In just 30 years, the microfinance movement has reached 200 million people who had been deemed "unbankable." That's a stunning success. But the narrative that drove this success has implicitly shut the vast majority of the unbanked out of the system. That's why it's time to change the story, and our minds, on how microfinance works.
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The rise of the microfinance industry has been driven by a simple narrative, most closely associated with Muhammad Yunus and the Grameen Bank, joint recipients of the Nobel Peace Prize in 2006: Get capital into the hands of competent but cash-starved entrepreneurs, who would need loans of just a few hundred dollars to start shops and other micro-enterprises. While this sort of lending is more complicated than that, microfinance has certainly worked in the sense that most loans in most countries are repaid on time, most lenders have steadily grown, and most investors have been happy with the results.
By keeping the focus on small businesses, this microfinance narrative keeps us in our comfort zone. We can intuit how small loans can make a big difference for tiny enterprises that would otherwise depend on local loan sharks or never start in the first place. More important, we can imagine how such loans could be repaid with interest, yet still benefit the poor. The problem is, by clinging to this concept, we have kept ourselves from seeing what a more inclusive approach could mean for the world's poor -- and what it is that actually makes the micro-loan model work reasonably well today.
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Consider Selco, an Indian company that sells solar-powered lighting to people unable to connect to the grid, or for whom power outages are way too common. The aim of Harish Hande, the engineer who founded Selco,, was to give households an alternative to expensive, non-renewable power sources.
Customers liked the Selco lanterns, but many balked at the price -- about $140 for the cheapest system. Hande saw that customers would only be interested if they could make payments over time. So Selco built partnerships with banks, and customers can now acquire lanterns and solar panels by taking out loans payable in installments over 3-5 years. Since 1995, about 150,000 customers have received such financing to purchase solar-powered systems. As a result, their children can do their homework at night, the air in their houses is cleaner, and their businesses (if they have them) can stay open later.
A similar story can be told about WaterCredit, a non-profit organization dedicated to financing improvements in household sanitation. To date, WaterCredit has made 65,000+ loans that have brought access to clean water and safe sanitation to close to 400,000 people in India, Bangladesh, Kenya, and Uganda. The loans fund household water and sewerage connections, toilets and pit latrines, tubewells, and rainwater harvesting tanks.
Finance is the key to making Selco and WaterCredit work, but not the sort we associate with microfinance. Rather, it is that most basic of consumer banking services: Loans that break up payments for large purchases into small installments. Indeed, recent studies of microcredit from sites as diverse as Mongolia, Peru, Indonesia, and Bangladesh show that in a substantial proportion of cases, micro-loans are being used to meet goals other than business investment -- health care, school fees, housing improvements, or simply keeping food on the table in periods of financial drought. And while those of us in the banked half of the world take this sort of thing for granted, the lack of reasonably-priced services to smooth out volatile and uncertain household cash flows represents a huge problem for poor households.
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