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Extreme poverty

There are more than 2 billion people living in extreme poverty – defined as living on less than $1.90 a day by the World Bank. Extreme poverty is an inability to meet even the barest of basic needs, typically characterized by food insecurity, having few or no assets, lacking access to education, and suffering from poor health. Often chronic and intergenerational, extreme poverty creates a trap that is incredibly difficult to escape.

Ending extreme poverty

Eradicating poverty is the first United Nations Sustainable Development goal. While there are many approaches to eradicate poverty, one particularly successful approach is to provide the very poor with access to capital.

Virtually everyone living in extreme poverty lacks access to capital. These “unbanked” people have no checking, savings or mobile money provider accounts, no access to financial products like insurance, loans or mortgages, and no protection for their money from theft or loss.

Good news

The good news is that over the last ten years 1.2 billion people have gotten access to financial services. Financial inclusion, the provision of financial services to the poor, allows the poor to escape poverty with dignity by starting or expanding a business.

Yet, even with this decade of success, the demand for capital can not yet be met by the existing banking system. This is where microfinance organizations such as Wisconsin Microfinance can make a huge difference.

Child in Haiti

Muhammad Yunus and microfinance

In 2006, Muhammad Yunus won the Nobel Prize for his practice of providing small loans to the very poor. He founded the Grameen Bank to develop this area of “microfinance”. The Grameen Bank model utilizes three important aspects that ensure success:

Targeting women

The vast majority of households suffering from extreme poverty are headed by women. Women are often marginalized by society and lack opportunities to improve their family’s quality of life. The Grameen Bank targets women for three reasons.

  1. Women more typically engage in the type of economic activities that microcredit institutions invest in;
  2. Women are more likely to reinvest their loans to better their entire family;
  3. Finally, women are more reliable borrowers and they are more likely to use their loans productively and repay them promptly.

Family at a market in HaitiGroup lending (solidarity groups)

Lending groups are used in place of collateral (because most loan recipients lack collateral for a loan). Lending groups create both support in the development of the business and peer pressure to pay a loan back. No member of a lending group may receive a subsequent loan unless all members of the lending group have paid back their previous loan.

Loan support

Borrowers are provided support and education on how to become financially responsible, make repayments, and successfully establish and grow a business.

How it works

Microfinance (or microcredit) is the provision of financial services to low-income individuals who would otherwise have limited or no access to capital.

In the developing world, the majority of the poor live in rural areas – isolated from the world of financial institutions.

Having access to capital enables the poor to increase incomes, build assets and reduce their vulnerability to external shocks. Microfinance allows poor households to move from everyday survival to:

  • Planning for the future
  • Investing in better nutrition
  • Improving living conditions
  • Ensuring children’s health and education