Women and Microfinance

Susan R Jones. Women and Politics around the World: A Comparative History and Survey. Editor: Joyce Gelb & Marian Lief Palley. Volume 2: Country Profiles. Santa Barbara, CA: ABC-CLIO, 2009.


Microfinance refers to an array of financial services to help poor people, primarily women. Although microfinance practitioners may differ on the appropriate use of the term—microfinance, microcredit, microlending, and microenterprise are often used interchangeably—it is important to note that the term “microcredit” is often used by international microfinance practitioners whereas U.S. practitioners use the term microenterprise. The term microenterprise is used because starting a microbusiness in the developed world requires more than just credit. Microentrepreneurs also need supplemental services, such as help with business planning, legal structures, zoning laws, business licenses and permits, and marketing. These supplemental services help to improve the survival rate of businesses and mitigate lenders’ risks.

Microfinance services generally include very small loans or microloans ranging from $50 to $35,000 given to individuals or groups, without traditional collateral, to start or expand a business. In this way, a microbusiness is clearly distinguishable from a small business, which may be defined by size and number of employees. Microbusinesses typically have fewer than five employees. The amount of the loan depends on such variables as the type of business and whether the lending takes place in a developing or a developed country. Larger loans may be granted in North America because of higher start-up and expansion costs associated with establishing a microbusiness. Although microlending is the best known form of microfinance, the term also includes housing loans, savings strategies, credit repair, and what are generally described as asset accumulation strategies through revolving loan funds, savings accounts, and insurance products (Carr 2002).

Sectors of the microfinance industry are focused on helping women feed, house, and cloth their families; educate their children; attend to their family’s basic health care needs; increase and diversify incomes; build social, human, and economic assets that contribute to freedom from risk; and enhance the quality of life for their families and communities (Jones 2004). Jeffrey D. Sachs (2005) points out in his book The End of Poverty that although changes are taking place regarding gender roles, “(t)raditional societies tend to be strongly differentiated in gender roles, with women almost always getting the short end of the deal.” Thus, women in these societies “often lack basic economic security and legal rights.” Significantly, microfinance has emerged to empower women, help combat food insecurity, and stimulate local economies, particularly in such post-conflict regions as Kosovo, East Timor, and Cambodia (Carr 2002).

Investing in women has multiplier effects because women contribute to the well-being and value base of their families. The 1995 Human Development Report “found that 70% of the 1.3 billion people living on less than $1 a day are women” (Cheston and Kuhn 2002). Reports on the effect of microfinance on women show that microfinance institutions (MFIs) can empower women and increase their self-confidence and self-esteem. The combination of education and credit enables women to gain equal access to school for their children, especially female children who are often denied education because of discrimination and lack of money, food, and medical attention; greater respect from their husbands and community; leadership skills; and increased political participation. However, empowerment also has negative effects in the form of domestic violence and increase in women’s work loads. In Bangladesh, for example, one study found that, on average, 39 percent of women were unable to have full control of their loans because they were controlled by a husband or a male household member; still, this also means that 61 percent of women have some degree of control, a vast improvement over previous powerlessness (Cheston and Kuhn 2002).

A Brief History of Microfinance

The first microenterprise programs began in the developing world in the early 1960s and emerged in the United States in the early 1980s. The U.S. microfinance movement was influenced by the women’s movement and is an integral part of the community economic development movement (Servon 1999). As governor of Arkansas, Bill Clinton supported the Good Faith Fund, one of the early U.S. microenterprise programs. As president, he emphasized the reform of welfare laws and economic self-sufficiency and created a new branch of the U.S. Department of Treasury called the Community Development Financial Institution Fund, which funds microenterprise development and other community banking efforts. Microbusiness development became a way to help move people from welfare to work and create new markets for capital growth. Today, more than 750 organizations in the United States are providing microloans or related business training (Latifee 2007). Many of the early microloan programs in the United States, such as the Women’s Initiative for Self-Employment, focused on women, who still remain the primary borrowers (Jones 1999).

Gender equity advocates have also recognized the importance of the microfinance industry. In 1994, Women’s World Banking, an organization dedicated to helping low-income women entrepreneurs by expanding their access to financial services, invited 40 microfinance leaders to form the United Nations (UN) Expert Group on Women and Finances. It is reported (Pandhi and Armacost 2005) that this meeting contributed to the UN’s 1996 Women’s Conference in Beijing, the UN Capital Development Fund, and the UN Department of Economic and Social Affairs. Contributions from the UN Expert Group on Women and Finances have been used by many practitioners and policy makers in many countries “… to build policies, systems and services that work for Microfinance” (Pandhi and Armacost 2005).

Microfinance services are provided by banks, credit unions, and microfinance organizations, which are also known as microenterprise development organizations (MDOs). These are generally for-profit and nonprofit or nongovernmental organizations (NGOs), private voluntary organizations legally chartered, where necessary, to lend money to poor people. MDOs such as ACCION International were started in the early 1960s; others, such as the Grameen Bank, began in the 1970s when its founder, Mohammad Yunus, an economics professor in Bangladesh, began lending small amounts of money to poor people, mostly women. These small loans were used to start or expand small enterprises, such as vegetable farming, weaving, and livestock holding (Smith 2005). The world’s attention was focused on microfinance when Yunus and the Grameen Bank won the Nobel Peace Prize in 2006 (Jones 2007). Funding for MFIs is provided by international finance institutions such as the World Bank, UN agencies, and the International Fund for Agricultural Development (Yunus 1999).

Today, a number of MFIs—including the Grameen Bank, the Bangladesh Rural Advancement Committee, the Vietnam Bank of Agriculture, and Caja Social in Columbia—are serving more than 1 million clients. Seventy percent of all foreign investments in microfinance are with regulated financial institutions, and 60 percent of this amount goes to only 10 MFIs, including Bancosol and Cajalos Andes in Bolivia, Compartamos in Mexico, Banco de Solidario in Ecuador, and Confinaza in Peru. These MFIs tend to serve what is called “upper layer of the pyramid” as opposed to the poorest of the poor (Latifee 2007).

Microfinance, now clearly a worldwide movement, is embraced by governments, corporations, banks, development agencies, business communities, civil societies, and philanthropists (Latifee 2007). Although the exact scale of the microfinance industry is imperfect because of incomplete data and self-reporting, several data sources shed some light on the industry (Rhyne and Otero 2006). For example, the State of Microcredit Summit Campaign Report 2005 states: “As of December 31, 2004, 3,164 microcredit institutions have reported reaching 92,270,289 clients, 66,614,871 of whom were among the poorest when they took their first loan. Of these poorest clients, 83.5 percent, or 55,622,406 are women.” The “poorest” are defined as persons living below their nation’s poverty line or living on less than one U.S. dollar per day, estimated at 1.2 billion people (Daley-Harris 2005).

Data published by the Microcredit Summit on the number of borrowers include MFIs and some banks. The Microcredit Summit is a civil society organization that launched a bold campaign in 1997 to “reach 100 million of the world’s poorest families, especially the women of those families, with credit for self-employment and other financial and business services by the end of 2005” (Cheston and Kuhn 2002). This effort has been expanded through the Millennium Development Goals, which call for an end to poverty by 2015, and include grassroots initiatives such as Make Poverty History. Additional attention to MFIs came in 1998 when the UN General Asssembly declared 2005 the International Year of Micro Credit and, as noted earlier, with the award of the 2006 Nobel Peace Prize to the Grameen Bank and its founder.

Another perspective on the scale of the industry can be found from the Microfiance Information Exchange (MIX), which reports that 675 MFIs serve 30 million borrowers. MIX collects data from MFIs capable of producing and willing to disclose financial statements, thereby addressing transparency concerns.

Remarkably, technological advances and the Internet have enabled new initiatives in microfinance. For example, Kiva, a nonprofit organization in the United States, allows individual donors to lend money via its Web site (Kiva.org) to specific entrepreneurs in the developing world, enabling them to lift themselves out of poverty. Kiva works with local partners to identify worthy microentrepreneurs whose photo, business track record, and loan request are posted to Kiva’s Web site. This peer-to-peer microcredit model allows individual lenders to put a face on the borrower (Clinton 2007; Ritsher and Hooper 2006). Another illustration is the 250,000 poor women in rural Bangladesh (who are now known as the Grameen phone ladies) who, with loans to purchase cell phones became entrepreneurs. The Grameen phone ladies earn about $60 per month after expenses. This is double the $30 monthly per capita income in Bangladesh. The Grameen phone ladies help the national economy of Bangladesh by providing telephone usage for thousands of villagers who previously had no telephone access. Almost half the calls are related to generating income for the family, and about 10 percent are health related. The end result is an increase in productivity, time, money, and health (Smith 2007).

Microfinance Models

More than 1.2 billion people live in extreme poverty, and microfinance aims to remedy this unfortunate problem. Microfinance models differ across regions and mirror the unique nature of economies and populations. South Asia has the largest microfinance industry, followed by East Asia, Latin America, and Africa. The fewest number of MFIs are found in the Middle East and North Africa, Eastern Europe, and Central Asia. By 2004, the Microenterprise Summit Campaign reported 3,164 MIFs, and of these, “1628 were in Asia, 994 in Africa, 388 in Latin America and Caribbean, 48 in North America, 34 in the Middle East, 72 in Europe and the Newly Independent States” (Latifee 2007). More than 92 million people have been assisted by MFIs: 81.5 million in Asia, 7 million in Africa, and 3.8 million in Latin America and the Caribbean.

Microbusiness lending may include direct loans to individuals, or the loans may be administered though circle, peer, or group lending. In the latter models people form groups and often guarantee each other’s loans to help each other’s businesses, thus boosting repayment through peer pressure. Group members must keep their loans current in order for other group members to receive a loan. Once repaid, a new loan may be made in higher amounts, which creates a repayment incentive and opportunities for repeat loans. A significant feature of microfinance is relationship banking, which allows local loan officers to closely monitor the loans and the repayment terms. Default rates are generally low. Grameen Bank, for example, reports a near perfect repayment rate. In countries such as Bangladesh and Bolivia it is not uncommon for microbusinesses to borrow from more than one MFI at a time.

Grameen Bank, a model MFI that others have tried to emulate, demonstrates the importance of understanding local needs, conditions, and political realities. It has 1,181 branches and 11,777 staff members, and it works in 42,127 villages. Since its inception it has disbursed loans totaling $3.9 billion. As of 2006, it had reached more than 6.4 million borrowers, 95 percent of whom were women. Grameen borrowers own 93 percent of the total bank equity, and the Bangladeshi government owns the remaining 7 percent. Boasting its self-reliance, Grameen no longer accepts donor funds. Initially, during the period that has come to be called Grameen Bank I, it focused on microloans. In its second phase of existence, known as Grameen II, the organization is focused on flexible loan products, or rescheduled basic loans, which has been described as “a Grameen micro-credit highway” (Yunus 2003). A good “loan driver” can pick up speed, shift gears, and upgrade her loan, and a driver who experiences car trouble—sickness, family problems, business slowdown, accidents—can take a detour and obtain a flexible loan (Yunus 2003). Other features of Grameen II include a pension savings account and a loan insurance program to facilitate asset accumulation and limit risk exposure (Yunus 2003). Another example of Grameen’s innovative effort is the Struggling Members Program, which targets beggars in Bangladesh, resulting in financial services to 71,295 people (Latifee 2007).

Government Support for Microfinance

Schreiner and Morduch (2001) describe a long history of U.S. government antipoverty discourse and a present-day phenomenon, the “Third Way,” coined by Robert Reich, President Clinton’s first labor secretary. The Third Way strives to encompass the best compromise between the left and the right, linking social commitment to market-based economic approaches. Microenterprise development meets this objective and tends to enjoy bipartisan support. The U.S. government encouraged the growth of microenterprise development domestically and internationally.

Significant support for microfinance comes from the U.S. Agency for International Development (USAID). USAID has been the leading bilateral donor of technical assistance and funds to MDOs since 1988, committing $158.7 million in 2001 and helping USAID-assisted MDOs serve more that 2.8 million loan clients and more than 3.5 million savings clients. “In 2001, the agency reported that it was conducting microenterprise projects in 52 countries and had obligated almost $2 billion since 1988 to support its program. The program supports micro loans, among other services, to assist poor entrepreneurs” (U.S. GAO 2003). A 2003 report on Microenterprise Development to the U.S. General Accounting Office found that the USAID’s four primary objectives were to reduce poverty, target the poor and the very poor, encourage participation by women (who have made up two-thirds of MFIs clients since 1997), and develop sustainable MFIs. These objectives focus on three key areas: advocating that host governments begin policy reforms to enhance MDOs, funding business development services in an effort to improve microentrepreneur’s business skills and develop markets for their microenterprises, and helping to fund and establish MDOs that provide loans and other financial services to the poor and the very poor. To accomplish its goals, USAID works through NGOs, contractors, and, on occasion, directly with governments. Although nearly two-thirds of USAID’s microenterprise development funds in 2001 funded the creation and strengthening of credit and savings institutions, the remaining one-third funded business development services and policy initiatives for more than 800,000 MDO clients encompassing new product development and testing, marketing, technology, and business counseling.

The Gender Approach in Small Enterprise Development, a publication of the Swiss Agency for Development and Cooperation, advocates for gender sensitivity and describes a range of gender-specific constraints that must be considered in four broad categories: legal (e.g., the need for approval of a male relative in business transactions); sociocultural, moral, and ethical (e.g., established patterns of behavior for women, including being bound to the household); women’s family and social obligations (e.g., greater workloads for women, limited mobility, and freedom of choice); and institutional constraints (e.g., lack of access to education, training, and dynamic economic sectors).

Microfinance organizations have the capacity to include education as a core part of their mission and positively influence gender imbalance. Included in the Sixteen Decisions of the Grameen Bank (Counts 1996) are such principles as hard work, discipline, courage, and unity. Specific decisions address family prosperity and planning, housing, food security, and sanitation issues. For example, decision 6 states, “We shall keep our families small. We shall minimize our expenditures. We shall look after our health” (Counts 1996).

Clearly, because most microborrowers are women, government support for microfinance must include an outreach and implementation plan inclusive of gender issues.

The Growth of Microfinance

Proponents of microfinance argue that it is an effective poverty-alleviation tool that justifies a subsidy because it creates social benefits that exceed social costs. The allocation of subsidies is political. Partly because of industry growth, MFIs are viewed in two camps: Camp A views MFIs as innovative financial institutions independent of subsidies and Camp B views MFIs as poverty banking institutions that are generally in need of subsidies. Both camps share best practices but experience tensions as well. To be sustainable, Camp A must provide attractive returns to lenders. Most MFIs are NGOs, raising questions about the need for transparency and disclosure. In an effort to address the realities of microfinance NGOs, the MicroBanking Bulletin, created in 1997, provides “peer group analyses of microfinance institutions and programs that voluntarily submit their financial data in return for a promise of confidentiality (http://www.microbanking-mbb.org)” (Carr 2002). The industry push for financial sustainability balanced against the social benefit may be a tension going forward, but politically microfinance is one of the few areas where liberals and conservatives agree. Advocates argue that it is possible to reach the very poor and give investors a commercial rate of return.

Microfinance is not without its critics and detractors who assert that it is oversold, not a panacea, and a development fad that in reality may not be helping the poorest of the poor. They caution that the microfinance industry governed by NGOs lacks regulation and that success stories are anecdotal.

The Future of Microfinance

Microfinance advocates caution that the future of microfinance depends on an enabling environment created by governments. MFIs are growing and are expected to remain innovative and competitive in serving unserved and underserved populations. At the same time, lack of funding is still a major obstacle. Notwithstanding this reality, it is expected that a few trends are likely. First, it is anticipated that established programs will expand into areas where there is a need. Second, more NGOs will incorporate microfinance into their existing programs and community-based organizations will participate in microfinance efforts. Third, grassroot, government-initiated MFIs will emerge in places that lack microfinance institutions. Fourth, more commercial banks will participate in microfinance at two levels, wholesale and retail—that is, as intermediary and provider. Fifth, credit unions and cooperatives may become microfinance providers. Sixth, international NGOs may create or help develop microfinance programs in regions where the concept has not taken hold. In addition, these trends focus not only on the “poorest of the poor” but also on the “missing middle” with a view toward developing small-scale enterprises through microenterprise (Latifee 2007).

Acknowledging this reality, U.S. Federal Reserve Board Chairman Ben Bernanke observed that “microbusinesses not only provide a path to economic self-reliance for owner-entrepreneurs and benefit their local communities, but they also are important for the economy as a whole. There is some truth to the popular image of the successful firm which had its beginnings in someone’s garage. Microenterprises can grow into small businesses, and small businesses can grow into large firms” (Bernanke 2007).


Microfinance that provides financial services to poor people, many of whom are women, is entrenched in the global political landscape. Notwithstanding criticisms, it enjoys support from liberals and conservatives alike. At the very least, microfinance is opening financial access to poor women and others who have been denied such access in the past. At its best, it is helping to lift the poorest of the poor out of poverty. These benefits alone justify continued support for the field.