28 December, 2008
A Brief History of Microfinance
By Tamsin Harriman at the Common Interest Foundation
Microfinance as we know it began, rather famously, with a $27 loan. Dr Muhammad Yunus, then an Economics professor in Bangladesh, noticed that the poor people around him, though they were very hardworking, were trapped in a vicious cycle of dependency on moneylenders and thus remained incredibly poor. They had to borrow from moneylenders to buy supplies for their stool-making businesses, because they could not get loans from traditional banks, who viewed the poor as too risky to lend money to, especially since they have no collateral. However, the amount they needed to borrow to create their wares was minuscule. Determined to end this situation, Dr Yunus lent money out of his own pocket to forty-two poor villagers - the total amount was only $27. When the villagers all repaid their loans on time, and began earning more from their businesses, Dr. Yunus realized his idea worked well and decided to create a bank that lent only to the poor, and with no collateral required. He called it the Grameen Bank (Grameen means "Village" in Bengali). This idea, lending small amounts of money to the very poor for their businesses to help raise them out of poverty, became known as microcredit.
Grameen was highly successful, and grew rapidly throughout the 1970s, becoming an official bank in 1983. Other microcredit organizations, such as ACCION, were also taking off at this time. ACCION was started in Latin America by a law student named Joseph Blatchford, and had already been doing significant development work in the 1960s. Seeing that their development efforts were not doing enough to help people out of poverty, ACCION pioneered its microcredit program in Recife, Brazil in order to address what they saw as the fundamental problem of poverty - lack of resources. This program saw great success, and today ACCION is one of the largest microfinance initiatives (MFIs) in the world.
The success of Grameen, ACCION, and other early microcredit initiatives spurred an explosion of interest in microcredit. In the 1990s, there was an enormous worldwide expansion of microcredit programs. During that decade, as well, some organizations realized that credit alone may not be enough to help the poor. They began to expand beyond loans, offering other services such as savings or insurance. Hence the term "microfinance" was born. This includes microcredit, which is still a large percentage of the services MFIs offer, but also any other financial service provided to the poor (savings, insurance, etc). Microfinance has become the standard term for the provision of financial services to the poor.
Microfinance programs around the world continued to grow with great success - most MFIs have a 98% or higher loan repayment rate, and have helped significant numbers of their clients escape poverty. Because of this, the early 2000's saw increased recognition of microfinance by governments, the media, and international organizations. The United Nations declared 2005 "The Year of Microcredit", and in 2006 Mohammad Yunus, and Grameen Bank, were awarded the Nobel Peace Prize, spurring even greater interest in microfinance. Because of the increased awareness of microfinance, and many MFIs' ability to become profitable while still helping the poor, many banks and other institutions have begun to invest in MFIs, giving them a new source of funding in addition to donations. Now, MFIs are very varied, ranging from small operations to multinational ones, and from credit-only organizations to ones that offer the full range of financial services. This trend of increasing diversity as well as increasing outreach, if it continues (and it looks like it will), will give poor people who want to take out loans or open a savings account a choice of several MFIs, with different products and rules, to do this with - a choice that has been previously nonexistent for the poor. With investment, repayment rates, and outreach all high, as well as demonstrated success in helping the poor, the future of microfinance looks bright and exciting.
Microfinance as we know it began, rather famously, with a $27 loan. Dr Muhammad Yunus, then an Economics professor in Bangladesh, noticed that the poor people around him, though they were very hardworking, were trapped in a vicious cycle of dependency on moneylenders and thus remained incredibly poor. They had to borrow from moneylenders to buy supplies for their stool-making businesses, because they could not get loans from traditional banks, who viewed the poor as too risky to lend money to, especially since they have no collateral. However, the amount they needed to borrow to create their wares was minuscule. Determined to end this situation, Dr Yunus lent money out of his own pocket to forty-two poor villagers - the total amount was only $27. When the villagers all repaid their loans on time, and began earning more from their businesses, Dr. Yunus realized his idea worked well and decided to create a bank that lent only to the poor, and with no collateral required. He called it the Grameen Bank (Grameen means "Village" in Bengali). This idea, lending small amounts of money to the very poor for their businesses to help raise them out of poverty, became known as microcredit.
Grameen was highly successful, and grew rapidly throughout the 1970s, becoming an official bank in 1983. Other microcredit organizations, such as ACCION, were also taking off at this time. ACCION was started in Latin America by a law student named Joseph Blatchford, and had already been doing significant development work in the 1960s. Seeing that their development efforts were not doing enough to help people out of poverty, ACCION pioneered its microcredit program in Recife, Brazil in order to address what they saw as the fundamental problem of poverty - lack of resources. This program saw great success, and today ACCION is one of the largest microfinance initiatives (MFIs) in the world.
The success of Grameen, ACCION, and other early microcredit initiatives spurred an explosion of interest in microcredit. In the 1990s, there was an enormous worldwide expansion of microcredit programs. During that decade, as well, some organizations realized that credit alone may not be enough to help the poor. They began to expand beyond loans, offering other services such as savings or insurance. Hence the term "microfinance" was born. This includes microcredit, which is still a large percentage of the services MFIs offer, but also any other financial service provided to the poor (savings, insurance, etc). Microfinance has become the standard term for the provision of financial services to the poor.
Microfinance programs around the world continued to grow with great success - most MFIs have a 98% or higher loan repayment rate, and have helped significant numbers of their clients escape poverty. Because of this, the early 2000's saw increased recognition of microfinance by governments, the media, and international organizations. The United Nations declared 2005 "The Year of Microcredit", and in 2006 Mohammad Yunus, and Grameen Bank, were awarded the Nobel Peace Prize, spurring even greater interest in microfinance. Because of the increased awareness of microfinance, and many MFIs' ability to become profitable while still helping the poor, many banks and other institutions have begun to invest in MFIs, giving them a new source of funding in addition to donations. Now, MFIs are very varied, ranging from small operations to multinational ones, and from credit-only organizations to ones that offer the full range of financial services. This trend of increasing diversity as well as increasing outreach, if it continues (and it looks like it will), will give poor people who want to take out loans or open a savings account a choice of several MFIs, with different products and rules, to do this with - a choice that has been previously nonexistent for the poor. With investment, repayment rates, and outreach all high, as well as demonstrated success in helping the poor, the future of microfinance looks bright and exciting.
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