Micro-Finance: Why it works…and a bit of history

Everything You Need To Know About Micro Finance

What Is Micro Finance?

Microfinance is a category of banking service that is issued to unemployed or low-income individuals, or groups who otherwise have no other access to financial services.  Essentially, the goal of micro-finance is to give low-income individuals an opportunity to become self-sufficient by providing a way to save money, borrow money and get insurance.

Most people are opinionated on this topic, some believe that micro-finance lifts people out of poverty while others see it as a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses.

History of Micro-Finance

Whilst the concept of micro finance has been used globally for centuries, it is Bangladesh’s Muhammad Yunus who is acknowledged with being the pioneer of the modern version of micro-finance. While working at Chittagong University in the 1970s, Yunus began offering small loans to impoverished basket weavers. Yunus then carried on this mission for nearly a decade before eventually forming the Grameen Bank in 1983 as a method to reach a much wider audience. Yunus and Grameen Bank were jointly awarded the Nobel Peace Prize for their micro-financing work, this model has inspired many actors in micro finance.

Joseph Blatchford the third Director of the United States Peace Corps, a University of California law student was also acknowledged for his efforts in building the modern-day micro finance as we know it. Blatchford founded the non-profit organisation Accion, which started offering small loans to entrepreneurs in Brazil to evaluate if an on-time influx of money could help lift them out of poverty. This operation was a success, with the organization’s 885 loans helped create and stabilize 1,386 jobs. Accion expanded the model to 14 other Latin American countries over the next decade.

Why Micro Finance works

Microfinance is based on a certain number of observations:

1. It was believed that the poor were less creditworthy than the rich. However, using original mechanisms based especially on group solidarity, as well as suitable repayment plans, Micro-finance Institutions (MFIs) actually obtain rather satisfactory loan repayment rates of about 97 or 98%.
2. An institution that grants loans of very small amounts to poor clients can be financially viable, without having to call on donations or grants after a start-up period.
3. Microcredit makes it possible for even very poor people to develop an income-generating micro-activity, which may be commercial, artisan or agricultural.
4. MFIs can contribute greatly to women’s empowerment and to their insertion into social and economic life.

What do YOU think is the role of micro-finance in our market?

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