Microfinance: low G high R

Microfinance gives loans to people who have no access to regular banking because of illiteracy, distance, lack of collateral, regular income, or basic documents.

This issues tiny loans to groups, often without physical collateral, filling the gaps that traditional banks deemed too risky and unprofitable to address.

Adam Smith would be in favor of microfinance over universal basic income.

• The loans would then be used to provide wages, reducing unemployment
• The wages would then be used to pay for the education of children

Loans are supposed to serve as one’s capital, and thus, are not supposed to be spent recklessly as an expense. A capital pays for itself, but an expense does not.

Real-World Examples of Impact

1. Grameen Bank (Bangladesh)

This is the pioneer of modern microfinance, founded by Nobel Peace Prize winner Muhammad Yunus. Grameen famously lends to the “poorest of the poor,” primarily women, to fund micro-enterprises like rice-husking, weaving, or buying a cow. Their model proved that the poor are highly credit-worthy: Grameen boasts a repayment rate consistently over 95%, a rate many traditional banks envy.

2. Kiva (Global)

Kiva filled a different gap—the capital gap facing MFIs themselves. By creating a crowdfunding platform, Kiva allows individuals in developed nations to lend as little as $25 to specific entrepreneurs in developing nations. For example, a$ 500 Kiva loan helped a seamstress in Peru buy a commercial sewing machine, tripling her production capacity and allowing her to hire a local assistant.

3. Equity Bank (Kenya)

While starting as a microfinance institution, Equity Bank recognized the gap in basic financial access. They shifted focus to provide micro-savings accounts to rural farmers and market traders. By adapting their services to allow tiny, frequent deposits via mobile money (M-Pesa), they brought millions of unbanked Kenyans into the formal economy, allowing them to safely save pennies that would otherwise be hidden under mattresses.

The Problem with Microfinance: Interest Rates

Microfinance booms whenever interest rates are low and gets scarce whenever they get high.

This carries over to the debtors who are slapped with higher interest leading to more failures.

This leads to microfinance turning into loansharks.

This is why we classify microfinance as a problem with low G and high R.

This is solved by barter credits to be explained in the solutions section.