Microfinance - An Introduction

Microfinance 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.