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Abstract
This literature review contains two parts. Part 1 describes microfinance, the broad types of
microfinance institutions that exist, and briefly touch on the reasons microfinance organizations
kick start. Part 2 aims at aiding a microfinance organization with deciding between which
location to create or extend its organization. Due to the advising direction of the CEO of a
successful Minnesota microfinance organization, the literature review focuses on market
segment, market niche, or targeted clients research, along with their corresponding obstacles.
The thought is those making the strategic microfinance location decisions can gauge and
compare the location’s available resources and characteristics with the research data listed.
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Table of Contents
Abstract ...............................................................................................................................2
Introduction ........................................................................................................................4
Part 1 – What is Microfinance? ........................................................................................4
Introduction to Microfinance ...........................................................................................4
The Multiple Categories of Microfinance ........................................................................5
Why are Microfinance Organizations Created? ...............................................................6
Part 2 – Who do Microfinance Organizations Target? ..................................................7
Microfinance Organization Clients ..................................................................................7
The Poor: Targeting Poor People is not as Simple as it Sounds .......................................7
Women ............................................................................................................................10
The Youth: Specifically College Students ...................................................................... 11
Muhamad Yunus’ Presence in the U.S. ..........................................................................14
Research Limitations .......................................................................................................14
Conclusion ........................................................................................................................14
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Introduction
Microfinance, or lending to small businesses, has been helping entrepreneurial mindsets
globally since the 1980s. Although given mixed reviews by media, microfinance has a strong
footing, as more and more funders become convinced of its benefits (Yunus, 2003). According
to employees of a successful microfinance organization in Minnesota, anyone on the path of
emulating a successful microfinance organization in a U.S. state is advised to be clear on
successfully targeted clients in the field and the underlying obstacles. This market niche data can
help gauge the optimal location and gleam the effort required to move forward with the creation
or expansion of a microfinance cause or organization. This literature review introduces
microfinance, then attempts to support the expansion of microfinance by providing details on
three common market niches with their accompanying nuances.
Part 1 – What is Microfinance?
Introduction to Microfinance
Microfinance was founded by Muhamad Yunus (2003), the head professor of Rural
Economics Program at the University of Chittagong, with a $25 loan experiment. Yunus (2003)
used the fexperiment to show that individuals deemed too poor for traditional bank loans (also
referred to as unbanked) can be successful lending clients. He was right. Yunus’ company,
Grameen Bank, boasts of over 90% loan recovery rate, the rate in which the borrowed money is
repaid (2003). Since then, hundreds of organizations, across multiple countries, have extended
or changed Yunus’ model to provide loans to the poor and small businesses.
Yunus (2003) has remained a vocal proponent of microfinance and does not necessarily
accept all of the other organizations as equal to his own. He has publicly denounced some public
microfinance organizations, such as The World Bank, as wastefully using the donations on travel
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or employee administrative details rather than purely on the clients. Mohamad Yunus’ loan
providing institution included an activity called group lending where a group of borrowers were
brought together to keep all members honest during loan recovery. Yunus’ institution also
provided other activities to instill and create business-minded networks in the impoverished area.
He denounces organizations who do not provide social and human capital aids, such as group
lending. He does not feel that organizations that purely provide financial aid are effectively
helping clients (Yunus, 2003). However, some organizations prefer individual loans because
they are easier to update the life cycle, and amount, based on specific emergencies that come up
for the client (Frankiewicz, Churchill, & International Labour, 2011). Regardless of his approval
or lack thereof, to date more than 10,000 microfinance organizations exist worldwide
(Armstrong, Ahsan, & Sundaramurthy, 2018). The monetary amount that microfinance
organizations lend depends on the country. Some sources state that a country is deemed a micro
lender if the formal loan amount provided equals less than 2.5 percent of the country’s GDP
(Chiu, T., 2017).
The Multiple Categories of Microfinance
Although the main goal is to reach out to the unbanked, microfinance institutions fall
within multiple categories. Overall, “microfinance institutions are comprised of a range of
institutions, such as cooperatives and banks, NGOs, public-private partnerships, for-profit
institutions, and government entities that vary in size, product offerings, and profit goals”
(Armstrong, Ahsan, & Sundaramurthy, 2018, p. 147). Specifically, three types of microfinance
institutions, thus far, exist.
The first and one lowest in the process is labeled the interactor (Armstrong, Ahsan, &
Sundaramurthy, 2018). Similar to Yunus’ group, this microfinance organization knows the
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culture of its borrowing client and works very closely with them to supply their exact
microfinance needs and incorporate their intricacies to ensure repayment. Since they work
closely with the clients, interactors tend to expand their roles to training the group or helping to
build their self-esteem, health, literacy as well as other positively building activities that the
group needs, such as Yunus’ group lending (Armstrong, Ahsan, & Sundaramurthy; Yunus,
2003). Interactors also provide client data to the other two groups, since they are the most
intimate and knowledgeable.
The second and middle group (in proximity to the clients) is the connector (Armstrong,
Ahsan, & Sundaramurthy, 2018). These organizations simply exist to connect small businesses
or borrowers (such as interactors) to financial firms, donors, or funders. These groups focus on
leveraging their financial knowledge and vocabulary to educate and raise awareness on behalf of
the clients and borrowers. They list the borrowers and categorize them (such as green, startup,
fair trade borrowers) so that funders can donate to their specific values, as desired (Armstrong,
Ahsan, & Sundaramurthy). They also vet borrowers, validate the quality of their work/outreach,
and attempt to keep up-to-date information on them (Armstrong, Ahsan, & Sundaramurthy).
The last, and highest, group is the institutionalizers (Armstrong, Ahsan, & Sundaramurthy,
2018). These are the financial institutions who funnel resources into the other two groups to
support the cause. Due to their breadth and high distance from the clients, institutionalizers
receive a lot of data from various sources within the two other groups, rather than sharing close
interactions with the end clients (Armstrong, Ahsan, & Sundaramurthy). They, therefore, have
the distinct ability to share best practices and new innovations across all microfinance
institutions as well as embodying trust in the microfinance ecosystem overall.
Why are Microfinance Organizations Created?
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Reasons for helping the poor or small businesses vary. Just like Yunus, some organizations
are called by the noble deed of helping these misfortune clients obtain a better life. Some
organizations join the space following their peers or competitors’ actions (Chiu, T., 2017).
However, other organizations are nudged by local laws or peer pressure from associations to help
(Chiu, T., 2017). Even certain organizations, typically international ones, leverage these works
as ways to join impoverished international markets and gain an avenue to learn from them by
performing small culture studies (Chiu, T., 2017).
Part 2 – Who do Microfinance Organizations Target?
Microfinance Organization Clients
During interviews of the CEO and other staff of a long-standing and successful
microfinance organization in Minnesota, there was a strong emphasis that in order for a new or
extending microfinance organization to be successful, it must clearly dictate the specific market
niche that it serves. Sources actually advise microfinance organizations to find specific
marginalized groups within the poor because it allows the organization to tailor help to that
specific group and differentiates the organization from others, increasing its chances of getting
donations (Frankiewicz, Churchill, & International Labour, 2011). It is important to figure out
the causes of microfinance success and sustainability because some sources cite that only 1% of
microfinance organizations have been sustainable, with other sources claiming up to 30%
success (Richardson, M., 2008). Therefore, significant readings and research are conducted to
flesh out whom has successful microfinance organizations historically served. The research
shows a varying list of individuals that fall in the three categories of the poor, women, and the
youth.
The Poor: Targeting Poor People is not as Simple as it Sounds
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Although it seems obvious for new or expanding organizations to target the poor, there are
specific characteristics that microfinance organizations look for within this group. In 2005,
Grameen Bank defined 10 proxies to gauge an individual’s poverty (Frankiewicz, Churchill, &
International Labour, 2011). The proxies included number of kids in the household who
attended school, the quality of the household’s drinking water, the household’s ownership of
appliances, land ownership, number of adults living in the household with salaries, type of
transportation available to the household, and so on (Frankiewicz, Churchill, & International
Labour, 2011). Grameen’s poverty metric and any metric is heavily based on the country and
culture’s definition and perception of poverty. For help with defining poverty for a particular
country and culture, sources advise to include varying types of the country/culture’s experts,
such as academics, workers, NGOs, community groups, and employer associations (Frankiewicz,
Churchill, & International Labour, 2011).
But in general, the poor target market are those who require small amounts of money, again
skewed towards how the country defines small. The clients are targeted because traditional
financial firms deem these borrowers too expensive or too time consuming to lend to (Yunus,
M., 2003). To find these individuals, often discriminated against by society’s norm, reduced
self-esteem from financial and social strife, and at times heavily-relied on non-needed
expenditures (alcohol), traditional financial firms may need to add relationship-building
resources, time, or processes not required for higher-incomed clients. Since these individuals do
not have the means, in some instances, it is up to the financial firms to find these individuals
rather than the individuals to seek the financial firms themselves. Further complication,
depending on the country, is location, where small chunks of poor people are scattered location
wise, instead of all being conveniently centrally located (Yunus). Other complications are that
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once the poor receive micro-lending help, they are sometimes declined much-needed government
assistance or charity based assistance (Yunus), putting them in more financial risk than they were
before.
Characteristics of the targeted poor people tend to include people with a lack of skills,
opportunities, or influence over their own financial well-being. Specifically, those with no or
little credit history, a lack of data for proper financial risk assessment, an no property or assets to
be used as collateral. Those who are from a crisis-affected community, are in households with
low food intake, are in households built with poor materials or roof, in households where the
main male is disabled or unable to work. Also those who do not trust traditional financial firms
or do not know how to use the standard financial system fall in the category (Frankiewicz,
Churchill, & International Labour, 2011; Leong, C., Tan, B., Xiao, X., Tan, F. C., & Sun, Y.,
2017). Specifically in the U.S., it has been cited that foreign-born individuals living tend to not
trust financial firms (The Foreign Born Population in the US). Therefore culture and country
based generalizations such as these are required to find the groups that fit the behavioral with
little physical indicatio. The organizations that focus on the poor are advised to have cheap and
visually observable tools to target these individuals. The reason is if targeting these individuals
cost money, then these organizations are not getting as much return on their, already limited,
donations as they could (Frankiewicz, Churchill, & International Labour, 2011).
Some microfinance organizations have targeted groups that are even more marginalized
than the poor, such as the ultra-poor (those whose basic needs such as nutrition are not met), the
disabled, individuals living with HIV/AIDs, and individuals thrust into forced labor. As can be
imagined, targeting these groups bring even additional resources, tactful strategy, country and
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cultural based intelligence, and challenges than what has been listed above for the poor
(Frankiewicz, Churchill, & International Labour, 2011).
Women
For multiple reasons, women are cited as a good group to target as a microfinance firm.
Although Muhammad Yunus’ organization did not start out by targeting women, overtime, they
noticed that their female lenders more successfully repaid their loans than their male
counterparts, and so they started focusing women as a market niche (Armendariz, B. & Morduch,
J., 2010; Yunus, M., 2003). Some sources mention their behavior patterns; that women are less
overall less mobile than men, so they cannot easily disappear to get rid of outstanding debt
(Frankiewicz, Churchill, & International Labour, 2011). They have less access to credit than
men and face more restrictions unique to their gender (Frankiewicz, Churchill, & International
Labour, 2011). They are fifty percent of the world’s population, which easily makes them one of
the world’s largest market niche.
The reason is, although that are not the only roles that women play, they majorly are the
“child-bearers and…caretakers in most societies” (Frankiewicz, Churchill, & International
Labour, 2011, p. 333). Women own one percent of the world’s property such as land title and
household assets. They earn less income, are less educated and have less time to devote
enterprise activities. It, therefore, takes them more time to accumulate wealth. They have
restricted mobility due to certain religions, even restricting their ability to network or negotiate in
business settings. They do not have the same rights as men due to certain cultures and have
more amount of physiological vulnerability, which greatly reduces their bargaining power.
Sometimes, giving women access to microloans puts them at risk to being pressured by the men
in their family to take out loans on their mens’ behalf. Or in some instances, men, due to
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paranoia, tended to overestimate the amount of money that women were getting through the
loans and purposely retributed by contributing less to the household.
Microfinance organizations combat challenges that women face with the following. In
cultures where men become suspicious of women’s lack of time or increased funds, they invite
men to also take out loans as well, that way the men have an accurate grasp of the work and
money that women are getting. The organizations allow women to provide more flexible items
as collateral, such as jewelry or household items, since women only own 1% of property
worldwide (Frankiewicz, Churchill, & International Labour, 2011). The organizations update
the repayment cycle to match the women’s trades, so that they do not have to sacrifice their
mother and wife responsibilities on behalf of the loan. They provide women training to enter
businesses that are traditionally seen as men owned or provide training to increase women’s self-
esteem and confidence. They also supplement the loans with emergency loans or insurance to
prevent them women from using the loans strictly deemed for business to cover emergency or
crisis related issues within the household. Or they offer short-term time deposits, that, let us say,
mimicking crop cycles, where women can take profits and save them over the span of low-crop
yielding months. The organizations provide money transfer to the women, sometimes directly to
their phones, so that not to take them away from their homes and make it convenient for them to
receive their money, without having to unsafely walk the same locations that the male
counterparts do.
The Youth: Specifically College Students
Some statistics on why the youth, although not apparent at first, is a viable microfinance
client. First, in the U.S., 80% of credit invisibles fall within 18 and 19 years old while 40% fall
within 20 and 24 years old (Holland, K., 2015). Some researchers, such as John Ulzheimer,
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president of Consumer Education at Credit Sesame, identified that the Credit Card
Accountability, Responsibility and Disclosure Act of 2009 contributed to the lack of a credit
profile for young people entering the credit world. The Act mandated that, to get a credit card,
people under 21 were required to obtain a cosigner or prove they had an independent income.
(Kelley, Holland). Second, “compared to adults, the youth are three times as likely to be
unemployed” (Frankiewicz, Churchill, & International Labour, 2011, p. 307). Third, some
countries have laws with age limits on when a youth can open their own savings accounts or
when they microfinance organizations can legally start working with them.
Regardless of the obstacles, the youth are viable microfinance clients. They are typically
provided four types of aid in addition to financial aid, financial education, business development
services, mentoring, and the creation of safe spaces (Frankiewicz, Churchill, & International
Labour, 2011). And even though there are some additional risk that comes to lending to youth
than to adults, organizations have found a variety of ways to appease these risks. Organizations
have given them loans in second year of high school based on first year attendance, have only
provided business loan to kids took business plan training. Also facing the same risk that women
do, loans are strategically to be priced as the same price as adults to reduce the risk of adults
borrowing through youth in order to get better pricing. Organizations have had to gain the trust
and buy in of the community so that there is little doubt that the organization has the youth’s best
interest and this also help safeguard the kids from being misused as financial pawns by family
members. Organizations have had to employ staff, even young people, that have a skill and
excitement to work with the youth and can advocate for them rather than taking the easier route
of recycling staff who are used to adult clients. Similarly, organizations have found that
leveraging processes used for adult micro-lending has not worked for youth. Organizations have
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had to develop a clear code of conduct between all adults that interact with the youth since they
can be more vulnerable to authority figures. Organizations have created partnerships by
interacting with organizations that are already working with youth. Organizations have had to
involve the teachers or schools to increase financial education for the youth. Organizations have
leaned on marketing to create a tag line, logo, or brand that the youth would find catchy,
attractive and fun. Below is a specific example of an organization, 007fenqi, who targets college
students and their ways of supporting them.
In China, 007fenqi is one of the top five companies that focus on college students. School
purchases, for these limited-wealth students, such as laptops are seen as necessities and not as
luxuries, to complete their education. One reason cited for focusing on this group is even though
these kids lack wealth, they still receive or generate a stipend to motivate them to their successful
graduation. Due to 2015/2016 public news of a student committing suicide for owing money,
007fenqi collaborates with nearby hospitality other applicable organizations to more easily
facilitate part-time jobs for their clients. 007fenqi also expanded by helping its clients to
knowledgeably invest in the markets. To obtain their success, 007fenqi created their own in-
house risk assessment process and tool (that includes more than 500 data points) and deliberately
built business strategies by leveraging gray-area legislations caused by the availability of new
technologies. Another factor of their success is the students buy laptops and other required items
via the 007fenqi website, therefore 007fenqi has buying history data of its customers that borrow
their loans. Also, the profits from the website can financially back the loan if they default.
Another reason for their success is 007fenqi do not lose their clients after they graduate, if their
clients become involved in their investment sector. Other companies ensure their successful
interaction with youth by allowing longer repayment times. In Bolivia’s, educational loans from
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EDUCA-PRO, do not have to be repaid until after the students graduate, knowing that the
students’ financial stability is unknown up until then (Frankiewicz, Churchill, & International
Labour, 2011).
Muhamad Yunus’s presence in the U.S.
Although U.S. resisted the implementation of microfinance, stating that the U.S. did not
share the dire poverty problems as countries as India and those in South America, Yunus’ ideas
did penetrate (Yunus, 2003). Between the 1980s and 1990s, numerous states hosted Muhamad
Yunus (2003) so that he can provide blueprint on how to successfully implement a micro-lending
organization. The state of Arkansas under the governorship of Bill Clinton, South Dakota and
Oklahoma under the leadership of Native American chiefs, as well as Chicago, Illinois under the
leadership of financial gurus (Yunus). All of these examples included a leader that saw a
significant group of U.S. citizens in need of help and strove to solve their financial issues with
Yunus’ Grameen methodology.
Research Limitations
This research paper does not include specific federal and local policy or budget criteria that
can deem a U.S. state more successful for an increased microfinance presence.
Other than the suggested market niche, this research paper did not pursue any other
alternate reasons of successful microfinance implementation
Conclusion
Microfinance organizations have been alleviating poverty worldwide since the 1980s. A
brief introduction is provided on how microfinance started, the types of organizations that fall
under that umbrella, as well as some reasons why these organizations are created. In order to
create or expand a successful microfinance organization in a location, research is conducted to
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display the market niches that strong microfinance organizations have pursued, as well as the
obstacles and nuances for targeting these niches. This information is provided to aid any new or
expanding microfinance organization the determination if their sought after location will serve
them well based on its demographics, and the strength of their future client base.
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