Executive summary

As women around the world struggle to be on equal footing with their male counterparts, there’s been a rise in the last 50 years of a new financial system — microfinance. Women are the primary recipients of this new form of lending and while it offers incredible growth for women and their communities, policies must consistently reflect the issues present for women when reforming financial systems considering: financial literacy, stability, and maternal responsibilities. 

Overview

A. Summary

Defined as financial services targeting individuals and small businesses who lack access to conventional banking and related services, microfinancing is a primary avenue for small business owners to gain easy access to limited amounts of capital. As these small businesses often don’t have the resources of major institutions, loan access becomes more difficult, and the role of microfinancing increases. Microfinancing is risky for investors because they’re often given to individuals with no collateral, something needed when taking out a loan. Because of this, interest rates are often high but either way, there is a high risk of default when it comes to these smaller, more experimental loans. Microfinancing lends itself to giving people opportunities that can’t be found elsewhere because, without a minimum savings balance, credit score, or collateral, microlending is the only way many small business owners can initially get their business off its feet. 

Coined by Nobel Laureate Muhammad Yunus, microfinancing can help financially marginalized communities and has historically had a great impact on dredging people out of poverty. By offering new opportunities to people who already have unique skills, microfinancing is a chance for entire communities to be uplifted. According to the Aspen Institute, Sahaland has found more than 2,500 craftswomen in Madagascar all presenting marketable skills. Opportunities to provide a second income can lead to increased opportunities for women and their children leading to generations being better educated because there is more money to dedicate towards non-essential (food, water, energy) items. 

This benefit is unique to women because, in many traditional households, their value itself is overlooked. With women typically not having a formal and structured education, they lack many career-requiring skills so their craftsman and artisanship is the first step to their financial freedom. Many times for women, financial freedom can lead to better things for their community and themselves as the business they generate can grow, teaching other women in their community how to generate revenue with those same skills. Additionally, financial freedom is the largest step away from dependency. In almost 70% of relationships, women feel financial and societal pressure in marital relationships to be financially dependent on the man so empowering women is a great way to start. 

Relevance

Despite being 50% of the global population, women own 36% of all businesses in the world making up a huge part of the global economy. The female population is on track to control close to 60% of America’s wealth by 2025 yet, in 2020, female-founded businesses only received 7.4% of venture capital investment. With less money being flooded into female businesses, investors are losing opportunities to capitalize on growing markets like sustainable businesses and those with large social impact, two primary considerations of many female-led businesses. This lack of investment is one of many examples of financial inequality women face around the world. Despite the evolving financial architecture of the world, women on average are paid 24 percent less than men. By setting precedents that it’s okay for a woman to be paid less for the same job, employers globally are perpetuating an economic cycle that puts women last. 

Microfinance plays a large role in holistically addressing that by offering women specific opportunities to hone other skills in non-male-dominated industries. According to the Center for International Private Enterprise, women make up the largest portion of microcredit borrowers. Microloans, as the name indicates, are small sums of money for businesses to capture new capital but there is still range within this. Going from a hundred to a few thousand dollars, microcredit gives opportunities for women to capture their skills and turn them into something that can deeply impact their family and community. With over 90% of female businesses reinvesting portions of their income back into their families and communities, microfinance for women in new environments will lead to generational growth. 

Microfinance and loan policies need to reflect this impactful change that a new generation of women will bring to our global economy. Starting businesses can reduce poverty, decrease the chances of opioid usage, improve health outcomes, and offer a better education for future generations if policies start prioritizing future outcomes and growth over stagnant economies. The International Labor Office in Geneva asserts that money earned by women as a result of microfinance is often put into their children’s education, something low-income families couldn’t afford to do before. Women also have higher repayment rates on these loans compared to men despite having higher interest rates. Not only does this demonstrate women having financial responsibility, but the impact of giving a woman a sum as small as a few hundred dollars. 

In line with the United Nation’s Sustainable Development Goals, gender equity is a priority for the global community along with reducing poverty. By allowing women access to financial resources because of their historical status as less economically fortunate, global investors have the opportunity to aid a thriving community of women that can add more value to the global economy in the long term. 

Current Stances

Microfinance is currently handled by three primary institutional bodies: governments, NGOs, and Microfinance Institutions (MFIs). Generally, the regulations on MFIs coming from the government vary between countries, but similarities can be found. Governments often require microfinance institutions to be licensed and registered to ensure that only legitimate organizations can provide microfinance services. Oftentimes, MFIs are powered by outside investors each investing small sums into MFIs that are distributed to the broader public. Because MFIs are given to communities with less capital, governments take this extra step in regulation to ensure that investors’ money is relatively secure. Additionally, some countries look at tired regulations where based on the size and amount of loans an MFI distributes, regulations can vary. 

Some governments also set interest rate limits. This is a pro-consumer protocol helping recipients of microloans ensure that their interest rates aren’t too high. Interest rates for microloans will still be higher than an average loan, but women have a higher likelihood of paying it back avoiding defaulting on these loans and protecting the investors. However, MFI regulation changes based on its impact on local communities. India, Bangladesh, Kenya, and Mexico have more lax policies on MFIs because of how beneficial they’ve been to marginalized communities like women helping build their greater economy as a country. However, almost every country will require supervisory boards over MFIs because of their experimental nature lending money to those with little to no credit history. 

In the United States, MFIs are certified as Community Development Financial Institutions (CDFIs) by the US Department of the Treasury. These CDFIs provide credit, capital, and financial services. To be a CDFI there are certain requirements such as; only serving low-income communities to maintain this certification. The U.S.  also has Small Business Administration Microloan programs (SBA). The SBA acts as an intermediary providing federal money to non-profit organizations to serve said marginalized communities. The SBA does place interest rate caps and is primarily oriented behind a consumer protection philosophy. Other countries like India where the impact of MFIs is felt strongly by women, operate under a similar ideology but instead of CDFIs India has NBFC-MFIs. Non-banking financial companies that follow interest rate caps, and loan size limits, and must serve communities below a certain threshold. The Indian government has also established the Micro Units Development and Refinance Agency (MUDRA) to refinance MFIs and other small enterprise lending institutions. So, despite the wide disparity in their population’s economy and lifestyle, the US and India have very similar driving ideologies when it comes to microfinance, and their execution varies only slightly in that India has a more formalized microfinance structure, because of its impact and demand from its national population. 

Tried Policy

Historically, the global community has been behind the idea of microfinance starting with pioneers from the 1980s like the Bangladeshi Grameen Bank. Founded by Muhammad Yunus as a means of providing small loans to poor individuals, the Grameen Bank focuses on providing opportunities to women. According to Brittanica Money, over 97% of the Grameen Bank loan recipients have been women, something unprecedented in financial history. The Grameen Bank is one of many MFIs targeting women because the need for women to be financially independent is not only a women’s issue but rather a much broader one impacting the global community. Women make up over 50% of the world’s population yet without proper support, they often won’t actively contribute to countries’ economies. Industry leaders like the Grameen Bank are advocating for women to have the same financial chances as their male counterparts and this has led to tremendous success. 

The Women’s Microfinance Initiative (WMI) is another visionary pioneer in the field of microfinance run 100% by women getting 100% repayment on all distributed loans. WMI focuses on rural areas because that’s where women often need the most help and where traditional aid organizations overlook their needs. According to WMI’s 2023 report, many WMI recipients make a per capita income of less than 1.25 USD per day. Often widows caring for many children that may not be their own, these women have a lot on their plate and the WMI offers that much-needed support in holding them up, allowing them to demonstrate the skills they do have. 

Above is a diagram explaining the goal of WMI and their cycle to ensure repayment of their loans. Because of their group-based approach and emphasis on financial literacy education, we see their outcomes skyrocket with 72% of women reporting that after just 6 months of working with the organization, their family income increased tremendously. Not only does more cash flow increase the standard of living in households, but it also transforms generations of women with more young people inspired to run businesses but now with the resources to do so. 

Policy Problem

A. Stakeholders

Microfinancing directly impacts women in low-income, underserved communities and often we see the highest impact in developing countries. As the primary beneficiaries of these loans, any reform to microfinancing would have the largest impact on their livelihoods. According to NPR, women make up 80% of microloan recipients amounting to $100 billion dollars from major MFIs. This large number indicates the sheer impact that reform to microloan systems would have on women in these communities. 

Reform to microloan systems would also attack participating financial institutions and MFIs around the world. This also includes banks and NGOs that provide microloans. New policies like interest rate caps, implementation of new regulatory bodies, and new policies have dramatically affected the way these financial institutions conduct business and can change the amount of money they can lend to these women. When reforming the microfinance system, it’s extremely important to note their primary interests to ensure it doesn’t conflict with a new policy. 

Governments and Policymakers are the ones often enacting said reform therefore being the driving force behind microloan systems. For federally insured banks and certified MFIs, the government also has a huge responsibility to ensure that quality loaners are lending money to protect consumers. Additionally, the private sector and investors that put money into banks and MFIs have a fairly large stake in this. According to Hsu Ming-Yee, as of November 2007 eighty-five percent of  MFI’s bankroll is by domestic investment and the remaining 15% is from foreign investment. This indicates that those impacted by microloans aren’t just the recipients but a host of individuals and corporations that all have large stakes in microloans reform. 

Risks of Indifference

So what happens if we turn our back on the issues women face when gaining access to financial services? It leads to this cycle of financial inequality continuing to repeat over and over. Often this just leaves women economically dependent and vulnerable. Financial freedom to women is more than just money to many. This money represents freedom from domestically violent households, an education for their children, an education for themselves, and most importantly, an opportunity for them to become educated business owners. 

If investors don’t take a chance on women around the world, they’re missing capitalizing on millions in potential dollars. Microloans are low-risk high-reward investments for investors as women specifically are more likely to repay their loan money and not default on the loans they take out. A few thousand dollars oftentimes isn’t a lot to investors making hundred-thousand-dollar loans, but to the female recipients, their yearly income could just be 1000 USD so a few hundred exponentially transforms their lives. Not only does microfinance benefit investors, but it also benefits national economies. Microloans significantly contribute to economic growth as they support small businesses, the backbone of economies, reducing unemployment rates, growing local economies, and helping to alleviate poverty. By bringing the people around them up with them, women participating in microloan systems deeply impact their communities making it our imperative to not turn our backs on them. 

Microfinance comes in many forms most often in loans (microcredit), but through microinsurance, microsavings, and microbanks. Turning our back on microfinance at all would be stripping individuals of all these other benefits under the umbrella of microfinance. As most MFIs have specific income thresholds their lenders must be under, by taking away all forms of microfinance, we can see these people losing the only form of insurance coverage they can afford perpetuating future health concerns and unintended consequences on spheres outside of the financial. 

C. Nonpartisan Reasoning

In line with traditional Republican values, we see a partisan divide on the issue of economic policies. Favoring the free market, Republicans tend to favor microloans coming from the private sector but support microloans in general because they support entrepreneurship. They are more likely to support microloan programs that aren’t diverting federal money but rather coming from private investors or non-profit organizations. Additionally, when it comes to MFIs, much of the impact is felt outside of the U.S. and as Republicans tend to prioritize domestic issues, other economic assistance would likely be a priority over microloans. But on an international level, Republicans wouldn’t reject microloans because they’re a remarkably politically unattached avenue to spur economic growth without direct government involvement. 

Democrats on the other hand are extremely supportive of microloan programs for women primarily because of driving motivations to address economic inequality, empower marginalized communities, and promote social justice. Democrats would be much more comfortable with direct government involvement in these economic programs favoring economic systems with strong government influences. Democrats also tend to view microloans to the global community as part of a broader agenda of social justice and equity so to them, microloans help level the playing field by addressing systemic inequalities. 

Despite party lines, it’s even more important to note the universal benefits of microloans and why this should not be a partisan issue. Across political spectrums, financially empowered women are beneficial due to their effects on uplifting their communities and future generations. Approaching microfinance from a purely data-driven approach also helps to reduce partisan bias where we see that women do have positive outcomes from financial independence and that it again benefits their communities along with them. 

Policy Options

MFIs have been a historic form of support that is primarily targeted toward women, something many financial support systems don’t do. However, it is important to address the lack of support MFIs offer beyond finances and the opportunity financial institutions have to grow communities even deeper with a few simple steps. 

Primarily, within MFIs reform needs to be seen in encouraging more transparency in leading practices like interest rates and the terms of repayment. Many countries have consumer protections to avoid exploitation but strengthening these regulations to ensure borrowers won’t be forced to default on a loan that is supposed to be helping them. It’s also important to prevent the aura of predatory lending practices often pungent from financial institutions and transparency is one of many ways to directly address that. Additionally, the government plays a role in encouraging MFIs to prioritize long-term growth and empowerment over short-term profit. Whether that means less frequent loan payments or lower interest rates, MFIs should prioritize the growth of consumers because that will bring them and their countries stronger long-term growth. 

The reform, however, doesn’t stop with MFIs. Often in areas MFIs like the WMI reach, rural and less populated, women don’t have quality education let alone financial education. When these MFIs are actively reaching into these communities, it’s also important to implement training programs alongside microcredit to teach financial literacy, savings, and entrepreneurship training. Instead of seeing these women as borrowers, the culture needs to be shifted to seeing them as valuable economic contributors business owners, and economic agents. The highest broad overarching statistic for most developing nations is a 30% financial literacy rate and among women, that rate is even lower. Because these MFIs are already in these communities, it is recommended for them to educate the women they're lending to as it can actually help them get a better return on their investment. 

A way to expedite this process of financial literacy is through technology. These rural communities often lack access to technological resources, but expanding access to digital services can have tremendous effects on security and education. In unsafe and often underserved areas, digital financial services can help reach women faster, but also give them total autonomy over the money loaned to them. However, a drawback to this is that implementing financial systems is incredibly costly and unlike financial literacy programs, has a large cost associated with them so this would come more as a government directive/policy before becoming widely implemented. Long term though, technological access would reduce barriers to access to education and to timely financial services. 

Finally, as most recipients of microfinance systems are women, their needs must be centric in the development of any reform surrounding microfinance. This includes incorporating provisions for maternity leave and many household responsibilities in their lending policies. Starting businesses regardless of financial situation will always be difficult but because the women these loans are going to often aren’t already educated and well versed in this sphere, it’s important that their investors don’t take advantage of their gender and inexperience. It’s also important for these women to have as much support as possible which can be found by partnering with locally based NGOs and governments to have an increased direct impact on the women in these communities. This also helps beat the language and cultural barriers because if MFIs work with preexisting organizations on the ground, it can help women feel more comfortable asking for aid and putting themselves in opportunistic positions. 

Conclusions and Recommendations

Going forward it’s important to see more pilot programs in developing countries taking these considerations into new policy. By emphasizing the need for financial literacy and acknowledging the tremendous gains women bring to local communities, MFI reform aims to shed a brighter light on the ails of struggling businesswomen around the world with specific artisan crafts that can uplift their communities. To provide lasting financial independence, it’s important that MFIs continue to improve and the model itself needs to reform to adjust to women’s needs in the present day. Additionally, it needs to adjust to present-day resources; technology, literacy programs, rural outreach programs, etc.

‍

Acknowledgment

The Institute for Youth in Policy wishes to acknowledge Paul Kramer, Mason Carlisle, Gwen Singer, and other contributors for developing and maintaining the Programming Department within the Institute.

References

1. A Guide to Regulation and Supervision of Microfinance Consensus Guidelines. (2012). https://www.cgap.org/sites/default/files/researches/documents/Consensus-Guideline-A-Guide-to-Regulation-and-Supervision-of-Microfinance-Oct-2012_0.pdf
2. aspen. (2014, May 12). Going Handmade: How Artisan Work Helps Women in Developing Countries. The Aspen Institute. https://www.aspeninstitute.org/blog-posts/going-handmade-how-artisan-work-helps-women-in-developing-countries/
3. Britannica Money. (n.d.). Www.britannica.com. https://www.britannica.com/money/Grameen-Bank
4. Cautero, R. (2022, April 15). Does Microfinance Really Work? The Balance. https://www.thebalancemoney.com/what-is-microfinance-and-how-does-it-work-4165939
5. Female Entrepreneurship Statistics Statistics: Market Data Report 2024. (2024). Worldmetrics.org. https://worldmetrics.org/female-entrepreneurship-statistics/
6. Financing: Why it matters for women and girls. (2023). UN Women – Headquarters. https://www.unwomen.org/en/news/in-focus/financing-for-gender-equality#:~:text=Globally%2C%20women%20on%20average%20are%20paid%2024%20per
7. MFIN INDIA. (n.d.). Mfinindia.org. https://mfinindia.org/
8. Micro-credit loans and skills training create jobs for women heads of families in Siem Reap Province. (n.d.). Retrieved September 12, 2024, from https://www.ilo.org/sites/default/files/wcmsp5/groups/public/@dgreports/@gender/documents/meetingdocument/wcms_091581.pdf
9. Nurith Aizenman. (2016, November). You Asked, We Answer: Can Microloans Lift Women Out Of Poverty? NPR. https://www.npr.org/sections/goatsandsoda/2016/11/01/500093608/you-asked-we-answer-can-tiny-loans-lift-women-out-of-poverty#:~:text=Today%20it%27s%20hard%20to%20overstate%20how%20vast%20the
10. Pouchous, A. (2012). The Regulation and Supervision of Microfinance: Main issues and progress. https://www.iisd.org/system/files/publications/regulation_supervision_microfinance.pdf
11. Renner, B. (2020, February 7). Survey: Many women feel “trapped” in their relationship due to financial dependence. Study Finds. https://studyfinds.org/survey-many-women-feel-trapped-in-their-relationship-due-to-financial-dependence/?nab=0&utm_referrer=https%3A%2F%2Fwww.bing.com%2F
12. Small Business Administration. (2019). Small Business Administration. Small Business Administration. https://www.sba.gov/
13. Team Enrichest. (2023, September 20). Empowering Women Entrepreneurs: How Microloans Drive Gender Equality. Enrichest.com. https://enrichest.com/en/blog/empowering-women-entrepreneurs-how-microloans-drive-gender-equality
14. Thai-Ha, L. (2021). Microfinance and Social Development: A Selective Literature Review. https://www.adb.org/sites/default/files/institutional-document/691951/ado2021bn-microfinance-social-development.pdf
15. Tucker, R. (2021, March 18). The Role of Microcredit Loans in Women’s Economic Empowerment. Center for International Private Enterprise. https://www.cipe.org/blog/2021/03/18/the-role-of-microcredit-loans-in-womens-economic-empowerment/
16. United Nations. (2015). The 17 Sustainable Development Goals. United Nations. https://sdgs.un.org/goals

Women’s Microfinance Initiative | Together Women Rise. (n.d.). https://togetherwomenrise.org/programfactsheets/womens-microfinance-initiat