In honor of RVL’s focus on Microfinance last week and tonight’s big Greendrinks event featuring Oikocredit, I’ve decided to put my Lululemon topic off until next Tuesday in order to touch on the role community plays in microfinance.

I first heard about microfinance, microlending, microcredit (however you want to term it) from the master of microfinance himself: Muhammad Yunus. Yunus was giving a guest lecture to myself and a bunch of other university students at the University of British Columbia. He was definitely an inspiring figure, and the way he spoke about microfinance…well, he made it sound like microfinance efforts could be the golden ticket to a world without poverty.

But what is it that makes microfinance so successful? Why does microfinance seem to work where other development policies have failed?

I would argue it’s because microfinancing incorporates elements of community into its model and for that reason, it has become one of the most popular trends in poverty reduction of our time.

Three Ways Microfinancing Incorporates Community

#1 Peer Pressure to Ensure Payback

In the case of Yunus’s Grameen Bank, money wasn’t lent to isolated individuals. Instead, the bank lent to groups of Bangladeshis who then served as co-guarantors of each other’s loans.

In other words, a community of individuals took out loans from the Grameen bank, distributed the funds amongst themselves, and then ensured that all the funds were paid back in full. They used peer pressure.

I remember Yunus outlining this specific feature in his talk. If one of the women borrowers was behind on their payments, the rest of the group of borrowers would almost shun them. It was repay the money or risk disconnect from a community.

#2 Community-Based Development vs. Top-Down Development

Microfinance is very much a community-based approach to development. Money is lent to needy individuals or groups, and then it is those individuals and groups who decide where the money will be best invested. The part that matters is that the communities who borrow money have both the incentive and the insider know-how to guarantee that the money will be used wisely.

This is in contrast to the top-down approach where wealthier nations swoop into an impoverished village somewhere and start throwing money at poverty claiming all the while to know how best to ‘develop’ that village.

This approach is wasteful and simply does not work. I remember reading in university about one seriously misguided non-governmental organization who thought impoverished females would be best served by charitable gifts of high heels. Money that could have been put to good use in the hands of a community was thrown away to purchase high heels!

Obviously, community involvement is necessary for community development. There are countless examples of successful efforts towards poverty reduction that have centered around community involvement. I myself witnessed the staying power of a community-based initiative in Nepal in the form of a community hospital. Of the numerous hospitals I visited in Nepal on a public health internship, it was the community hospital that most impressed me with its technology, cleanliness, and procedures.

The fact that the microfinance model fully embraces community empowerment is partly the key to its success.

#3 Lending Lenders a Sense of Community

With the increased use of the internet, microcredit has found itself an increasingly  secure niches among lenders. The internet has allowed microcredit organizations to create community for lenders online.

The first microcredit organization to really tap into social media was Kiva. Kiva allowed lenders to go onto the Kiva website, search and read the stories of people in need of loans, and then select which individual they wanted to send their loan to.

Kiva provided a direct connection between lenders and borrowers.  Lenders suddenly felt they were a part of a community of other lenders in support of a common cause: the needy person they were investing in.

As it turns out, Kiva does not actually connect its lenders directly with borrowers. See New York Times’ article “Confusion Over Where Money Lent Via Kiva Goes” for more information on this Kiva’s lending practices.

The point is that Kiva discovered how to create an online community for lenders and thereby compel them to give more loans to impoverished people across the globe. The potential for further development of this concept is incredible.

Empowering Individuals and Communities

It will be interesting to see where microfinance goes in the future in terms of helping alleviate poverty. Of course, microfinance can’t be the one and only golden ticket for ending poverty altogether; poverty is much too complicated of a problem for to be solved so easily. However, microfinance does currently represent one of the best opportunities for your average, every-day person to contribute to the global battle against poverty. It empowers individuals and communities to take the problem of poverty into their own hands and actively do something about it. And out of the many different ideas around development, microfinance definitely had my vote as one of the most effective methods available!

If you want to find out more about microfinance and if you happen to live in Seattle, this Tuesday night (January 12th) is your chance! RVL, in partnership with microfinance organization Oikocredit USA, will be hosting a Greendrinks event for your socializing and green-organizing pleasure.

And as promised, up next week: Lululemon: Cultevating Community or Cultivating Cult?

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• This Week in Education: Microfinance
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