Overview: What is microfinance?

Microfinance is a general term to describe financial services provided to low-income individuals or to those who do not have access to typical banking services. Microfinance is also the idea that low-income individuals are capable of lifting themselves out of poverty if given access to financial services.

How does microfinance specifically reduce poverty?

First of all, microfinance helps to empower people. By increasing household incomes, building assets, and reducing vulnerability to humanitarian disasters, microfinance clients can overcome the cycle of poverty. As entrepreneurs, they are able to plan for their family’s future, manage cash flow, and apply funds to household priorities. Essentially, microfinance helps people to make their own choices and work their way out of poverty.

In addition to empowering its clients, microfinance also breaks the dependency on local moneylenders. Because the formal financial sector does not extend credit to impoverished entrepreneurs due to the small loan amounts required, the absence of any credit history, and the lack of collateral assets, a moneylender (i.e., “loan shark”) will step in to make loans at high rates of interest. While this enables entrepreneurs to buy the supplies needed to produce a product, once they begin selling their wares, nearly all of their profits are applied to the payment of interest to the “loan shark,” leaving them in a position of poverty.

According to CGAP, “Comprehensive impact studies have demonstrated that: Microfinance helps very poor households meet basic needs and protect against risks; The use of financial services by low-income households is associated with improvements in household economic welfare and enterprise stability or growth; By supporting women’s economic participation, microfinance helps to empower women, thus promoting gender-equity and improving household well-being.” (UNCDF Microfinance)

In summary, “‘financial services allow poor households to make the transformation from “every-day survival” to “planning for the future.’”

How effective is money given in microloans?

To the lowest-income micro-entrepreneurs in the developing world, $50 is a fortune. They can invest that money to make their labor far more productive. They might buy a used sewing machine so that they can make dresses faster than by hand stitching. They might invest in a used refrigerator to keep the produce they sell from going bad overnight. They might buy thread for weaving in bulk, at wholesale prices, so they make more on every item. Economist Milton Friedman once said that “the poor stay poor, not because they’re lazy, but because they have no access to capital.” (FINCA).

Access to capital and free markets are critical to lifting millions out of poverty – more so than many government programs. For example, since the Chinese government transitioned to free market capitalism in 1978, it is estimated more than 600 million people have been lifted out of poverty. For comparison sake, there are just over 300 million people in the entire United States! (World Bank, IMF.)

Why does Second Command Digital choose to support microfinance organizations?

We believe that by supporting microfinance organizations, such as Kiva, we are fulfilling several commands that are found in the Bible. The first of these is Micah 6:8, which tells us to act justly, love mercy, and walk humbly with God. The second is Isaiah 56:1, which commands us to maintain justice and do what is right. And the third is the story of the good Samaritan in Luke 10, which reveals that everyone is our neighbor, and we should have mercy on anyone in need that we encounter. By creating games that support and advocate for microfinance institutions, we believe we are showing mercy and maintaining justice for those are held down by poverty. We realize that everyone trapped in poverty is our neighbor, and we desire to be a helping hand to someone in need by partnering with organizations that teach the poor how to work their way to a better situation.

As Christians, we believe that we should use what have received wisely and invest our abilities as well as we possibly can. Christ himself gave us the parable of the talents to implore us to be good stewards of our finances, and all the opportunities in life. In the parable of the talents, three people were given capital to invest, two of them doubling the amount through wise investing. One hid the money and was scolded for not wisely investing his time and money.

But how can you be a good steward of money and wisely spend your time if you don’t have access to money?

This is where microfinance comes in. Groups such as Kiva and WorldVision aggregate small loans and provide the funding to entrepreneurs and small business owners worldwide. You can only be a steward if you have the opportunity to steward something, and microfinance provides the poor with the opportunity to do exactly that!

Poverty can be a crippling situation that continues in a vicious cycle – but it doesn’t have to be! Join Second Command Digital in helping to end cyclical poverty through microfinance organizations.