Microcredit - An Introduction and Brief History

 I realized that this is something which I should probably put on here since I may not have given all of you "the pitch" on Microcredit, so here it is! (Sorry if its a bit long...)

Defined

The quick and dirty definition of microcredit - and microfinance as a whole - is the provision of financial services, such as savings accounts, insurance and loans, to impoverished entrepreneurs to enable them to start or expand a business and accumulate wealth

The Concept

The concept of microcredit is that people want to help themselves and, when given the chance, will do everything they can to improve their lives. Before microcredit large banks and lenders would not even dream of offering loans and financial services to the worlds poor. These people do not have any significant assets since they usually do not own the land they live on and don't have a large enough income to be able to save up money.

We in the developed world start building a credit rating very early on, and the banks are ok with loaning us money since we have assets which can be used as collateral in the event that we default on the loan (or at least our parents do). However, people in poverty do not have any assets and therefore don't have collateral so they are excluded from the worlds financial markets. Microcredit is based on the idea that if you give people a chance - for example a loan, even if they have nothing, they will make good use of the money and pay you back. With microcredit the only collateral is the persons reputation and good will. Microfinance institutions (MFIs) may still high interest rates compared to what we are used to, but they are certainly lower the moneylenders, and in the event of a default the bank works with the borrowers to help them eventually pay back the loan, even if it takes a lot longer.

Especially in rural parts of developing countries the only other option for these people to get loans is from money lenders. Money lenders can charge 100% + interest on these loans, and if you default, then beware since violence is the security that often used. And if you want to save money, then you need to pay the money lender to have an account! Thats the opposite of here, where the bank pays us so that we give them our money and they can loan it out!

To some people it may seem backwards thinking to give money to the worlds poor but them ask them to pay us back with interest. However, it is very empowering and rewarding for people to do things themselves, rather than just being given something. Microcredit is about treating people in poverty the same, or at least give them the same opportunities as people in the developed world have.

A Brief History

For a more detailed version take a look at A Banker to the Poor by Muhammad Yunus. In the 1970s Yunus was a professor of economics at the University of Chittagong, in Bangladesh. He took his students out to a nearby village where he learned how the women were being forced to borrow from a moneylender to rent bamboo from him, they then made bamboo stands and then had to sell them back to the same moneylender. For a whole days work she made only a couple cents profit. All she needed was a little bit of money to be able to buy her own bamboo.  Yunus found out that the entire village needed only 27 dollars to do things like be able to buy their own bamboo, which he quickly loaned out to them from his own pocket. From there it was a struggle working with banks and governments to set up a branch in Chittagong and then eventually form  the independent Grameen Bank.

The rest is history as they say and from the Grameen website: "As of March, 2010, it has 8.07 million borrowers, 97 percent of whom are women. With 2,564 branches, GB provides services in 81,351 villages, covering more than 97 percent of the total villages in Bangladesh." All the while Microcredit has spread throughout the world, so much so that 2005 was the UN's  International Year of Microcredit and Muhammad Yunus and the Grameen Bank jointly won the Nobel Peace Prize in 2006.

Microcredit / Development Books to Read!

I was feeling ambitious a couple weeks ago so i went out and bought a bunch of books to read. Needless to say I haven’t actually had time to read them yet. But they are on my to do list.

The first book, which I have started reading is “The Fortune at the Bottom of the Pyramid: Erradicating Poverty through Profits” - by C. K. Prahalad. So far it seems like a very interesting book. It all about how big companies have to start seeing the developing world as a potential market, and treat them like customers.

Other books a picked up where “Capitalism at the Crossroads: Aligning Business, Earth, and Humanity” - by Stuart Hart and “Poverty Capital: Microfinance and the Making of Development” - by Ananya Roy.

More books for my wishlist include: “Portfolios of the Poor: How the World’s Poor Live on $2 a Day” - by Daryl Collins, Jonathan Morduch, Stuart Rutherford, & Orlanda Ruthven. And to provide a little balance: “Whats Wrong with Microfinance?” by Thomas Dichter. Also another book that my dad just brought to my attention is “War Games” - by Linda Polman looks very good, it takes a look at the impact aid has had on conflict in the developing world, whether it has help alleviate suffering or been a cause of further violence.

I keep remembering books that I forgot to put on here, so heres another couple (theres soo much!): “Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa” - Dambisa Moyo, “A Billion Bootstraps: Microcredit, Barefoot Banking, and The Business Solution for Ending Poverty” - Philip Smith, Eric Thurman and “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else” - Hernando De Soto

Of course an almost essential read for this trip has to be “Banker To The Poor: Micro-Lending and the Battle Against World Poverty” and “Creating a World Without Poverty: Social Business and the Future of Capitalism” both by Muhammad Yunus.

I made a separate page for the list of books I mentioned, I will keep updating that page as i come across more books.

Cheers,

Mike

Welcome!

Hey,

OK i switched blog sites because here you guys can post comments on my posts!

My name is Michael Clark, I am the Vice President of the Western Microcredit Society at the University of Western Ontario. Throughout the year I have been trying to organise a trip for myself to Bangladesh to visit the Grameen Bank and hopefully encourage some other people to join me! Finally it looks like it is all good to go! Myself, Ross Strike, and Navid and Nadeem Nathoo will all be going in May and June!

Alright so it is only a couple weeks until we leave for Bangladesh! Mine and Ross’ flights are on May 4th arriving in Dhaka on May 5th and we return on June 17th!

I’m all set to go! I got my visa back in the mail from Ottawa, I go get my last shot tomorrow, Flights are booked, hotel is good to go (I think!).

The hotel has given us a discount on rooms:

• Single bed with AC, TV and a sofa for $12,
• Double bed with AC, TV, sofa, and FRIDGE for $15, and
• Double bed, AC, TV, sofa, fridge and INTERNET and a CARPET for $20!!

I think I am going to go with the $20 room, aka the Blossom Single, it will be nice to have internet and not have to worry about paying for the internet in the lobby and waiting to get online if its busy. Plus we will be living there for 44 days! so I want to be comfy enough!

Flights the prices started to go up as I waited longer to buy them, i bought mine at $1,650 ish for there and back. We are flying Etihad Airways connecting through Abu Dhabi. It was the most direct flight, with only one stop over and the quickest travel time.

I will post another update soon about Ross, Navid and Nadeem who are also travelling on the trip with me!

Cheers,

Mike