The Potential Impact of Microfinance

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Posted on 1/10/2014

Breaking the cycle of generational poverty is a serious challenge in many developing nations, particularly those in sub-Saharan Africa. ChildFund works in some of Africa's poorest countries, and microfinancing has proved to be an effective way to help families start their own businesses and be self-sufficient. In a recent research paper, Nathan Fiala of the German Institute for Economic Research reports that, when paired with proper training, microfinancing can be an effective way to help people living in poverty.

A Two-Tiered Approach

To arrive at his conclusions, Fiala studied a control group of Ugandan men and women who received microloans and associated business training, and a second group that just received financial support. Fiala took assessments at six and nine months to determine if financing alone would be sufficient to help families emerge from poverty.

He found that training was important in helping business owners grow their incomes. Approximately 54 percent of men who received access to both training and financing reported gains in profits at both the six- and nine-month evaluation periods. Loans by themselves made an initial impact, Fiala writes, but by the end of nine months, the money was often gone.

Despite the potential for microfinancing to positively impact people's lives, the paper highlights difficulties faced by women. Fiala notes that in his study, female business owners made no measurable gains, regardless of whether they received training. Fiala concluded that married women, particularly those with children, face significant domestic pressures that prevent them from succeeding in business, despite receiving both financing and training.

Empowering Families

ChildFund has worked in Uganda since 1980, and with approximately 35 percent of the country's population of 36 million people living in poverty, many families need support.

In 2012, ChildFund Ireland's Communities Caring for Children Programme helped establish the Village Savings and Loan project in a small village in the country. Before the VSAL program, Agnes Akello, a mother of four, used to run a roadside stall selling tomatoes and fish. However, thanks to the availability of microloans, Agnes borrowed around $155 to establish her new business selling sorghum, a grain used as livestock fodder, to supplement her stall's income.

"I would never have been able to access this amount of money in this village," says Agnes. "My greatest joy is in seeing my children go to school, get good medical services, proper food and clothing, which was very difficult before, considering that my husband is only a farmer. My whole life has changed."

Agnes has served as the chairperson of the VSAL program since its inception, and today, the project's loan portfolio is more than $1,100, which allows other families to access the funding to expand current businesses or diversify their operations into more lucrative areas, as Agnes did.

Microfinancing is just one way to help families in need and provide them with the means to break the cycle of generational poverty. Another way you can help ChildFund make a difference in families' lives is by becoming a monthly giving partner. For around 50 cents per day, you can allow us to provide aid and support where the need is greatest, potentially saving lives. Your generosity will make a lifetime's worth of difference.