It’s time for another blog series at globalEDGE! This week we’re going to be talking about microfinance; but before we get into this topic further, I’d like to give a little background on what exactly microfinance is.
People have been lending and charging for money for a long time (with some records showing that interest was required on loans as far back as the 1400s). However, in the entire history of lending money, one group of people was always forgotten: the poor. Microfinance is a relatively recent trend that was developed to help meet the financial needs of the poor that had arisen by them being left out of this practice.
The credit for founding the microfinance movement is often given to Dr. Mohammad Yunos, founder of Grameen Bank and Nobel Peace Prize Laureate. Dr. Yunos found that by giving very small lines of credit to poor people in India, he was able to help them to break the typical cycle of poverty (i.e. low income, low savings). By further helping the poor out by guiding them in how to spend the money in an investment (such as buying a cow to sell the milk and calves), he thought he’d be able to eventually end poverty. That’s the thought process that started modern microfinance.
Microfinance has grown dramatically in the last several years. The vast majority of microfinance loans are given out through microfinance institutions (MFIs), which are specialty organizations that are created with the sole purpose of giving microcredit. MFIs can range from small, non-profit groups to huge, commercial organizations. The requirements vary a lot as well: some MFIs require a small amount of collateral or a group loan in order to ensure repayment, while others have no requirements. The one common theme all of these organizations have is that they give amounts well below the minimum thresholds that traditional financial institutions have.
Through this blog series, globalEDGE will be talking about some of the pros and cons of microfinance, main institutions involved in microfinance, and how you can become involved in microfinance personally. If you’d like more background on microfinance, check out these descriptions at Kiva.org and Microfinance Gateway.