowers’ smart phones and other data that it gathers through its application to disperse loans. Financial technology is improving financial inclusion in a variety of ways as it introduces the unbanked and underbanked to formal financial services.
- Muhammad Yunus, who won the Nobel Peace Prize for his work in microfinance, encourages us to see the world not through the lens of profit, but social impact. Last November, Yunus joined the Knowledge@Wharton show on Wharton Business Radio on SiriusXM, to talk about his book, A World of Three Zeros, which refers to zero poverty, zero unemployment and zero net carbon emissions. During that interview, he explained his view of poverty and why he felt it was necessary to create a bank for the poor. “Poverty doesn’t come from the poor people themselves; poverty is imposed from outside. It’s something that we have in the economic system, which creates poverty. If you move those problems, the system, there’s no reason why anybody should be poor,” said Yunus. “One struggle that I had all of my life is the banking system doesn’t reach out to [the poor]. I kept saying that financing is a kind of economic oxygen for people. If you don’t give this oxygen to people, people get sick, people get weak, people get non-functional. The moment you connect them with the economic oxygen, the financial facility, then suddenly they wake up, suddenly they start working, suddenly they become enterprising. That is the whole thing missing. Almost half of the population of the entire world is not connected with the financing system.”
- Kiva Protocol
- K@W: How Fintech Is Transforming Microfinance
- K@W: Muhammad Yunus on Social Impact
- The Wall Street Journal: China Tightens Rules on Microlenders
- Nasdaq Venture Out: Shivani Siroya
- Ozy: One Out of Every Four Americans Is Underbanked
- The World Bank
What is financial inclusion and how is it connected to microcredit?
What does Vishwakrit Choradia mean when he says, “If we want to create a more inclusive society, we need to make people sustainable, not dependent on outside assistance.”? Do you agree or disagree?
Do you have any experience with microcredit, either as a borrower or a lender? Share your story in the comment section of this article.
What does Muhammad Yunus mean when he says, “Poverty doesn’t come from the poor people themselves; poverty is imposed from outside.” Do you agree with his image of ‘economic oxygen?’ Why or why not?
“If we want to create a more inclusive society, we need to make people sustainable, not dependent on outside assistance.”
I do agree with the perspective to a large extent. The importance of an inclusive society certainly can not be disputed, and micro financing is certainly a commonly proposed method. In fact, for my IB extended essay, I am studying the effectiveness of the Pradhan Mantri Jan Dhan Yojna (PMJDY), which is a government scheme chiefly focusing on the integration of the lower classes into the banking system and allowing micro financing opportunities. First implemented in 2016, the PMJDY allows bank accounts to be opened with no deposit, and allows anyone to borrow small overdrafts or loans of up to Rs. 10,000 (around $140), without a credit score or credit history.
For India (as for many other developing countries), the introduction of micro financing in such a large scale helped in eliminating money lenders, commission agents and corruption. Money lenders often charged very high interest rates, and fabrication of loan payment record for their own financial gain was common practice in India. Often, those in the lower classes would be forced to borrow to pay off existing loans, forming a vicious cycle. While the cycle has not been completely eradicated yet – it is certainly being broken quickly. Microfinance affords the lower classes an opportunity at economic mobility – one that is hard to find in developing nations.
However, much like the PMJDY, micro financing as a whole also faces one major challenge – the lack of awareness. Based on my own primary research of my extended essay, I found that 19 of the 45 interviewed subjects were not aware of micro finance in any sense. While this may be a small sample size – data from the government also reflects this idea. On the 24th of March 2017, it was reported that 92.52,609 accounts were frozen under PMJDY due to lack of transactions. This only further reinforces my point, that while micro financing may be effective, in developing countries (where it is of most use), there is certainly a lack of education and awareness. Until this educational barrier is broken, I do not think the true benefits of micro finance can be availed completely. From my experience while conducting interviews in a smaller district near by – a large reason why people seem to be dissatisfied with the policy is because they do not completely understand the relevance of it.
I also have reservations on weather microfinance truly is sustainable. While it could allow small businesses an opportunity to get seed funding or investments, and allow the poorer sections of society into the economy for the first time; micro finance is focused on short term gains based on small amounts of income, which is not self sustaining.
As with most government policies, micro finance can not be deemed completely good or bad. However, it can be said with certainty that micro finance has revolutionized the Indian economy. While it is too early to decipher completely how sustainable the policy has been in the Indian economy, it quite certainly has made the ideal of economic mobility far more achievable in the Indian economy.