Written by guest contributor Jennifer Gorton from Forex Traders
The issue of poverty around the world, especially in developing countries where a stable business infrastructure is lacking, has been attacked on several fronts by many international organizations and donor networks for decades. Unfortunately, the recent global recession has caused a slowdown in many of these well-intentioned efforts and spurred debate on which efforts are the most effective and whether priorities going forward should be reallocated.
However, two broad-based initiatives have gained favor and have demonstrated that a combination of strategies, when fine tuned to align with differing social, environmental, cultural, and political factors, may be the most effective means for building a vibrant network of stable business enterprises that serve as a foundation for future growth and investment.
One initiative that has grown dramatically in the past decade has been the strategy to invest in small to medium sized enterprises (SMEs) that are devoted to manufacturing and marketing sustainable products. These products are environmentally friendly, generate benefits for society, and create jobs on a local basis, particularly in low income or poverty stricken areas of the world.
Traditional investors have typically foregone these opportunities due to risk concerns, but efforts by many international non-profit intermediaries are breaking down these barriers and enabling access to vitally needed capital. Entrepreneurs have demonstrated their ability to provide solid returns, and broader applications of this strategy will certainly induce recognition and acceptance as a viable means for establishing a base for future growth.
Perhaps, the broadest based initiative to gain acceptance around the globe, however, has been the microfinance business model. Microfinance embraces the provision of financial services and low-value loans that are typically targeted to low-income individuals. It encompasses loans, savings, insurance, transfer services and other financial products and services that are provided to individuals that normally would not have access to such services. Microfinance represents one of a host of financial tools that have been used to reverse the effects of poverty with some success.
To date, there has not been a coordinated effort to report and measure results in the microfinance arena, but a report was developed in 2004 that highlights the success of alternative financial institutions in the developing world. The report details roughly 665 million client accounts at over 3,000 financial institutions that served a population of consumers generally ignored by traditional commercial banks. India constituted the most concentrated market where nearly 18% of the entire population benefited from the use of this type of loan financing. The lowest concentrations were in Latin America, the Caribbean, and Africa where only 3-4% of the respective national populations had access to these loans.
The current popularity of microfinance is frequently supported by many success stories about people pulling themselves out of the depths of poverty. However, these stories are primarily anecdotal in nature without specifics about broader performance criteria, but a review of many of these stories reveals several common themes. These benefits include the value of being empowered, becoming an entrepreneur, and rewarding individualism through liberal access to micro-loans. These loans are also predominantly made to women, who actively grasp the opportunity to change gender roles in their respective cultures by acting assertively to change their current economic situations.
Current attempts to measure quantitative success as a general strategy have been inconclusive. Microfinance tends to work well when the general economy is growing, and vice-versa. However, these studies have also suggested that widespread use of the strategy should not be used in manufacturing dominated economies. Attempts in these environments would be most effective if limited and concentrated. Large scale microfinance activities are recommended in rural societies and service-based economies where repayment histories and participation rates have been higher.
Microfinance is not without its critics. They claim that microfinance is not the perfect tool for eliminating poverty that proponents insist. They point to the lack of measured results, but research in this area is difficult for a number of reasons. Another criticism is that interest rates tend to be over 22%, and do not include additional costs for support or foreign currency transactions. Entrepreneurs that engage in international trade would be well advised to take a Forex course. Donors also frequently complain that funds are not effectively disbursed due to intermediaries and agents that hang up the process.
At the end of the day, microfinance strategies have demonstrated a level of success when used correctly. It does assist in economic development, but there is no one solution that will work when an economy is in total disarray. Projects designed to attack poverty or build local business infrastructure should evolve after making a case-by-case basis of the prevailing local requirements. A multifaceted approach is recommended using microfinance for budding individual entrepreneurs and specialized SME funding for enterprises with broad based sustainable objectives.