Microfinance Disrupts Bias Against the Unbanked

February 8, 2023 by Stephen T. Day

Microfinance disrupts the bias against the unbanked throughout international finance that continues to undermine the growth of small businesses around the globe. Entrepreneurs in rural emerging markets are often ignored by banks and other traditional financial institutions given the small loan size and high costs typical of the segment. Approximately 1.7 billion people around the world, over 31% of adults, are considered “unbanked” because they do not have a mobile phone, internet access, funds to meet minimum balance requirements, government ID, requisite education, assets to serve as collateral, or even geographic access to a bank branch.[1] An estimated 200-245 million businesses are thus constrained, contributable at least in part to lack of personal infrastructure, high costs of due diligence, and limited understanding of business models.[2] Microfinance institutions match entrepreneurs ignored by the traditional lending model with capital and expertise, but policymakers must facilitate the process by lowering barriers to self-employment and the regulatory burden on microfinance institutions.

Founded in the 1970s, microfinance provides primarily rural entrepreneurs with loans of a few hundred to a few thousand U.S. dollars at modest interest rates, reaching the unbanked by establishing regional groups of lenders to share business advice, distributing financing in stages as businesses develop, and partnering with local institutions to strengthen repayment.[3] The movement arose in response to the traditional consumer lending model that places a premium on credit history and current financial capacity in estimating a loan applicant’s likelihood of repayment.[4] This focus on ex-ante finances disadvantages entrepreneurs in rural regions of emerging markets who lack credit cards, cell phones, and other infrastructure critical to developing a personal credit history. Failure to obtain financing stymies the efforts of entrepreneurs in such communities to hire new employees, purchase inventory, or otherwise expand production. Microfinance serves this need by engaging entrepreneurs with peers, advisers, capital, and other tools to improve repayment rates by expanding the resources available to borrowers.

In addition to providing entrepreneurs with capital to grow, microfinance improves resilience during economic downturns. Accion, the leading global nonprofit dedicated to financial inclusion through microfinance and fintech impact investing, found entrepreneurs were better able to weather the effects of the coronavirus pandemic if they could seek emergency financing from banks or microfinance institutions as alternatives to cutting costs or pursuing private loans.[5] India supported the emergency response to the pandemic by microfinance institutions like Accion through a credit guarantee program with the Ministry of Finance relaxing capital requirements, demonstrating the opportunity for governments to facilitate microfinance through policy.

Policymakers can maximize the impact of microfinance by lowering the barriers to self-employment and the regulatory burden on microfinance institutions. Countries have effectively encouraged entrepreneurship with extended deadlines for entrepreneurs on welfare to declare income until their ventures are sustainable, by lowering taxes on microfinance institutions, and through telephone hotlines providing confidential financial advice.[6] After France simplified administrative tasks for small self-employment firms and lowered applicable tax rates in the early 2000s, the share of self-employed workers in total employment grew (as did shares of self-employed workers in the Netherlands and United Kingdom, which had enacted similar policies).[7] These interventions give entrepreneurs flexibility to get their businesses off the ground without sacrificing consumer or investor protection, expanding access without jeopardizing market safety.

Microfinance institutions have the resources to match unbanked entrepreneurs with capital and expertise, but policymakers must update tax and administrative frameworks to contemplate small entrepreneurs, not just those with traditional funding.



[1] Kiva, Microfinance 101: What it is and how to get involved, https://www.kiva.org/microfinance (last visited Dec. 20, 2022).

[2] Accion Venture Lab, Bridging the Small Business Credit Gap through Innovative Lending (2016).

[3] Kiva, Microfinance 101: What it is and how to get involved, https://www.kiva.org/microfinance (last visited Dec. 20, 2022).

[4] John M. Chapman, Commercial Banks and Consumer Instalment Credit, NBER, 109-39, 109-10 (1940).

[5] Accion Center for Financial Inclusion, Does Financial Inclusion Boost Borrowers’ Resilience? Three Lessons from the Pandemic, https://www.centerforfinancialinclusion.org/does-financial-inclusion-boost-borrowers-resilience-three-lessons-from-the-pandemic (last visited Dec. 20, 2022).

[6] Jan Evers & Stefanie Lahn, Promoting Microfinance: Policy Measures Needed, 25 De Boeck Supérieur 47-53, 49 (2006).

[7] Gilbert Cette & Jimmy Lopez, Promoting Self-Employment: Does it Create more Employment and Business Activity? 36 LABOUR 94-114, 96 (2022).