1. Microcredit/ Microfinance
By: Jeremy Park+ Paraash Manwani

2. Poverty around the world
Poverty= “a condition existent in an individual or community that live with the income under the poverty line defined by the WorldBank of as an income of $1.9 per day.”
Approximately 10.7% or 700 million people live under an income of $1.9 a day.
Most people who are in poverty usually come from less economically developed countries and have limited access to good schools, healthcare, electricity, safe water etc.
Cutting the poverty rate around the world is first goal of the Millennium Development goals. (shown in the picture at right)

3. Poverty cycle
A cycle that describes why it is hard for people to escape poverty. People are trapped in this cycle unless real help such as investment is given or saving is made by the people in the cycle.
In less economically developed countries, there are less capital flows in the society and thus less capital that could be reached to the poor people, which fails to give them the sufficient investment and capital to be able to earn enough income. This is called the poverty cycle is usually seen in less economically developed countries but can also be seen in rural areas of developed countries where income is not as sufficient as in cosmopolitan areas.

5. Microfinance vs. microcredit

6. What is microfinance?
Microfinance is a type of banking service provided to unemployed or low- income individuals or groups that have no real access to financial services.
Microfinance offers help for people in poverty to break out of the poverty cycle.
Poor people have difficulties getting loans from banks because poor people have less of a credibility of being able to pay back the interest and banks would not be willing to give them a loan to make profit from other clients.
Ex: Savings, insurance, pensions, financial training etc.

7. What is Microcredit?
Microcredit is an aspect of microfinance. It is an extremely small loan given to impoverished people to help them get out of their poverty and become self employed.
Through microcredit, poor people can have a chance without a collateral or achieve a steady income by starting a new business.
Kiva lending money to its loaners is an action of providing microcredit.

9. How did microcredit become widespread?
Microfinance is believed to be first started in the 1970s by Muhammed Yunes, the founder of the Grammen Bank of Bangladesh, who won a Nobel Peace Prize for coming up with the concepts of microfinance and microcredit in the year of 2006.
Grammen means ‘village’ in Bangle and it started as a bank where the poorest people of Bangladesh could go to, get a loan and start a small business and pay a monthly recharge.
Grammen Bank was the first type of microfinance bank and in the 1980’s it started to spread around the world, where more and more microfinance organizations were established.
Right now, a total of 3,133 microfinance institutions are providing help to million clients.

10. Aims of microfinance
The aim of microfinance is to first of all help people get out of the poverty cycle. As mentioned, to break out of the poverty cycle, some level of investment needs to be made towards the poor in order to lift them from

11. Organizations that provide microfinance
Kiva
FINCA International
BRAC
Grameen foundation
Accion
Freedom from Hunger

12. How does microcredit occur?
First, a person posts a loan online
Second,

13. Benefits of Microcredit
The poor are able to gain access to a financial system.
Access to loan allows the poor to gain opportunities such as starting a new business or household assets
Chance to break out of the poverty cycle they are locked inside.
Microfinance organizations are pro-feminist. They target women as loaners, which might help them but not to the extent that they will become free of poverty.
Giving loans to women helps speed up the process of economic development.
KIVA statistics

14. Microfinance Success Example: Victor
This is a KIVA success story about Victor, a young Mexican immigrant who has opened two of his own coffee shop in America thanks to the 0% interest of $5,000 provided by 67 KIVA lenders.
Using the loans of $5,000 and $10,000, Victor set up his two coffee shops, fulfilling his ultimate dream of being able to set up his own coffeeshop.
Victor is a great example of someone who has greatly benefited for the micro-financial system.
For more success stories, go to: stories

15. Main criticisms against microcredit
Biggest criticism is that the loan of microfinance organizations are higher than traditional banks and they might set high interest rate to get profit out of the loans of the loaners.
Some microfinance organizations take advantage of people who are in desperate need of loans and charge them with extremely high interest rates.
Evident in countries such as Mexico and Bolivia.
This is usually seen in countries where microfinance organizations are not as competitive, the interest rates set by the organization may be high and the loaners have to make the inevitable decision to take the loan.

16. Real World Example: Bolivia BancoSol
In 1992, BancoSol, one of the only microfinance organizations of Bolivia, charged an annual 65 percent interest rate to its microfinance loaners.
This was due to the lack of competition of the microfinance organization.
Poor people had no choice but to loan from BancoSol as it was one of the few selections they could rely on to borrow their money from.
Now, its interest rate is much lower, charged at the range of 18 to 22 percent.

17. Other Criticisms against microfinance
Microfinance does not necessarily save people from poverty. Some people state that the loans provided to these poor people may not be used to set up small business and become self-unemployed but to cover up their basic subsistence fee.
Policy is not truly effective amongst people under the poverty line.
Because individuals have to pay back their loan by a monthly repayment, they cannot use their income to save it for future use.
In worst cases, if loaners are unable to pay back their loan from an organization, they might get a loan from another microfinance organization to pay back the loan, which will increase the debt level of the loaner.

18. Real World Example: South Africa
In South Africa, Microcredit was hoped to help support businesses, but used to help deal with consumption.
Became counterproductive as households didn’t necessarily have stable income to be able to pay back their loans
Resulted in increased unemployment as these households had to either sell their household assets, borrow or request more microcredit to deal with their loans.
Small percentage of businesses that become successful from Microcredit, is not sufficient enough output to reduce poverty or generate high economic growth for the country.
In South Africa, Microcredit was hoped to help support businesses, when instead the loans taken were used to help deal with consumption for very poor households. This in turn became counterproductive as households didn’t necessarily have stable income to be able to pay back their loans and this resulted in increased unemployment as these households had to either sell their household assets, borrow or request more microcredit to deal with their loans.
Additionally, of the small percentage of businesses that become successful from Microcredit, their output is not sufficient enough to be able to reduce poverty or generate high economic growth for the country.

19. Evaluation Appealing ideals, but doesn’t meet standard to help enough
Studies show it doesn’t change household income too much
The Microfinance Industry was estimated at between $60-$100 billion, with more than 200 million clients in total.
High debt rather than benefiting households
Interest Rates of 100%-200% are very common in Zambia and Mexico
Loans used for consumption especially in Mexico and Peru
The overall conclusion that despite Microcredit’s ideals being very appealing, it doesn’t quite meet the standard to empower many poor households’ wealth. This is because there has been a substantial amount of studies that have proven that Microcredit for the average person, will not result in an incredible change.
According to an interview with Timothy Ogden, the Managing Director of the Financial Access Initiative at NYU, states that, “Microcredit is a useful and generally beneficial product. It is not a one-stop get-out-of-poverty card. The credit is not sufficient to quickly move people out of poverty permanently.”
The Microfinance Industry was estimated at between $60-$100 billion, with more than 200 million clients in total. However, this has led to negative consequences such as high levels of debt and a greater focus on commercialization rather than the altruistic philosophy of serving the poor by simply providing loans. Especially in countries like Zambia and Mexico, Interest Rates of over 100% to 200% are very common. And as previously stated, even placed like Peru and Mexico, the loans are used for consumption purposes rather than capital investment for individual’s small businesses.

20. Solution Subsidies to large industries instead
Raise employment and output
Banks charging reasonable Interest Rates
Stakeholders Benefited:
Poor Families
Government
Higher Tax Revenue
Increased Expenditure on Infrastructure and Education
Leave Poverty Cycle
Increased productivity
Therefore, the solution is that loans should be provided to larger industries where firms can sufficiently take on machinery and capital and be able to hire workers that will raise employment rather than drop it. The loans will be able to be taken from banks that may charge a much more reasonable and lower Interest Rate where the burden will be focused on the firm rather than the individuals. Additionally, subsidies can be provided to such firms so that costs will be decreased and the firm will be able to produce a higher level of output, contributing more to the economy, and raising GDP and employment as well.
The stakeholders benefited include the many households that are living under poverty, as the increase in job opportunities can benefit more households. This can even help the government, as when people’s income levels go up, more taxes can be paid, and when corporations improve, higher corporate taxes can be paid. This benefit can be reflected on society as well, because as the government has higher tax revenue, more expenditures can be made on infrastructure and education, so that more individuals can escape the poverty cycle, and high levels of economic development can be achieved.

21. QUIZ TIME!!

22. QUESTION 1 What is microcredit?
ANSWER: An aspect of microfinance. It is a small loan given to impoverished people to help them get out of their poverty and become self employed.

23. QUESTION 2
What is the difference between microfinance and microcredit?
Microcredit is an aspect of microfinance. Although the general concept is similar, microcredit only involves giving credits and loans to the poor while microcredit is a broader concept of financial services such as savings, insurances and pensions.

24. QUESTION 3 Name two benefits of microcredit? ANSWER:
It helps the poor break out of the poverty cycle.
It gives the poor a chance to become self-sufficient by giving them
When women take loans and earn higher incomes, their social and economic status rises, speeding up economic development.
Gives children a chance to receive better education.

25. QUESTION 4
Diagram or list the 4-5 step process of how KIVA gives loans.
Answer:
A borrower applies for a loan.
The loan goes through the underwriting and approval process.
The loan is posted to Kiva for lenders to support.
Borrower repays the loan.
Lenders use repayments to fund new loans, donate or withdraw the money.

26. QUESTION 5
Name two organizations other than KIVA that provides Microcredit?
ANSWER: FINCA, Grammen Bank

27. BONUS QUESTION
What is the name of the person that established the first microfinance organization Grammen Bank?
ANSWER: MOHAMMED YUNES

28. CONGRULATIONS!!

29. Works Cited
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Emelda M. "Difference Between Microfinance and Microcredit." DifferenceBetween.net. October 27, < microcredit/ >.
Karnani, Aneel. "Microfinance Misses Its Mark (SSIR)." Stanford Social Innovation Review. N.p., Summer Web. 12 Mar <
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Nakamura, Peter. "Introduction To Microcredit And Microfinance." LinkedIn SlideShare. N.p., 07 Sept Web. 8 Mar < and-microfinance>.

30. WORKS CITED
"Kiva Zip." Haverford Microfinance Consulting RSS2. N.p., n.d. Web. 8 Mar <
"Microcredit: Effects on Rural Poverty and the Environment." THE STATE OF FOOD AND AGRICULTURE N.p., n.d. Web. 8 Mar <
Staff, Investopedia. "Poverty Trap." Investopedia. N.p., 28 June Web. 8 Mar <
Rosenberg, Richard. "Does Microcredit Really Help Poor People?" CGAP. N.p., 5 Oct Web. 8 Mar <
"What Is Microfinance?" FINCA International. FINCA, n.d. Web. 8 Mar < work/microfinance/>.
Rhyne, Elisabeth. "Why Are Microfinance Interest Rates so High?" The Huffington Post. TheHuffingtonPost.com, 28 May Web. 8 Mar < inte_b_ html>.
FTTheBanker. "Why Microfinance Fails." YouTube. YouTube, 15 July Web. 8 Mar <
Kiva. "Graduating Kiva: How a $5,000 Kiva Loan Helped Victor Gain Financial Independence." Medium. Kiva, 06 May Web. 8 Mar helped-victor-gain-financial-independence-d5036a971b89#.du27fg6ic>.