Sustainability

What is Microfinance?

Microfinance is a financial service that provides small loans, savings accounts, insurance, and other financial products to individuals who typically lack access to traditional banking services. It targets low-income individuals, particularly in rural and underserved areas, who may not have collateral or a credit history to qualify for loans from commercial banks. It has gained attention as a tool for inclusive finance and sustainable development, with initiatives implemented worldwide to expand access to financial services for marginalized and vulnerable populations. The service has the potential to empower individuals, particularly women, by giving them the means to create livelihoods, build assets, and improve their standard of living. Thereby, it aims to alleviate poverty by providing financial resources to support income-generating activities, such as starting or expanding small businesses, purchasing livestock or equipment, or investing in education and healthcare.

How can it be bearer of importance to women?

Its relevant and important for women’s empowerment, especially in rural areas, due to several reasons, such as financial inclusion, economic empowerment, poverty alleviation, social impact, and risk mitigation. An undeniable proof of that is the fact that by 2006 microfinance services had reached over 79 million of the poorest women (Daley-Harris 2007 cited in ILO 2008).

Financial inclusion

Women, particularly in developing countries, often face barriers to accessing formal financial services such as bank accounts, loans, and savings. Microfinance provides them with access to financial resources that they may not otherwise have, empowering them to participate in economic activities and make financial decisions.

Economic empowerment

Microfinance enables women to start or expand small businesses, generate income, and become economically self-sufficient. By providing them with loans, savings accounts, and other financial services, microfinance helps women to invest in income-generating activities, improve their livelihoods and support their families.

Poverty alleviation

Women constitute a significant proportion of the world´s poor population. Microfinance programs specifically targeting women can contribute to poverty alleviation by providing them with the means to lift themselves out of poverty. By investing in women’s economic activities, microfinance helps to create opportunities for income generation and asset accumulation, ultimately improving their living standards.

Women´s Empowerment

Access to financial resources through microfinance can enhance women’s autonomy and decision-making power within their households and communities. As women become financially independent, they gain greater control over household finances, education, healthcare, and other important aspects of their lives. This empowerment can lead to positive social outcomes, such as improved gender equality and women´s rights.

Social impact

Investing in women’s economic empowerment through microfinance can have broader social benefits. Studies have shown that when women have control over household income, they tend to prioritize spending on the well-being of their families. Consequently, microfinance programs targeting women can have ripple effects on community development and poverty reduction.

Risk Mitigation

Women often face greater financial vulnerability due to factors such as lower incomes, limited access to formal employment, and social and cultural constraints. Microfinance can help mitigate these risks by providing women with financial tools to cope with emergencies, smooth consumption and build resilience against economic shocks.

Microfinance in developing countries

Microcredit programs have been implemented in developing countries such as Bangladesh, India, or Cambodia since 1976 and its relevant to understand if and how it’s a beneficial initiative. To answer this concerns, it was conducted a study focused on the development of microfinance programs in Ethiopia and how it changed the lives of who was targeted. Ethiopia is known for being one of the poorest and underdeveloped countries (68.7% of the population, 82,679 thousand people in 2021, is multidimensionally poor while an additional 18.4% is classified as vulnerable to multidimensional poverty, 22,076 thousand people in 2021).

For the past two decades, microfinance institutions have held significant sway as a pivotal development initiative in Ethiopia. The genesis of this movement and its subsequent expansion in the country can be traced back to the enactment of legislation postulated after the 1996 proclamation. This legislative milestone stands as a cornerstone in the inception and evolution of microfinance across this country. Notably, there has been a steady escalation in female engagement within the microfinance sphere. All microfinance enterprises share a unified aspiration towards ameliorating poverty and fostering the economic empowerment of women.

The main aim of the inquiry is to analyse the impact on microfinance programs on women´s economic empowerment. A sample of 346 women that were clients of those initiatives were questioned and examined for a deeper understanding of the debate in question. With the help of tools such as multiple regression and sampled t-test data analysis, was revealed that age, marital status, education level, credit amount, and number of trainings have a significant impact on women’s economic development.

The results of the paired sample t-test unveiled noteworthy disparities in mean values pre- and post-engagement with microfinance services, particularly concerning income, asset accumulation, and savings. Microfinance interventions evince a discernible positive impact on women’s economic empowerment, manifesting through augmented independent income streams, heightened asset portfolios, and increased monthly savings. Furthermore, the investigation underscored the constructive role of microfinance in nurturing women’s entrepreneurial acumen and fostering their exposure to business opportunities.

Despite this article being more focused on the effects of microfinance in developing countries, because of how the impact is noticeable, it’s also important to emphasise the fact that also it has also reached and in a growing scale, developed countries, like Spain, that you can read more about in one of the links in the references focused on the Barcelona case.

Conclusion

Overall, by addressing the unique financial needs and challenges faced by women, microfinance plays a crucial role in promoting women´s economic empowerment, reducing poverty, and advancing gender equality with the help of its programs that promote an inclusive and sustainable development. Also, it has been proven to be beneficial to countries in development, being a fundamental tool for growth, prosperity, and equality of opportunity.

References:

ILO. 2008. “Small change, Big changes: Women and Microfinance”. Geneva, ILO. wcms_091581.pdf (ilo.org)

Leight Lebos, Jessica. 2022. “How microfinance supports livelihoods in developing countries”. Kiva. Consulted in 01/05/2024. https://www.kiva.org/blog/how-microfinance-supports-livelihoods-in-developing-countries

Lorenzo Vidal, Raquel, and Julia Soler Agustí. 2017. “Microcredit in the developed countries: the case of Barcelona”. https://migrant-integration.ec.europa.eu/sites/default/files/2019-10/EWI05-Microcreditinthedevelopedcountries_thecaseofBarcelona.pdf

Mengstie, Belay. 2022. “Impact of microfinance on women’s economic empowerment”. J Innov Entrep 11 (55). https://doi.org/10.1186/s13731-022-00250-3

Raid, Dr. Moodhi, Nisar Ahmad, Dr. Hisham Alhawal, and Dr. Jumah Ahmad Alzyadat. 2023. “Impact of Microfinance on Poverty Alleviation in Developing Countries: The Case of Pakistan”. http://dx.doi.org/10.2139/ssrn.4402017

Laura Casanova

Undeniably, society’s concern about being green has been growing tremendously for the past years and environmental awareness is, certainly, one of the burning issues of the century. Consumers are changing their behaviors, opting for sustainable products and making more aware choices. However, is replacing a plastic bag for a paper one the only way of being green?

12 years ago, the European Investment Bank issued the first ever Climate Awareness Bond (CAB). These green bonds are designed to encourage sustainability and to support not only climate related but also other types of environmental projects. Backed by the issuer’s balance sheet, these sometimes called “climate bonds” are intended to fund projects that are environmentally friendly, going towards new or existing projects that are meant to have positive environmental or climate effects, supporting sectors such as renewable energy, transport or waste management.

“Green bonds offer investors the option to diversify their portfolio by not only income-based decisions but environment-based ones as well.”

This market works as a common bond market, in which borrowers are institutional investors trading their financial assets. Companies, local, state and national governments and supranational institutions ensure the lending of this eco-friendly project, representing the supply side of a growing market that has, nowadays, more than 50 issuers.

The field of action is large, involving several sectors of the economy. For instance, in June of 2013, Commonwealth of Massachusetts, as the North American pioneer in this field, sold green bonds amounting to $100 million and publicly shared which projects are being financed by green bonds and how does society benefit from the investment in this innovative financial asset. Being the main market supplier, the US, led by the mortgage giant Fannie Mae, plays an important role promoting this environmentally friendly financial asset and, since Poland opened the sovereign market in 2016, France, Belgium, Ireland and the Netherlands did not take long to follow the example of Uncle Sam’s country.

Throughout the years, the green bonds’ market has been experiencing a boost of investors looking for conscientious choices to allocate their funds. According to Bloomberg, until 1st October 2019, “assets under management at 644 funds focused on environmentally friendly investments stand at more than $220 billion, compared with around $80 billion at the end of 2014”. Also in the past month, George Ammond wrote for the Financial Times, concluding that Asia-Pacific issuance of green bonds had hit a record of $18.9bn. This value was raised from 44 green bond issuances that were open to international investors, which positively correlates with the growing interest from investors in green finance.

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Moreover, this green investment method has revealed to be beneficial for both parties: sellers and investors. The first ones benefit from the eco-friendly vision of the investment which is propitious to attract new investors, resembling almost to a marketing strategy and drawing the attention of the most concerned consumers. The second ones benefit from the fact that these financial assets are characterized by having tax-exempt income. Additionally, investing in green bonds enables buyers to monitor these projects, contrarily to the very little insight investors have into what happens with the funds raised on debt capital markets.

However, a major dilemma arises. Are these “bonds for the planet” truly used to start and develop eco-friendly projects or are they just part of a bigger marketing strategy?

As previously mentioned, green bonds have tax-exempt income, they are supported and sponsored by governments, what closely fills the expectations of environmentalists in trying to solve climate change problems. What about the cases in which green bonds are issued to promote other projects that are not so “green” and institutions still benefit from all of these advantages? Firstly, it depends on the perception of green. This broad concept can differ not only internationally but also nationally, making it difficult for issuers to comply with both standards. Moreover, the lack of a “standard universal certification system” allows for green bonds not to be analysed through a universal procedure that accounts for the borrower’s creditworthiness or “greenness” of a bond. For instance, China is the biggest carbon emitter and occupies the second position in issuing green bonds. The problem started when the chinese power used this concept to finance coal-burning plants which, even if less polluting than previous methods, don’t reduce the carbon emission in the long-run. Another dilemma, pointed by Boardman, the chief financial officer of clean energy developer Sindicatum, comes with the lack of benchmarks that causes green bonds not to “qualify as a mainstream investment vehicle.”

“I think we need to think differently, we need governments to sit down and say all finance has to be green. There has to be strong incentives, clarity over the status of green bonds, status of green loans and bank financing.”

— Michael Boardman

In an attempt to clarify this problem, several studies were conducted aiming to broaden the definition of “green”. Oslo-based Cicero (Center for International Climate Research) came up with the idea of using three shades of green according to the ecological impact of the project in question: dark green, for projects reducing the carbon emission in the long run (wind energy); medium green, for projects that take a good step forward; and light green for steps that won’t change the long-term outlook on their own, consisting in more efficient projects (China’s case).

Indeed, in the mesmerizing bonds’ market, if an investor understands the environmental risks better, the cost of capital will go down for green projects. The benefits this financial asset brings to the environment have evidently been shown. However, in order to really create an impact on sustainability, this market has to grow much more than the observed heretofore. Massive investments are required to change the way we produce energy, reinforcing the urgency for individuals to take a proactive approach against climate change. As an “idea that captures investor imagination to combine the force of capital markets for a good end”, green bonds arise as a “tool to reconnect the dots between finance and the real economy”. What determines the effect of this revolutionary financial asset not only on the environment, but also on society, is how institutions and companies incorporate and allocate these green investments and in which degree are individuals incentivized to engage in an eco-conscious behavior. It is crucial to acknowledge that ecological progress is not simply imposed on society, but rather a consequence of conscious and informed choices by society’s decision makers and green bonds are certainly an important step towards a more sustainable financial market.

Sources: S&P Global Report, Bloomberg, European Investment Bank, CNBC, Dealogical Data, The Financial Times, CNBC.