Imagine receiving a loan from a lender, then only being permitted to sell your product slightly more than your cost of goods.
How would you be able to build the life you want? Would your family have to remain in a cycle of poverty?
The 1970’s was an era focused on recognizing and finding solutions to economic struggles around the world. People were becoming more aware of the issues faced by many around the world, with many reaching into their own pockets to help out those in need.
In 1976, Dr. Mohammed Yunus, an economics professor at the University of Chittagong in Bangladesh, grew frustrated witnessing the never-ending cycles of poverty those around him were experiencing. He realized that because the individuals could not qualify for a dependable source of credit, they would have a drastically decreased chance of moving towards independence and freedom.
Dr. Yunus’ first loan was to a group of 42 local women who had previously only been profiting pennies on their bamboo stools from previous loans. Due to the forced agreeance with lenders because of a lack of alternatives, the women had to sell their stools only slightly higher than the cost of goods. With the single $27 loan from Dr. Yunus, these women were able to purchase materials themselves, repay the loan in its entirety and flourish as businesswomen.
This initial success combined with other similar experiments mark the beginning of the modern microlending movement. It also set one of the basic principles of modern microfinance: combating poverty through microloans and focusing on serving women in emerging markets.
Dr. Yunus founded the Grameen (Bengali for “village”) Bank in 1983, turning the traditional finance world on its head. When offering loans to poor populations, there were no financial guarantees required for return. Repayments of the loan began immediately, with frequent and small payments made over the agreed upon term. Smaller, more frequent loans enable the borrowers to gradually pay back the loan in small sums that are more manageable to pay, rather than a few large sum payments. By 2008, he had 7.5 million borrowers in 82, 072 villages throughout Bangladesh. This statistic is jaw-dropping considering the traditional exclusion of women from the financial systems.
Road Fact: 97% of the beneficiaries in Bangladesh are women!
Dr. Yunus’ influence in the microfinance industry continued its growth in the 21st century, becoming a prominent method of lending internationally. In 2005, the United Nations declared it as the “International Year of Microcredit”. His philanthropy and passion for social change earned him and the Grameen Bank the Nobel Peace Prize in 2006.
By demonstrating that people living in poverty were able to repay their loans, regardless of if they had collateral or a poor credit score, Dr. Yunus laid the groundwork for microfinancing and moving poor populations out of the cycles of poverty.
The goal of microloans and microfinancing is simple: provide impoverished people an opportunity to become self-sufficient and move them out of the cycles of poverty.
Low-income individuals that are trapped in poverty, many living on less than $2 a day, are often excluded from the financial resources of traditional finance institutions due to their limited income or other socioeconomic factors. Microloans allow these individuals to acquire a small enough loan to make a difference in their lives, while enabling them to take the loan with limited risk.
This form of ethical and responsible finance can be used for virtually any function, whether that be purchasing new equipment for a business, attending entrepreneurial training events, putting food on the table, sending children to school, making critical purchases not possible otherwise, and many more.
Contrary to traditional lender-borrower relationships that focus on the borrower having enough collateral to cover the loan, organizations that provide microloans focus on developing the borrowers. Loans often only cover the financial aspects of the borrower’s life, which microlending organizations counter by helping them to grow their businesses and learn leadership skills.
Successful repayments of microlending loans begins to develop a good credit history for the individuals receiving the loans, allowing them to apply for and receive larger loans in the future. Once the money from the loan has been paid, the lender is then able to provide a microloan to another individual and another farmer, creating a positive chain of compounding effects.
Benefits of obtaining a microloan extend past the individual who received it. Microloans extend into their communities, create jobs, grow businesses, allow parents to send their children to school, increase economic activity within the area and work to improve the community as a whole.
Road Coffee successfully launched our BeyondFair program in 2019, that has impacted 11 different farmers and 11 different families to date. BeyondFair was created because the standards of fair trade and direct trade coffee aren’t good enough for us. By providing microloans to our farmers, we are able to come alongside and empower them to move from poverty towards independence and freedom.
Paying farmers above their cost of goods at a livable wage follows parallel to the original vision of Mohammed Yunus, providing coffee farmers living in poverty an opportunity to grow their business, send their children to school and support their communities.
Author Jordan Calladine