Since 1976, when Muhammad Yunus founded Grameen Bank in Bangladesh, microfinance has received a lot of attention in the economic development field. Advocates have celebrated its successes in helping people support themselves, while others have criticized interest rates and emphasis on lifestyle changes. Now, the situation has shifted as mobile money has emerged as an alternative that serves individuals and small businesses in developing countries. Which system is better may ultimately depend on the needs of the user, though both are important options to have available.
What Is Mobile Money?
Mobile money is a service that allows people to send and receive cash, save money in a deposit account, borrow money, pay bills, or accept cash payments from customers using mobile phones. Mobile money doesn’t require participants to use credit cards or traditional banks, and the amounts involved may be quite small. Mobile money services are provided by for-profit companies, which charge fees and interest at market rates.
Microfinance is similar in that it involves providing financial services to those who are excluded from traditional banking. But in contrast to mobile money, microfinance institutions are actual lenders who provide small loans to recipients who use them to start or grow a business, for example buying supplies or improving facilities. Microfinance loans are often administered by charities or other nonprofits, although participants still pay interest and fees, which can be controversially high.
When Microfinance Loans Are the Best Option
In some cases, microfinance loans may be a better option than mobile money remittance services or loans offered by mobile money providers. Mobile money services that enable receiving gifts or payments are only helpful if someone has paying customers, friends, or family who are willing to send cash. While remittance services allow money to move around more efficiently, they don’t inject new capital into a community. A microfinance loan can give an aspiring entrepreneur needed capital when that person’s family and friends aren’t able to lend money.
Second, microfinance loans sometimes offer financial training or require recipients to join support groups with other loan recipients. For someone who is new to running a business, these extra forms of support may be helpful. In comparison, mobile money loans do not come with any training or support. And in some cases—though not always—the service rate offered by a microfinance institution may be lower than the rate offered by a mobile money provider.
When Mobile Money Is the Best Option
What is mobile money’s advantage? While microfinance loans have played an important role in poverty alleviation, sometimes what’s needed isn’t a loan but a way to transfer money efficiently. For example, Quartz reported on a resident of Uganda whose business required him to make a nine-hour bus trip several times a month to collect payments. Since he began using mobile money, he’s been able to forgo the long bus rides and expand his business.
Other people want to send money to help out relatives living in faraway villages or different countries. They can use mobile money to transfer cash, potentially obviating the need for loans and other forms of assistance.
And even when people are looking for a loan, borrowing via mobile money will sometimes be the better choice. Microfinance loans sometimes come with ethical strings attached. For example, Grameen Bank promotes precepts known as the 16 Decisions, as the Yale School of Management notes. These include, among other items, pledges to plant vegetable gardens and abolish dowries. Borrowers who don’t share the values of microfinancing organizations may prefer to borrow money from another source.
There’s no doubt that many disadvantaged communities around the world—and women in particular—have benefited from microfinancing. But for those whose needs microfinance can’t meet, mobile money may offer a path to financial vitality.