Kogod Students Learn the Value of a Dollar
It’s staggering how much a few dollars can do for so many.
That’s the underlying principle behind microfinance, an economic engine that loans small amounts of money to people for whom $100 can mean the difference between financial success or ruin. In a world of 6 billion, roughly two-thirds live on about $2 a day.
Ghiyath Nakshbendi ’74 began working in microfinance in 1996, and last semester the Kogod School of Business executive in residence introduced American University’s first course on the subject from a business perspective.
“When I started in microfinance, it opened my eyes about the possibilities, and how much good these projects will do in alleviating poverty,” he says. “When I see a person who is destitute, who is a beggar, and when he starts getting these loans he starts buying goats and selling milk, you can see the success.”
Bangladeshi economist Muhammed Yunus is considered the father of microfinance. He founded Grameen Bank in his native country in 1983, offering small loans to the poor for things like tools, small-scale farming, and craft making. When he won the Nobel Peace Prize in 2006, awareness about microfinance exploded around the globe.
“Ever since I was in high school I have had an interest in microfinance,” says Suzanne Witkowski, a student in the Kogod class. “I want to incorporate my passion for accounting with my love for community service. I hope to one day work with MFIs around the world to help them improve their financial management and to continue to help others and improve our world.”
Today more than 10,000 microfinance institutions operate throughout the world, according to Nakshbendi. With 50 million borrowers and 60 million depositors, they are able to sustain themselves and the mostly working poor to whom they distribute loans.
Anyone can be a lender in this model. Last semester, Nakshbendi’s class took $100 and loaned it, through a microfinance institution, to a Peruvian woman who wanted to invest in her small grocery store.
While some of these institutions are for-profit, the majority of the field is comprised of socially-conscious people who hope their small scale lending can make a big difference in the lives of the poverty-ridden who have no access to the standard banking system, Nakshbendi says.
“The argument that Dr. Yunus started with—in order to alleviate poverty giving people money is not sufficient—” Nakshbendi says, “they will take it; they will use it; and then what? The idea is to provide them with capital, and they have the expertise in doing something to generate income. In the old days they used to go and get money from loan sharks, with high interest rates. It would never allow these people to succeed. Whatever they are making, they are paying back as interest or part of the principal. The argument is that if you give me money and I can start something on my own, after a certain period of time I will be able to generate the necessary income that will satisfy my needs. Sooner or later these borrowers are going to be depositors as well.”
The loans generally have 12-month terms, and interest rates under 15 percent. Institutions work with borrowers to ensure they have a business plan, and are able to subsist, save money, and repay the loan.
“What is interesting, the default rate is very minimal,” Nakshbendi says. “They are proud people, and they are committed to paying back their loans.”
Nakshbendi structured the course so that the upperclassmen and graduate students learn all aspects of the field.
“Microfinance needs different specialities,” he said. “It needs an accountant, it needs an internal auditor, it needs a management information system person, it needs a marketing man, it needs a banker, you name it.”
A true believer in the institution, Nakshbendi’s only concern is the small salaries MBAs can expect if they enter the field. That’s been somewhat alleviated through his experience with his AU students.
“Deep in their hearts they are so socially responsible,” he says. “When they look at business they don’t think, ‘I am going to make a killing, and the hell with the world.’ They look at it with the idea of helping others, adding value to their community, which is very refreshing.”
Alexis Acuna is one of those students.
“If ‘a commitment is planting a seed,’ then microfinance is the fertilizer that help these seeds grow in barren and dry lands,” she says. “People with the desire and know-how to work and make a decent and profitable living require the support of MFI to succeed. Just type in ‘microfinance’ on any search engine and you’ll find millions of success stories.”