Inequality and Microfinance Opportunities

“Inequality” is a loaded word, especially in a socioeconomic context. Depending on who you talk to, inequality can be used as justification for greater government intervention or be deemed an inevitable byproduct of the free market system. When the international development community decries the economic inequality of the human condition – releasing statistics, reports, photographs, videos, Facebook updates and Tweets – what is our collective goal? It is to reverse inequality, and eliminate the resulting poverty, by fostering opportunity – through a world in which all people can access the tools for a satisfying quality of life – including proper nutrition, clean water, adequate housing, healthcare and safe employment.

But how do we go from inequality to opportunity?

We know that donor funding alone cannot eliminate poverty. Instead the change we need must be sustainable and systemic. And so, we must change the conversation, and place new emphasis on developing a framework that identifies and promotes ways to foster equity, or equal chances for opportunities to work towards a brighter future for all people, at all stages of life.

The World Bank’s Human Opportunity Index (HOI) provides such a framework. Developed by economists from the World Bank, Argentina and Brazil, the HOI offers a methodology for identifying and correcting the causes of inequalities in opportunity, specifically for children. The study focuses on children primarily because:

“As a whole, societies with greater inequality of basic opportunities among children are more likely to show inequalities later in the lifecycle, despite individuals who beat the odds through their effort, talent and luck.”

This study also attempts to quantify inopportunity, leading to this important discovery:

“Between one fourth and one half of income inequality observed among Latin America and the Caribbean adults is due to personal circumstances endured during childhood that fell outside of their control or responsibility, such as race, gender, birthplace, parent’s educational level and their father’s occupation.”

The HOI helps to identify which circumstances outside of a child’s control or responsibility – such as race, location, parent’s education, access to electricity or clean water – can determine the child’s economic future. It goes on to provide statistical evidence on a number of intervening factors that can catalyze a child’s access to opportunity and lead them to a more productive life, including government support, community development programs – and even microfinance. These tools can help expand access to electricity and clean drinking water, improve literacy rates, and boost parents’ incomes – an effective way to level the playing field and foster opportunity.

How do microfinance opportunities contribute to a child’s economic outlook?

ACCION International has found that through microfinance opportunities parents can access the economic tools they need in order to succeed and in turn provide their children with better chances for a more productive life. Microfinance is the practice of providing financial services – such as loans as low as $100, savings and insurance – to the self-employed poor who use financial services to boost their small businesses. As a result of microfinance, the poor are able to work more efficiently, save money and use it to improve their families’ lives – through paying for school fees and vaccinations, improving family housing conditions and providing clean food and water.

ACCION has seen that by bringing financial services – and therefore economic opportunity – to working parents, the children benefit. Take Juan Pirir, a farmer and furniture maker from Guatemala. As a child, Juan had to work in the fields instead of receiving an education. Today, he has six children.

According to the Human Opportunity Index, Guatemala is the lowest-ranking nation in providing educational opportunities for children. The study also explains that children who live in rural areas and whose parents are uneducated agricultural laborers have many siblings and have nearly the worst chances of prospering later in life.

And yet, so far Juan’s children are beating the odds. Thanks to loans from ACCION partner Génesis Empresarial, Juan was able to trade in his manual tools for electric ones, increasing the number of furniture pieces he could produce threefold, therefore tripling his profits. Now, he has a full workshop of tools, and he is even employing three neighborhood boys part-time. As a result of microfinance, and the chance it has given him to grow his business, Juan was able to put a new roof on his family’s home while sending all six of his children to school.

When we interviewed Juan, he told us, “When I was young, I had to work. Now all of my children are in school,” he smiles. “It makes me happy to give them an opportunity I never had.”