Microfinance is not only beneficial to the professionals in the field but it also has social benefits as it provides access to loans to people who otherwise wouldn’t have such access, explains Sachal Abbassi

What began in isolated rural communities of Bangladesh three decades ago now spans across the globe, and its success has transpired into a counter-narrative of financial market-based capitalism. Microfinance has succeeded in providing social welfare and economic growth with the need of complete capitalist-based corporate control or with a communist style state control.

As a financial conglomerate, it has been successful by collecting information about risk and return through forming communal relationships which is difficult to acquire by traditional banking practices, and by reducing transaction costs by specialising in a regional model. With high transaction costs of overcoming informational asymmetries and unavailability of collateral, it is not worthwhile for bankers to commoditise risk in this unconventional form of banking.

This has enabled the development of a niche micro-financial industry, which possesses capabilities of risk assessment and relationship forging which is difficult and expensive to acquire by traditional corporate banks. The modern micro-financial banking is a brain child of Bangladesh’s Muhammad Yunus, founder of Grameen Bank, who institutionalised microfinance, and won a Nobel Peace Prize for it.

During the 1980s, its success in Bangladesh was remarkable, which coincided with the shrinking of the state’s role across the world, and success of this venture was soon interpreted as privatisation of human welfare. The industry also showed promise not only for its social benefits, but in terms of income for micro-financial analysts who also profited from services within this institution.

The emergence of this market demonstrated arrival of new opportunities, and during the ’90s, its model started to receive mimesis across the world, as more and more professionals saw its benefits in generating fee income for micro financial bankers.

The 2000s saw exponential growth and since then, microfinance has evolved to include more services other than micro-credit offering, and it has witnessed a rapid growth in the size of its industry. Today, there are over 7,000 micro financial firms in the world.

While the starting of new firms has slowed down, it is only because the success of micro finance worldwide is so dispersed that competition has intensified, and new markets for these institutions do not offer as much income as it once did in a less competitive environment.

Microfinance is not only beneficial to professionals in the field, but it also has social benefits as it provides access to loans to people who otherwise wouldn’t have access, which can aid the poor in so many different ways. Its main utility lies in being beneficial to the poor, whom the mainstream banking and financial systems bypass.

There is considerable evidence to suggest that microfinance has not only been successful in developing rural areas, but even in urban areas of most affluent cities, including like New York and Montreal, for instance.

Typically, there are some social problems which accompany low levels of income and poverty. These problems include lack of education, poor hygiene, malnutrition, crime, inequality, homelessness, among others. Social problems are easily mitigated, as microfinance institutions help lift households, rural and urban, beyond a level of poverty which causes these problems, and beneficiaries of loans become more empowered and self-sufficient.

In most countries, the poor often trade their basic human rights for food and shelter and at times unavailability of proper lending facilities makes them vulnerable to exploitative borrowing. By providing a source of sustenance to these people, micro financial institutions alter the existing social and power dynamics.

With sustenance comes not only social and political power, but also the ability to exercise rights and informed judgment without coercion in a free environment. In most countries, microfinance has elevated status of women by providing them loans which relieves them from dependence on men for their financial needs; minorities in rural and urban regions have also benefited from microfinance.

Welfare and self-reliance of the poor are perhaps the most important humanitarian benefits of microfinance, but its benefits are also macroeconomic in nature. It has a social and economic multiplier effect of macroeconomic benefits, such as employment growth, better efficiency and productivity of the rural sector, higher GDP, amongst others.

Furthermore, loans to entrepreneurial enterprises can also trigger emergence of innovation, which is an important factor in economic development. While the industry today faces a few challenges, microfinance is here to stay and tends to demonstrate that it will have a greater global outreach with increasing demand for services, which now have extended to providing saving services and insurance.

The success of microfinance proves that the mainstream capitalist model which often reduces democracy to a mere euphemism for corporate control isn’t a necessary condition for human development. The thesis of Milton Friedman’s trickle down effect has been discredited time and again, as the momentum of microfinance suggests that human welfare is best achieved by incorporating social preferences within capitalism.

That is not to suggest that state interventions should supersede the private sector; the state should only accommodate these institutions rather than intervening directly. Indeed, the success of microfinance represents the emergence of a new form of capitalism with a social conscience, one which is not only driven by maximisation of profits at all costs.