Microfinance/Microcredit

The most famous example of a microfinance institution (MFI) is the Grameen Bank in Bangladesh, which was founded by Nobel Peace Prize winner Muhammud Yunus. In 1976 Yunus,a former economics professor, gave a $27 loan from his own pocket to a group of woman in the village of Jobra. The group’s successful repayment and the positive impact of the loan prompted Yunus to found the Grameen Bank, which in the 30 years since its inception has given out some $6 billion dollars in loans to 7 million borrowers. Grameen’s model has now spread throughout the world, as well as spurring innovation in other financial instruments for the poor. Many of these instruments share common features:

• Solidarity groups: many poor people lack physical assets to use loan collateral, so microfinance programs use informal groups as the basis of the financial instrument. For a loan, this means everyone in the group is responsible for an individual’s loan being repaid, and the group meets regularly to help one another out.
• Individual output: groups come together either to pool their individual savings (for example, 10 women provide $10 each week into a fund, each taking turns to spend the $100 for larger purchases) or as solidarity groups to obtain loans (as above), but almost always the output is focused on an individual. The group saves but the individual spends.
• Focus on women: most MFIs are focused on women, with the primary reasons being that women are more likely to use money to benefit the family was a whole than men are. Women are also believed to rely more heavily on social connections and so the mechanism of a solidarity group is believed to be more effective with them. Finally, increasing the purchasing power of women increases their status in the family, seen as a positive effect vs. many current relationships.

Although microfinance includes such financial instruments as savings mechanisms or insurance programs, by far the most prominent example of microfinance is microcredit (the extension of small loans to entrepreneurs too poor to qualify for bank loans). In fact, microcredit is so popularly known that many people initially associate most business approaches to poverty with it: “Oh, you work with business and poverty. Do you mean microcredit?”