Micro-Financing and the Economic Health of a Nation

Copyright © 2021 by Bensson V Samuel, MD, PhD, DBA, CHCQM.

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

This is a work of fiction. Names, characters, places and incidents either are the product of the author’s imagination or are used fictitiously, and any resemblance to any actual persons, living or dead, events, or locales is entirely coincidental.

Any people depicted in stock imagery provided by Getty Images are models, and such images are being used for illustrative purposes only.

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Rev. date: 03/01/2021

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CONTENTS

Dedication

About the Author

Preface

Chapter 1 The History Of Micro-Financing

Chapter 2 Current Trends in the Markets

Chapter 3 Current Use Of Micro-Financing

Chapter 4 Micro-financing and Microeconomics Relation to Macroeconomics

Chapter 5 The Impact of Micro-financing and Microeconomics on the Developing Economy

Chapter 6 The Benefits and Lower Risk of Using Micro-financing

Chapter 7 Microfinance and Different Sectors

Chapter 8 Micro-financing and Economic Health of a Country

Chapter 9 Microeconomics and the US Economy

Chapter 10 Micro-financing and the COVID-19 Pandemic

DEDICATION

To my wife Magdalena Samuel and my children

Jovan, Kailah, Rayna and Hansen.

Thank you for believing in my dreams when I did

not have the strength to believe in myself.

-To light the fire in a curious heart,

To help them make a change,

To live their lives anything but ordinary

ABOUT THE AUTHOR

About Dr.Samuel

Education:

Bachelors of Science: University of Connecticut

Doctor of Medicine-Poznan University of Medical Science.

Post Graduate Diploma: Queen Mary University, London, UK

Oxford University- Professional Diploma in Executive Leadership

MBA-Anglican Ruskin University, Cambridge UK

DBA- Ofqual- UK Government Degree conferred

PhD-Health Care Management-Pan American University

PhD-Strategic Management and Leadership –London School of International Business- Ofqual- UK Government Degree conferred

Nominations:

FABIC School of Medicine- Professor of Medicine

FACMED School of Medicine- Professor of Medicine

Unilogos University- Chancellor

National Small Business Association-Leadership Council

Council of Economic Advisers-Member -2019-2020

Central Michigan University- Adjunct Faculty of Health Science

Charted Managers Institute, UK-Fellow

Board Certifications:

American Board of Internal Medicine- Diplomate

American Board of Physician Specialties- Diplomate

American Board of Quality Assurance and Utilization Review- Diplomate

United Council of Neurological Subspecialties-Board Eligible

Other Certifications:

National Rural Health Association – CEO certification 2020 Cohort

Certified Physician Executive- May 2021 Cohort

National Board of Quality Assurance and Utilization Review Physicians-Diplomate

Certified Professional Medical Services Management-CPMSM (May 2021)

FACHE- Fellow of American College of Health Care Executives (May 2021)

US Government Commissions:

US Army Central Command-Army Major, 256th Combat Support Hospital

Other Affiliation’s:

United Nations-Ambassador of peace/Refugee partnership

PREFACE

The lives of poor people are complex; equally varied are the goods, services, and facilities they need to escape from poverty and the means by which they get them. One-size-fits-all cures are a delusion. As development policymakers, scholars, and practitioners in all fields, our task is to recognize and react to this complexity in ways that help create diverse, sustainable socio-economic structures that can serve the needs of the poor, sustainably and on a large scale, in finance, agriculture, health or education.

The microfinance field now represents the multidisciplinary intersection of finance, technology, and growth, where new ideas transform the art of what is possible. The actors represent this complex environment that involves everything from mobile providers to community networks to microfinance institutions. This book has introduced an incredible collection of specialists in the field to a rapidly evolving area of practice.

The main objective of this book is to provide the basic and important information required for individuals interested in the field of microfinance in various ways and for those operating and managing microfinance institutions (MFIs), bankers, university lecturers, students, investors, professionals, and development practitioners in this field.

In addition to offering financial services, the idea of microfinance ultimately entails ethical and moral values and social responsibility to eradicate worldwide poverty as a noble goal. The initial microfinance policy was non-profit-oriented and predicted that poverty would be reduced. Due to globalization, the popularity of the idea, and business completion, more and more financial intermediaries are joining the microfinance field today.

CHAPTER 1

THE HISTORY OF MICRO-FINANCING

Microfinance, or the provision of small loans to the economically disadvantaged to raise them out of poverty, is a key poverty reduction strategy that has expanded rapidly and globally over the last 20 years and is currently operating in more than 60 countries. ¹ Microfinance encourages entrepreneurship, increases income-generating activity; thereby reducing poverty, empowers poor people (especially women in developing countries), increases access to health and education, and builds social capital among poor and vulnerable communities. ² Studies of market-based poverty alleviation initiatives are now gaining significant popularity in the management literature, where scholars have developed concepts such as ‘base-of-pyramid’ and ‘creating mutual value’ to address what companies can do to alleviate poverty and enhance social welfare. ³

Poverty is a large business. Even in the U.S., one of the wealthiest countries in the world, the poverty industry is worth about $33 billion a year, which includes payday loan centers, pawnshops, credit card firms, and microfinance providers that produce revenue from the poorer population segments. ⁴ Millions of people continue to face crushing poverty between the so-called emerging and least developed countries. The first of seventeen Sustainable Development Goals set by the United Nations is ‘Ending poverty in all its forms everywhere.’ In absolute terms, between 1.2 and 1.5 billion people are still living in severe poverty and 162 million children are still suffering from chronic under-nutrition at the global level, a figure that the UN finds ‘unacceptable.’ ⁵

Microfinance is not a new concept. It dates back to the 19th century when money lenders played the function of now formal financial institutions informally. Over the past two decades, policymakers, international development agencies, non-governmental organizations, and others have developed numerous development strategies aimed at reducing poverty in developing countries. One of those approaches, which have become increasingly common since the early 1990s, includes microfinance schemes that provide financial services to the working poor in the form of savings and credit opportunities.

While the word finance is in the term microfinance, and the core elements of microfinance are those of financial discipline, microfinance has yet to enter into the literature of mainstream or entrepreneurial finance. In 2007, more than 33 million lenders and 48 million savers served in the microfinance industry. Statistics presented by Unitus, a global poverty-fighting group, indicate that 80 percent of the potential market has not yet been reached.

Poor citizens all over the world are excluded from formal financial structures. Exclusion varies from partial exclusion in developed countries to complete or almost total exclusion in less developed countries (LDCs). The poor have formed a wide variety of informal, community-based financial systems to meet their financial needs in the absence of access to formal financial services. In addition, a growing number of formal sector organizations (non-governmental, government, and private) have been established. Microfinance is the term that has generally come to refer to such informal and formal arrangements that offer financial services to the poor.

With the advent of structured financial structures, microfinance has existed, but often in the shadows and unnoticed by casual observers, and indeed possibly predates them. Nevertheless, it was only during the last four decades that significant global attempts were made to formalize the provision of financial services to the poor. This cycle started earnestly in the early to mid-1980s and has gathered a remarkable momentum ever since. Today, thousands of MFIs offer financial services to the world’s poor, estimated at 100-200 million. ⁶ What started out as a grass-roots movement inspired primarily by a paradigm of growth is transforming into a global industry increasingly driven by a commercial/finance paradigm.

The rise of the microfinance industry reflects a remarkable achievement taken in the sense of history. It has overturned existing ideas of the poor as users of financial services, shattered perceptions of the poor as not bankable, spawned a range of lending methodologies demonstrating the feasibility of providing the poor with cost-effective financial services, and mobilized millions of dollars of private investment for the poor. ⁷ This also needs to be emphasized that poverty alleviation was the animating force behind the microfinance movement. Not only that, but microfinance offered the opportunity to reduce poverty while paying for itself, and maybe even making a profit—doing well by doing well. This opportunity, perhaps more than anything else, accounts for the rise of microfinance on the global stage.

Scholarly interest in microfinance has lagged behind the growth of the industry, but it is now increasingly growing too. Until 1997, academic journals published only an occasional paper on microfinance, but hundreds of peer-reviewed papers on the topic have been published by academic journals since. But microfinance has yet to enter into financial newspapers. The word finance in microfinance proves that the basic products provided by microfinance institutions (MFIs)—investing (savings), lending (credit services), and insurance (risk management)—are all well-established conventional finance research topics.

History of Micro-finance

The concept behind microfinance and its goals aren’t new. Tiny informal savings and credit networks have functioned around the world for decades. Since the early nineties, emphasis began to go deep and broaden the definition to the more expansive framework of microfinance beyond the reasonably narrow practice of microenterprise credit. This came primarily in response to the changes in paradigms and policies of growth and the demands for a participatory, human-centered, motivating approach.

The idea of microfinance, therefore, seeks to reach the poor, the disadvantaged and financially excluded groups and financial services geared towards mainstream growth to replace subsidized credit and donations. Within this context, the growth and development of the idea of microfinance have passed through several stages and processes involving a variety of stakeholders, including governments, UN agencies, NGOs, CBOs, the U.S. The aim has always been to motivate the poor to sustain a decent living, and to escape from the pit of poverty. Microfinance is now seen as a significant resource for poverty reduction and a pivotal contributor to achieving the Millennium Development Goals (MDGs), particularly MDG1 on poverty alleviation. Microfinance is now growing into an industry to which the governments and civil society are showing tremendous commitment.

Microfinance involves offering financial services and goods to underprivileged communities excluded from the conventional banking system. It all began gradually in Bangladesh, in Jobra village, before it was turned into the global economic operation it has become today. Below is the system’s remarkable history, which, in the words of its originator Muhammad Yunus, liberates the aspirations of the people and helps the poorest of the poor gain dignity.

Microcredit: Fostering Entrepreneurship

to Combat Poverty

Many facets of modern society trace their origins back through history, and no exception is microfinance. Mechanisms have existed for thousands of years in Asia for providing loans to destitute communities in different ways. In Europe, during the 15th century, Franciscan monks founded the Mounts of Piety to reintegrate the most impoverished communities into community life. In 1879 the first savings and loan cooperative opened in Germany’s Rhineland, nearer to our day. As the first financial mutualistic institution, it mainly served working communities by giving them access to credit. In the 20th century, the same mutualism idea would continue to flourish in Europe.

Yet those models of financial inclusion proved inadequate to stop the tide of poverty in what was then known in 1970 as the Third World. Modern microfinance thus originated in one of the developing countries in the world: Bangladesh. Muhammad Yunus, a professor of economics, came to a startling remark: the free market had failed to prevent famine from ravaging his land. The effort to counter poverty, including assistance and subsidies, was unable to achieve its goal, and the financial system was unable to cater to these deprived communities.

Yunus agreed to lend a personal loan to a group of 42 women in the village of Jobra to help them start a company. And it worked: these female bamboo stool makers took advantage of the loan to maximize their productivity before repaying the amount in full. The act laid down the basic principles of modern microfinance: reducing poverty through microcredit and serving women, especially in developing countries.

What occurred may have remained an isolated occurrence in Jobra. Yet Muhammad Yunus has been eager to recreate the first experience of microcredit elsewhere. He has decided to