Microfinance
Microfinance is a system of providing microcredit, that is small loans (under $200) in poor countries to promote entrepreneurship. The loans are made to small groups of women who form a mutual support network (and thus lower the risk of default). Programs are active in Bolivia, Peru, Mexico, and Costa Rica, Nigeria, Mali, Malawi, Togo, Chile, Bangladesh, India, Indonesia, Malaysia, Nepal, and Sri Lanka.
Microfinance originated from credit cooperatives and Rotating Savings and Credit Associations (ROSCAs), but the key idea of small loans to groups without collateral began with local initiatives in Latin America and South Asia in the 1970s. By 2006 some 65 million entrepreneurs around the world have received receive small loans without collateral. Skeptics argue that microfinance is an inappropriate policy intervention, and that what is needed is macroeconomic reform, and not microcredit delivery, in order to promote entrepreneurship and develop the private sector in low-income countries. Similar critiques have been made by traditional bankers who have stressed the general unfeasibility of providing financial services to the poor.
Major international organizations and philanthropies, such as the World Bank, have begun funding in order to speed up the reduction in poverty levels. They appreciate that women in poor countries have little access to funding, and see microfinance as a route to gender empowerment for women in developing countries who face great social, legal, and economic obstacles.
The lenders (Micro Finance Institutions or MFI) usually provide basic training in necessary business skills and set up peer support networks. The MFI interest rates range from 18% to 60% per year, well below the rates of local “money lenders,” who regularly charge between 120% and 300%. Many MFI also offer microinsurance packages that include life, health, and property insurance--even rainfall insurance.
The Grameen Bank of Bangladesh, which was founded by 2006 Nobel Peace Laureate Dr. Muhammad Yunus, is the world’s largest and most successful MFI. It serves more than seven million clients. The Banco Sol in Bolivia, and Bank Rakyat in Indonesia have noteworthy records as well. Grameen has pioneered new lending mechanisms known as progressive lending or complementary information mechanisms. Inspired by its previous success, in 2001 the Grameen Bank launched a new program they christened the Grameen Generalized System (GSS) or Grameen Bank II. This second-generation idea is commercially more sophisticated and better equipped than its earlier lending program, now called the Grameen Classic System (GCS) or Grameen Bank I.[1]
External links
Bibliography
- Armendáriz, Beatriz, and Jonathan Morduch. The Economics of Microfinance (2007) excerpt and text search
- Bhatt, Nitin, and Shui-Yan Tang. "Delivering Microfinance in Developing Countries: Controversies and Policy Perspectives." Policy Studies Journal 29#2 (2001) pp 319+ online edition
- Robinson, Marguerite S. Microfinance Revolution: The Emerging Industry (2 vol 2005) excerpt and text search
- Yunus, Muhammad. Banker to the Poor: Micro-Lending and the Battle against World Poverty (1999) online edition
notes
- ↑ Armendáriz and Morduch (2007)