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Microcredit:
Exploring the Fight against Poverty
Lesson Plan and Outline of Videoconference Series
Tuesday, September 30 and Thursday, October 12
“Lasting peace can not be achieved unless large population groups
find ways in which to break out of poverty. Microcredit is one such
means. Development from below also serves to advance democracy
and human rights.” – The Norwegian Nobel Committee, 2006
1
Introduction:
In 2006, Muhammad Yunus1 and the Grameen Bank won the Nobel Peace Prize
for developing a model aimed at lifting millions of people worldwide from
poverty: microcredit.
Microcredit, the act of providing very small loans to poor or unemployed
entrepreneurs, typically serves people in developing countries who do not qualify
for a traditional loan. Now with more than 10,000 microcredit lending
institutions worldwide, an estimated 16 million people are borrowing loans on
this burgeoning system.
On Day One of this two-part PULSE series, students will discuss the basic
principles of microcredit, including the benefits and disadvantages of the system.
Students have the opportunity to debate whether microcredit should be one of
the cornerstones in the fight against poverty. Finally, students will be asked to
compare and contrast microcredit to the American entrepreneurial culture.
During Day Two of the PULSE series, students will meet Matt Flannery2 face-to-
face and delve into the topic of microfinance with one of the world’s leading
figures in microcredit today.
Overall Objectives:
Through the lesson and interaction, students will:
Understand the concept of microcredit, how it came about, how it works,
and who benefits from it
Explore the role of microcredit and microfinance in the fight against
poverty
Deliberate the pros and cons of microfinance as a leading tool in fighting
poverty
Familiarize themselves with the growth of microfinance through
mathematical exercises
Problem-solve on a case-by-case basis for entrepreneurs seeking
microcredit loans
Engage in discussion with students around the U.S. about the merits of
microcredit
Engage in high-level discussion about microcredit with Matt Flannery,
founder of Kiva.org
Making This Lesson Plan Work for You
1
Muhammed Yunis is the author of a book called Banker to the Poor. You and your students may wish to
read an excerpt. You can find Chapter Four on-line at this link:
http://www.bankertothepoor.com/bankertothepoor/
2
Matt Flannery is the founder of www.kiva.org, Kiva’s mission is to “connect people through lending for
the sake of alleviating poverty.”
2
This lesson plan begins by providing teachers and students with a foundation of
knowledge to prepare ALL participants for the videoconferences. This section is
divided into the following parts:
1. Background on microcredit
2. Case studies of microcredit in practice
3. Introduction to the Grameen Bank and Muhammad Yunus
Beyond this foundational component, teachers have the option of using the
extension activities, which follow two tracks:
1. Business track – practice writing and evaluating business plans for
microcredit
2. Mathematics track – problem-solving with real figures in microcredit
These tools will help teachers provide their students with hands-on education
appropriate to their class subject and level and transform the lesson on
microcredit into a multidisciplinary learning experience. Please note that the
content of the videoconferences will focus on the broader social and political
issues in microcredit, rather than any of the skills gained while completing the
optional business and mathematics exercises.
Pre-conference Preparatory Activities for All Participants
ACTIVITY ONE: Introduction
(30 min)
To begin the lesson, provide students with some basic background information
on microcredit (complete background found in Appendix 1). Explain that there
are many different systems for fighting poverty, and microcredit is one that has
been gaining ground since the 1980s when Muhammad Yunus founded the
Grameen Bank.
What is microcredit?
Microcredit is a small amount of money loaned to a client by a bank or other
institution. Microcredit can be offered, often without collateral, to an
individual or through group lending.
• Group lending, also known as solidarity lending, is a mechanism
that allows a number of individuals to provide collateral or
guarantee a loan through a group repayment pledge. The incentive
to repay is based on peer pressure; if one person in the group
defaults, the other group members make up the payment amount.
• Individual lending, in contrast, focuses on one client and does not
require other people to provide collateral or guarantee a loan.
What is microfinance?
3
• Microfinance refers to loans, savings, insurance, transfer services
and other financial products targeted at low-income clients.
Microcredit, then, is one component within the broader spectrum of
microfinance.
Source: www.yearofmicrocredit.org
Ask students to discuss the following questions:
• Based on the definition of microcredit, how do you think this system could
help reduce poverty?
• What are other ways to reduce poverty?
ACTIVITY TWO: Frequently Asked Questions
(10-15 min)
Refer students to the list of Frequently Asked Questions compiled and answered
by the International Year of Microcredit 2005 (Appendix 2). Have them read
these in the large group, making sure each point is clear before moving on to the
next.
ACTIVITY THREE: Homework/Journaling Assignment
(20 min)
Ask students to write a journal entry in response to the following prompt:
Think of a time when you tried to make some money (whether through a
lemonade stand, garage sale, small business, or other). Why did you
want/need the money? Where did you get the money to buy the raw
materials? Was your venture successful? Why or why not? What
obstacles can you imagine people in developing countries have to face
when they are trying to start their own businesses, and how are those both
similar to and different from your own?
ACTIVITY FOUR: Case Studies in Microcredit
(30-50 min)
To familiarize students with the real-world applications of microcredit and the
individuals who are involved, tell them they’re going to read stories of
beneficiaries. To do this, divide students into groups of 3-4 and give each group a
different case study (linked below either from the Kiva.org or Aga Khan Agency).
Students should read the case studies in their small groups and then complete the
handout in Appendix 4 as a group.
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Case studies from Kiva.org borrowers: (This includes a 15-minute video and a
brief article, either of which you can use depending on time.)
http://www.pbs.org/frontlineworld/stories/uganda601/video_index.html
Case studies from Aga Khan Agency for Microcredit:
http://www.akdn.org/microfinance/case-studies.html
ACTIVITY FIVE: Profile of the Grameen Bank and Muhammad Yunus
Screen the following 10-minute piece, a “Portrait of Muhammad Yunus”
produced by NobelPrize.org, for all students. Muhammad Yunus in Brief:
http://nobelprize.org/mediaplayer/index.php?id=146&view=3
If you have more time, there are other great related videos linked below the
video. Afterwards, lead students in discussion:
• Why do you think Muhammad Yunus won the Nobel Peace Prize?
• Do you agree? Why or why not?
• What are your impressions of him and the Grameen Bank?
• What were the reactions of his fellow Bangladeshis?
• What do you think it takes to make a big positive change in the world?
ACTIVITY SIX: Debating the benefits of microcredit
Explain to students that while microcredit has been praised throughout much of
the world for improving the situations of many poor people, there are also many
critics of the system.
Divide the class into two groups and explain that one group will look at the
benefits of microcredit, while the other will look at microcredit’s shortcomings.
Below are two articles that support microcredit as a major tool in fighting
poverty:
• CommonDreams.org: “Microcredit Best Tool to Fight Poverty”
http://www.commondreams.org/archive/2007/10/23/4750/
• New York Times: “How to Fight Poverty: 8 Programs That Work”
http://select.nytimes.com/2006/11/16/opinion/15talkingpoints.html?pag
ewanted=3&_r=2&sq=microcredit&st=cse&scp=10
And below are two resources that cast microcredit as overrated in the scheme of
fighting global poverty:
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• Reuters article on UN Report: “Role of Microcredit in the Eradication of
Poverty”
http://www.gdrc.org/icm/reuters.html
• Foreign Policy in Focus: “Microcredit: False Hopes and Real Possibilities”
http://www.fpif.org/fpiftxt/4323
Tell students they will become experts on one of the sides and then present their
findings to the class. Have groups present at least ten statements in support of
their position. After both groups have done this (and you may want to record on
the board), lead a discussion on microcredit’s merits.
• How does microcredit stand apart from other methods for alleviating
poverty?
• What can microcredit do that nothing else can?
• What do you think needs to be done alongside microcredit to reduce
poverty further?
• What are some of the most serious considerations against microcredit?
• If you were a global official spearheading a brand new poverty reduction
program, what would you recommend? Would microcredit be included in
your plan? What else might you want to include? Where would you focus
the majority of your resources?*
*This question can be assigned to students for a short paper. Students can
reference the entire “How to Fight Poverty: 8 Programs That Work” article,
among other resources, to help support their ideas.
OPTIONAL ACTIVITIES: BUSINESS TRACK
Microcredit for Sustainable Development
Facing the Future
This lesson asks students to create a business plan from the perspective of
microcredit borrower. The lesson contains other useful material,
including action projects.
http://www.facingthefuture.org/Portals/0/documents/GSRLibrary/34.Mi
crocredit.pdf
Case Studies
Global Education Project, Professional Development Initiative
Presented in the following package are two case studies of borrowers and
their businesses in Indonesia. Follow-up activities include calculating
earnings, preparing graphs, suggesting ideas for more profitability, and
more.
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http://www.globaleducation.edna.edu.au/microfinance/case-studies.pdf
OPTIONAL ACTIVITIES: MATHEMATICS TRACK
Microcredit: Growth in the implementation of microcredit, 1997-2003
Australian Bureau of Statistics, Education
The lesson linked below asks students to calculate percentage differences
and ratios using figures in a chart of statistics about microcredit. It also
asks students to graph the information in groups.
http://www.abs.gov.au/websitedbs/D3310116.NSF/85255e31005a191885
2556c2005508d8/be55683b798455f3ca25704a001dbd76/$FILE/Microcr
edit%20Growth.pdf
Case Studies
Global Education Project, Professional Development Initiative
Presented in the following package are two case studies of borrowers and
their businesses in Indonesia. Follow-up activities include calculating
earnings, preparing graphs, suggesting ideas for more profitability, and
more.
http://www.globaleducation.edna.edu.au/microfinance/case-studies.pdf
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Appendix 1
Background
What is microcredit?
Microcredit is a small amount of money loaned to a client by a bank or other
institution. Microcredit can be offered, often without collateral, to an individual
or through group lending.
• Group lending, also known as solidarity lending, is a mechanism that
allows a number of individuals to provide collateral or guarantee a loan
through a group repayment pledge. The incentive to repay is based on peer
pressure; if one person in the group defaults, the other group members
make up the payment amount.
• Individual lending, in contrast, focuses on one client and does not require
other people to provide collateral or guarantee a loan.
What is microfinance?
• Microfinance refers to loans, savings, insurance, transfer services and
other financial products targeted at low-income clients. Microcredit, then,
is one component within the broader spectrum of microfinance.
Source: www.yearofmicrocredit.org
Why is microfinance necessary?
If you want to buy something or start a business but do not have the money you
might try and save the money, sell or pawn something you own, or borrow the
money from family, bank or lending institution. To save money assumes you
have a way of earning it and there is somewhere safe to keep it. To borrow money
from family assumes they have it and are able to do without it until you are able
to pay it back. To borrow money from a bank, credit union or other lending
institution assumes you can demonstrate an ability to pay it back. Lending
institutions will not lend to people unless they have some kind of security, or
collateral, for the loan, to ensure that if it is not paid back, the bank or other
institution will be able to recover part of the debt. Poor people often do not have
spare money to lend other family members, access to banks or the collateral to
guarantee a loan, so they find it difficult to try to improve their situation through
loans. Yet a very small loan can make a great difference to a poor person.
Microcredit is helping millions of poor people, especially poor rural women, with
tiny loans so they can start small, create self-employment and improve their lives.
There is a common view that poor people cannot or do not want to save. But the
reality is different. Because the poor have little money, making the most of what
they do have is vital. Building a pool of savings that can be drawn on in
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emergencies, or that can help to finance the education of children or the purchase
of a productive asset, is vital to poor households, and providing them with safe
and accessible means of doing this is therefore an important service.
Poor households are particularly vulnerable to the setbacks that come from ill-
health, loss of employment and other emergencies. Providing insurance that can
mitigate the impact of such setbacks is another vital financial service. While
insurance is a very different business from taking deposits and making loans, a
number of microfinance organisations are looking at including insurance services
in their range of products.
The beginnings of microfinance
The idea of microfinance was developed as a survival strategy for the poor. Ela
Bhatt established the Self-Employed Women's Association (SEWA) in India in
1974, while in 1976 Mohammed Yunus founded the Grameen Bank project in
Bangladesh. Ela Bhatt's first loan was $1.50 to a woman who sold herbs, while
Mohammed Yunus' initial outlay was a total of $27 to forty-two poor people.
How microfinance works
Poor people often live from day to day, and have few reserves for major expenses
such as illness, weddings, house repairs or education. They are often unable to
save for these expenses, or have been unable to open a bank account that would
enable them to build their savings, and therefore need to borrow, frequently at
exorbitant rates, to meet these unexpected costs, further worsening their
economic situation. Microcredit provides poor people with access to small loans
at more manageable interest rates, and can lead to self-sufficiency and poverty
alleviation. There are many models of microcredit. A common model is for small
groups to form a collective and with a start up grant to provide an initial pool of
money, which is augmented with regular savings and interest members pay on
their small loans. One or two members take loans to develop small businesses,
and, when they have repaid their loan, others are able to draw on the collective
fund. They may be supported with business and other training to help make
these micro-enterprises successful. The outside support and group pressure
leads to a low default on repayments.
Where poor people are able to build their savings, they can often use these
savings to meet their needs for lump sums of money, either to meet emergencies
or to finance a productive investment. This is less risky than relying on credit,
because it doesn't involve going into debt. Saving and borrowing are really
different ways of turning small amounts of money into lump sums. Saving
involves building a lump sum by first accumulating smaller amounts; borrower is
taking the lump sum first and then 'saving' afterwards in the form of loan
repayments.
How does microfinance address poverty?
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With less interest to repay, more profitable businesses and autonomy, poor
people have been able to reduce debt burdens and break the cycle of poverty.
Studies of the impact of microfinance in more than 24 countries have found
dramatic improvements in household income levels. These improvements take
place mainly through growth in the borrower's business. Access to microfinance
allows the borrower to reduce costs with lower interest rates and bulk purchasing
of raw materials. Income increases as the number of goods or services offered is
expanded and reduced product costs increase sales.
Is it all good news?
Although microfinance can demonstrate huge levels of success, there are risks
and other disadvantages to the scheme. Maintaining a sustainable small loans
program is costly, and the high interest rates take their toll on borrowers,
although less than that of local money-lenders who may charge even higher
interest rates or indenture children.
Microfinance fosters self-employment, but the odds are stacked against the self-
employed in the global marketplace. Business training and support can be
important so that loans can be effectively used. However, many poor
entrepreneurs in fact know very well what to do, but lack the capital needed to set
up or expand their businesses.
While women have taken a high percentage of the loans and invested in their
households, improving the health and education of their children, this has had a
cost. Running a business has added to their workload and changed their role in
the family, sometimes putting a strain on their marriage. Moreover, in some
cases husbands have used the loans, but expected the women to repay it. It is
important to include gender training as part of the microfinance program to
address these problems.
Microfinance programs may enable poor people to improve their situation, but
they do not eliminate the need for other basic social and infrastructure services.
Microfinance can help poor households to reduce their vulnerability to economic
shocks, but they do not eliminate such shocks. It helps the poor to take advantage
of economic opportunities, but it does not create such opportunities.
Microfinance can only ever be one part of a broader process of social and
economic development.
Source:
Global Education Project:
http://www.globaleducation.edna.edu.au/globaled/go/cache/offonce/pid
/1533;jsessionid=0BDB10DB1465E68326A0997A1D98864F
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Appendix 2
Frequently Asked Questions
What is the difference between microfinance and microcredit?
Microcredit is a small amount of money loaned to a client by a bank or other
institution. Microfinance refers to loans, savings, insurance, transfer services,
microcredit loans and other financial products targeted at low-income clients.
Microcredit has been changing the lives of people and revitalizing communities
worldwide since the beginning of time.
Who are the clients of microfinance?
The clients of microfinance are generally poor and low-income people. They may
be female heads of households, pensioners, artisans or small farmers. The client
group for a given financial organization depends on that organization’s mission
and goals.
How do financial services help poor and low-income people?
Anyone who has access to savings, credit, insurance and other financial services
is more resilient and better able to deal with everyday demands. Microfinance
helps poor and low-income clients deal with their basic needs. For example, with
access to microinsurance, poor people can cope with sudden expenses associated
with serious illness or loss of assets. Merely having access to formal savings
accounts has also proved to be an incentive to save. Clients who join and stay in
microfinance programmes have better economic conditions than non-clients.
What is a microfinance institution?
A microfinance institution (MFI) is an organization that provides financial
services targeted to the poor. While every MFI is different, all share the common
characteristic of providing financial services to a clientele poorer and more
vulnerable than traditional bank clients.
What is an inclusive financial sector?
An inclusive financial sector allows poor and low-income people to access credit,
insurance, remittances and savings products. In many countries, the financial
sectors do not provide these services to the lower income people. An inclusive
financial sector will support the full participation of the lower income levels of the
population.
If microfinance is about serving the poor, why does the provision
of financial services need to be profitable?
Microfinance institutions need to be profitable in order to cover the costs of
reaching out and meeting the demand of underserved segments of the population
over a sustained period of time. Additionally, after a series of very small loans, a
microentrepreneur often wants to expand her business; a microfinance
institution must keep up with the demand for larger loan amounts so businesses
can grow into small enterprises.
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How can poor people afford such high interest rates?
Microcredit interest rates are set to provide viable, long-term financial services
on a large scale, while subsidized interest rates generally benefit only a small
number of borrowers for a short period. Studies conducted in India, Kenya and
the Philippines found that the average annual return on investments by
microbusinesses ranged from 117 to 847 per cent. These high returns are
commonplace among microentrepreneurs, and while the interest rates seem
high, they usually represent only a small portion of microentrepreneurs’ total
returns. Interest rates charged by informal moneylenders are overwhelmingly
higher than those of MFIs.
Do poor people save?
Poor people save all the time, although mostly in informal ways. They invest in
assets such as jewelry, domestic animals, building materials and things that can
be easily exchanged for cash.
Access to secure, formal savings services provides a cushion when families need
more money for seasonal expenses and in tough times. Secure savings accounts
allow people to guard against unexpected expenses associated with illnesses,
build assets, prepare for old age or pay for school fees, marriages and births.
Why is microfinance so important for women?
In a world where most poor people are women, studies have shown that access to
financial services has improved the status of women within the family and the
community. Women have become more assertive and confident. Furthermore, as
a result of microfinance, women own assets, including land and housing, play a
stronger role in decision-making, and take on leadership roles in their
communities.
When is microcredit NOT appropriate?
Microcredit may be inappropriate where conditions pose severe challenges to
loan repayment. For example, populations that are geographically dispersed or
have a high incidence of disease may not be suitable microfinance clients. In
these cases, grants, infrastructure improvements or education and training
programmes are more effective. For microcredit to be appropriate, the clients
must have the capacity to repay the loan under the terms by which it is provided.
Source:
International Year of Microcredit 2005
http://www.yearofmicrocredit.org/pages/whyayear/whyayear_aboutmicr
ofinance.asp#glossary
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Appendix 3
Microfinance Glossary
Bankable people are those deemed eligible to obtain financial services that can
lead to income generation, repayment of loans, savings, and the building of
assets.
Collateral is a security or guarantee (usually an asset) pledged for the
repayment of a loan in case of financial difficulty.
Grameen Bank is the bank that invented the concept and practice of micro-
credit - providing working capital to the poorest of the poor without demanding
collateral - in order to help people lift themselves out of poverty. The bank was
founded in Bangladesh in 1983 by Professor Muhammad Yunus.
Informal Economy is the exchange of goods and services not accurately
recorded in government figures and accounting. The informal economy, which is
generally untaxed, commonly includes goods and services including day care,
tutoring, or black market exchanges.
Interest is a charge for a loan, usually a percentage of the amount lent.
Microcredit is a small amount of money loaned to a client by a bank or other
institution. Microcredit can be offered, often without collateral, to an individual
or through group lending.
• Group lending, also known as solidarity lending, is a mechanism that
allows a number of individuals to provide collateral or guarantee a loan
through a group repayment pledge. The incentive to repay is based on peer
pressure; if one person in the group defaults, the other group members
make up the payment amount.
• Individual lending, in contrast, focuses on one client and does not
require other people to provide collateral or guarantee a loan.
Microentrepreneurs are people who own small-scale businesses that are
known as microenterprises. These businesses usually employ less than 5
people and can be based out of the home. They can provide the sole source of
family income or supplement other forms of income. Typical microentrepreneur
activities include retail kiosks, sewing workshops, carpentry shops and market
stalls.
Microfinance refers to loans, savings, insurance, transfer services and other
financial products targeted at low-income clients.
Micro Finance Institution (MFI) is a business that provides financial
services that the poor can use. Every MFI is different, but all of them provide
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financial services to people who are poorer and more vulnerable than traditional
bank clients.
Microinsurance is a system by which people, businesses and other
organizations make payments to share risk. Access to insurance enables
entrepreneurs to concentrate more on growing their businesses while mitigating
other risks affecting property, health or the ability to work.
Microsavings are deposit services that allow people to store small amounts of
money for future use, often without minimum balance requirements. Savings
accounts allow households to save small amounts of money to meet unexpected
expenses and plan for future investments such as education and old age.
Remittances are transfers of funds from people in one place to people in
another, usually across borders to family and friends. Compared with other
sources of money that can fluctuate depending on the political or economic
climate, remittances are a relatively steady source of funds.
Risk is the chance of non repayment of a debt. The term risk can also refer to
variability of returns from an investment.
Unbanked describes people who have no access to financial services (services
that include savings, credit, money transfer, insurance, or pensions) through any
type of financial sector organization such as banks, non-bank financial
institutions, financial cooperatives and credit unions, finance companies, and
NGOs. Implicit in this definition is that financial services are usually available
only to those individuals termed “economically active” or “bankable”.
Sources:
International Year of Microcredit 2005
http://www.yearofmicrocredit.org/pages/whyayear/whyayear_aboutmicr
ofinance.asp#glossary
Global Education Project
http://www.globaleducation.edna.edu.au/microfinance/wordbank.htm
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Appendix 4
The Borrowers
After reading about a particular person in the microlending system who has
borrowed money, please respond, in a group, to the following questions:
How would you describe the borrower?
What do you think are characteristics lenders look for when they’re deciding
whether to process a loan?
What is the loan being used for? What do you think are typical types of
businesses that are associated with microcredit?
In your opinion, why was the loan successful?
Do you think the borrower will be successful from now on? Why or why not?
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Appendix 5
Additional Resources:
World Hunger Year:
http://www.worldhungeryear.org/why_speaks/ws_load.asp?file=67&style=ws_table
Great resource on Mercy Corps:
http://www.globalenvision.org/library/4/1062/
Free online distance learning course from UNDP/UNCDF:
http://www.uncdf.org/mfdl/index.php?_mode=students.home
Great resource for younger students from the Global Education Project:
http://www.globaleducation.edna.edu.au/microfinance/
Catch-all resource on microfinance:
http://www.microfinancegateway.org/section/about/
All Cow Fund:
http://www.cowfund.org/c/about/
Nobel Peace Prize:
http://nobelprize.org/nobel_prizes/peace/laureates/2006/press.html
Global Education:
http://www.globaleducation.edna.edu.au/globaled/go/cache/offonce/pid/1533;jsessioni
d=0BDB10DB1465E68326A0997A1D98864F
Grameen Bank Resource:
http://www.grameen-info.org/bank/WhatisMicrocredit.htm
Case studies from India:
http://ifmr.ac.in/cmf/wp-content/uploads/2007/12/case-studies-of-micro-
entrepreneurs.pdf
UN Secretary General’s Report on Efficacy of Microcredit:
http://www.gdrc.org/icm/un-report.html
CARE resources on microcredit:
• Story of Maria Landa who we featured last March for International Women's Day
(microfinance was CARE’s focus) -
http://www.care.org/newsroom/articles/2007/08/20070824_peru_womenwel
ders.asp
• Flash piece on Maria Landa's story -
www.care.org/features/flash/microfinance/index.asp
• Advocacy Action CARE developed in conjunction with Maria's story -
https://my.care.org/care/notice-description.tcl?newsletter_id=8072152
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