The Birth of Microcredit and its Advancement in Today’s World – Carola Bertone, Italy

Microfinance has proved its value, in many countries, as a weapon against poverty and hunger. It can really change people’s lives for the better, especially the lives of those who need it most.” – Kofi Annan

Background

In the last decades hundred of microfinancing projects and funding ideas have been made a reality, but without as large an impact as envisioned. In fact, the money bwing sent to poorer countries is well out of proportion with the increase in quality of the grantees’ lives. Today, in 2016, more than 1 billion people struggle to make ends meet, with shortages of basic goods and services. Microcredit is different from other kinds of aid, such as organisations that provide millions of dollars of funding in developing countries – it only helps on a small scale in a manner that is direct and local.

In 1977 the Grameen Bank was founded, the start of microcredit in Bangladesh, which is considered one of the poorest countries in Asia.

Microcredit, termed by Muhammad Yunus as a human right, is “A small financial loan ($50-$150) made to individuals to make them start their own business and work their way out of poverty, based on trust, and collateral free”. One aspect of microfinance that distinguishes it from the traditional financial system is the “joint liability concept,” where individuals, usually women, group together to apply for a loan, and hold joint accountability for its repayment.

One day on his quest to find a way to help inhabitants of villages in Bangladesh, Yunus met a bamboo weaver who, for less than 1$, was indebted to a money lender. From his own pockets, the professor lent 0.64$ to the weaver. In 1976, Muhammad Yunus,  the then Head of the Rural Economics Programme at the University of Chittagong, launched an action research project in the village of Jobra, adjacent to Chittagong University, to examine the possibility of designing a credit delivery system to provide banking services targeted at the rural poor. He discovered that the poor as well as the lower income group were facing major problems in accessing credit, due to a lack of capital and the fact that they were self-employed.

Yunus’ innovation won him the Nobel Peace Prize in 2006. Another activist who contributed in setting the foundations for the microcredit movement was Dr. Akhtar Hameed Khan from Pakistan. 2005 was proclaimed by UN as the “International Year of Microcredit” and it was recognised then that microfinance plays an integral part in our collective effort to achieve the Millennium Development Goals.

 

Effects

It is incredible how a small sum of money can affect someone’s life. Those who have access to microcredit can shift their focus from “everyday survival” to “planning the future.”

Since microcredit was first introduced, it has produced vast improvements in the development and growth of local economies. Yunus’ Grameen Bank is one of the most successful initiatives in providing credit to the poor. Such programmes have reduced poverty by increasing individual and household income levels, improving healthcare, nutrition, education and empowering women. More than 80% of recipients are women and in fact, they are the ones microfinance is mainly targeted at, in order to promote gender equality and effectively decrease poverty amongst them. In regions where women’s rights and freedoms are restricted, women have become more visible, economically active and are more capable to negotiate within the public sphere. What is more, according to Ackerley and Goetz-Gupta studies,  women are more dependable when it comes to repaying their loans.

In addition, more children can attend school and stay enrolled for longer, further aiding potential borrowers in developing a sense of accountability and self-confidence, with regards to their loan repayment.

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Another huge advantage is seen when people with microcredit can afford health care in time, rather than wait until an illness has reached crisis proportions. Access to health services and protection is an important aspect of the fight against poverty. This is why some microcredit programs include education on basic healthcare issues as part of their program. The World Bank report, Dying for Change, stated that the number one cause of poverty is illness. Having access to microcredit can improve children’s health and is correlated with lower infant mortality rates, deaths from diarrhea and overall malnutrition.

However, not all is ideal – In the Indian state of Andhra Pradesh, called the “Mecca of Microfinance”, in 2010, a series of suicides by rural borrowers caused concern, highlighting the contrast between their status and the great fortunes made by the executives of microfinance corporations. The government claimed that their aggressive tactics led to this situation. Interest rates were sometimes astronomically high, with no apparent intent to lower them

It is also important to note that some microenterprises fail after just a few years of activity and when a business venture fails and the loan has to be repaid, people are usually forced to sell their personal assets. In Bolivia, after more than 20 years of microfinance, the market is saturated with people who have ended up more isolated than ever.

Unconventional microcredit ideas from around the world

An innovative new approach to microfinance that of water supply and sanitation, which essentially provides individuals with loans to enable them access to an improved water source and basic sanitation in developing countries. For instance, WaterCredit, founded in 2003, connects microfinance institutions with water and sanitation NGOs to provide water and sanitation microcredits, or the Sanitation Revolving Fund in Vietnam.

Micro energy loans enable people to invest in solar energy for their homes and businesses, which allows children to study at night as well as reducing the cost of the electricity bills.

Kiva is a non-profit organisation, aiming to alleviate poverty, allowing common people to lend money via the internet to low-income entrepreneurs and students all over the world. Founded in 2005, it has crowd-funded alone more than 1 million loans.

A Model for Implementation

Inspired by the success of the Grameen Bank, in the late 90s, there was a continuous growth in the number of micro-finance institutions appearing around the world, some initiated by NGOs and others set up by grants. As a result, today more than 150 million people around the world have profited from Micro-finance institutions.

However, at the same time, several estimates suggest that hundreds of millions  of  people  are not able to access financial services that could help them improve their life conditions.

Regarding women, a great and successful example would be SEWA Bank, founded in 1971, which aims to empower and support poor self-employed women that has been endorsed by the World Bank as a model that can be replicated elsewhere.

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In 2006, Freedom from Hunger, an international development organisation working in nineteen different countries, with the help of the Bill & Melinda Gates Foundation, launched the Microfinance and Health Protection initiative, heralding a large role for microcredit in health financing.

“Should microfinance address the marginally poor or the extremely poor?” was a question Morduch (1999) set out to answer. He ended up discovering an increase of just 1$ in income for the very poor has five times greater impact than the same amount for the marginally poor.

Whether microcredit can work worldwide, it is hard to say; it really depends on the reality of a given country. One of most the notable example of failure was the Good Faith Fund in Arkansas, due to the smaller percentage of those living in poverty, with factors such as the lack of entrepreneur opportunities for the poor and group structure also having played a role in the failure.

Though there are some stories of failure, microfinance has managed to spread over five continents and hundreds of countries, potentially being a viable solution to economic development and poverty alleviation.

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