AUSTIN, Texas — The world’s most impoverished often faces barriers within the economy. This is because many low-income people lack access to a bank account and do not qualify for traditional loans. Microfinance aims to combat financial exclusion by helping low-income individuals start businesses and invest in the future. Furthermore, mobile money allows people with mobile phones to make transactions even in remote areas. While both have drawbacks, microfinance and mobile money hold the potential to help vulnerable people achieve financial resilience.
Financial Exclusion and the Unbanked
Microfinancing and mobile money aim to address financial exclusion, a major contributor to poverty. According to the World Bank, in 2017, 1.7 billion people lacked a bank account. It is difficult for these people to manage their income, which may be irregular. Saving for future expenses is also especially challenging. Because they must store and carry physical cash, unbanked individuals are “vulnerable to theft” and misplacing their money.
Furthermore, traditional banks are unlikely to grant loans to individuals living in poverty because they are considered a financial risk and usually have no credit history. Because of this, if low-income people need money to purchase farm equipment or to start a business, their options are limited. They either have to borrow from friends, family or loan sharks who charge high interest, trapping borrowers in massive debt.
Defining Microfinance and Mobile Money
Microfinance encompasses “microloans” as well as insurance plans and savings accounts, for low-income people or groups. People usually use microloans to start or manage small businesses. According to the 2019 Microfinance Barometer, in 2018 alone, microfinance benefitted about 140 million people. The majority of these borrowers were women (80%) and people in rural areas (65%).
Mobile money allows people to transfer, withdraw and deposit money directly from their phones. This is helpful because this flexibility allows the unbanked to more easily and securely manage their money. Mobile money is also helpful for working people who send money to relatives in rural areas. It also comes in handy in emergencies when people need quick money transfers.
According to a Bill and Melinda Gates Foundation research brief, about 300 million people worldwide use mobile money, more than half of whom reside in sub-Saharan Africa. Mobile money platforms include:
- M-Pesa (Kenya)
- mKesh (Mozambique)
- bKash (Bangladesh)
- Airtel (Uganda, Malawi, Niger)
The effects of mobile money are largely positive. One study demonstrates that mobile money “reduced the extreme poverty index by 42%” in Bangladesh. Mobile money also “increased food security by 45% for households” located far from a bank in Northern Uganda. Other studies suggest mobile money can help unbanked families purchase necessary goods during unexpected hardship.
While both microfinance and mobile money have benefitted some, neither platform goes uncriticized. Some believe microfinance, especially in the form of microloans, exploits the impoverished. In the early 2000s, Mexico’s for-profit microfinance company Compartamos Banco drew criticism for charging annual interest rates at nearly 90%. Additionally, some studies suggest that microfinance keeps people in a dependency cycle because it does not significantly increase profit.
Some critics claim that while mobile money has met success in countries like Kenya, barriers remain for certain populations. For example, in Ghana and the Philippines, social class stereotypes prevent low-income people from using mobile money. Furthermore, globally, “women are 36% less likely than men to have a mobile money account.”
Critics of both microfinance and mobile money argue that due to their flaws and limited reach, neither should be a replacement for systemic solutions to poverty. Instead, critics advocate for government-led social programs and nationwide economic development.
Neither microfinance nor mobile money is an all-encompassing cure for poverty. However, both my help low-income individuals in other ways, especially during disasters.
Since people in developing countries are especially susceptible to the effects of environmental challenges, microfinance institutions also have the potential to help vulnerable communities withstand environmental disasters. Microfinance institutions are equipped to invest in resources that will withstand floods, droughts or rising sea levels. About one-fourth of microfinance investment vehicles (MVIs) already offer loans for green products, such as solar panels, to incentivize sustainability.
While microfinance does not appear to have significantly increased profits for the unbanked, some studies suggest that loans have been helpful for non-business needs, such as emergency savings or house repairs.
Likewise, mobile money has been helpful for some during the COVID-19 pandemic. Mobile money allowed people to exchange money through a single human agent as opposed to going to a bank full of people, which lessened physical contact. Additionally, unlike banks, agents are typically located throughout rural areas. This allowed people to manage their finances without having to travel far, which was beneficial during government-issued travel restrictions.
Neither microfinance nor mobile money can singlehandedly end poverty. Nevertheless, both provide benefits to the unbanked and have the potential to help people during unexpected hardship. Hopefully, with further research and increased accountability, both microfinance and mobile money will continue to combat financial exclusion.
– Annie Prafcke