Christian Microfinance and
Microenterprise Development
Microfinance (MF) and Microenterprise Development (MED) have become popular with those working among the poor in Asia, Africa, and Latin America. In 2006, the Nobel Peace Prize was awarded to Muhammad Yunus, a founder of the MF/MED movement. The MF and MED terms are often used interchangeably by many people. However, they are not the same. So, what is microfinance and what is microenterprise development and how can they be used to help in poverty alleviation?
What is Microfinance?
In countries of Africa, Asia, and South America, the poor have a need for savings, credit, and insurance to enable them to prepare and cope with emergencies, to meet life-cycle needs, or to pursue opportunities to invest in their businesses or a household asset. Unfortunately, they typically do not have access to the formal banking and financial systems. On the savings side, the banks don’t want to handle small amounts of savings even though the poor can and do want to save. On the credit side, the loan sizes for poor people are too small and the poor do not have acceptable collateral, a credit record and income that banks can easily verify. As a result, most banks shy away from lending to poor people and the only option available for many of them is to turn to loan sharks and even (unimaginable in Western financial systems) savings sharks, who typically charge very high interest rates
Microfinance solves these problems by offering people accessible places to save very small amounts of money, sometimes only 10 cents (US) per week. It also offers access to very small loans as low as US $10 when poor families need lump sums of money for emergencies, life-cycle needs, or investment opportunities. Some say that microfinance is “finance for life” rather than a narrow focus only on livelihood. The broader "finance for life" approach is now highly favored by most analysts and investors in microfinance.
Effective microfinance strategies have learned that organizing poor people into groups enables larger savings build-up that all group members can access. The groups also make use of social collateral and peer pressure instead of physical collateral to facilitate the repayment of loans.
What is Microenterprise Development?
In Africa, Asia, and Latin America, poor people have viable business ideas. However, in addition to the lack of access to financial systems as mentioned above, many lack the skills and knowledge to run an profitable business.
Microenterprise development (MED) refers to an economic development strategy that focuses on small businesses. It is more narrow than microfinance, which focuses on broader finance for life. MED utilizes the following two resources: a) the financial tools of microfinance to help fund a business and/or b) non-financial business development services (BDS) that include training in management, accounting, and marketing to help low-income entrepreneurs to start or expand their own businesses. (Additional BDS tools exist but most of these are not appropriate for local churches in Asia, Africa, and Latin America or foreign workers that serve them.)
MED is NOT focused on training missionaries, churches, or ministries to own and operate their own businesses or livelihood projects, although many of the principles and tools would be relevant to these efforts.
What is Business as Missions?
Another major financial approach which uses business in ministry is called “business as missions (BAM).” BAM is typically not considered part of microenterprise development by MF/MED practitioners, even though some in the missions world do consider it a microenterprise development strategy. In BAM, the church, missionary or Christian ministry own and operate the business, often as a means to generate finances for the organization or to provide the foreign worker a legal basis for being in a country.
In contrast, MED is an economic development approach focusing on the poor person owning his or her business. Another distinction is that BAM is not necessarily focused on poverty alleviation whereas microfinance and microenterprise development are focused on helping the poor. Even though the Chalmers Center does not consider BAM to be either MF or MED many of the principles and tools of MF and MED can be relevant to the BAM business effort as well.
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