Microfinancing

Microfinancing

An Introduction To Microfinance

The introduction of microfinance came in the 1970's giving people, who previously had no access to credit, small loans to set up and grow their personal wealth or small businesses. It gave people a chance to use their entrepreneurial skills that otherwise would not have had a chance. In areas like Bangladesh, loan sharks were king at the time and if one wanted a loan from them then there were faced huge interest rates, 200 to 300% a year and rapid repayment dates (Gross, 2008).

Microfinance has only been around for a brief while in terms of conventional banking and lending but only in the past few years has it started to gather momentum. This part will give a brief background into the history of microfinance before exploring what it has achieved and what there is still to be done. This study will highlight the impact microfinance has had on people and places, with use of case studies, in its brief existence. There is a lot of information written on this topic, both positive and negative. Through this study both sides will be discussed in order to understand microfinance and its impact on financial lending.

Microfinance has evolved and adapted to suit the needs of clients but that same basic model that Muhammad Yunus created is still in place. “I was shocked to see how poor people in Jobra suffered because they could not come up with small amounts of working capital. The amount needed was less then a dollar a person. They could get that money only against extremely unfair terms. I made a list of people who needed this kind of money. I came up with 42 people. The total amount they required was $27. How easy it was for us to talk about millions and billions of dollars - but we were paying no attention to the $27 requirement for 42 able bodied, hardworking, skilled people.”(Yunus, 2001:22)Muhammad Yunus lent $27 dollars to stool makers in Jobra, Bangladesh. He recognised that even with such a small amount, 42 people could benefit and help themselves out of poverty. He saw that he could inspire them into using their entrepreneurial skills to give them, and their communities hope of a brighter future. Grameen Bank was formed in 1976 and began to offer micro-loans to poor people to try and help them out of poverty. Grameen Bank's methodology is almost the reverse of conventional banking methodology. (See table below)This table is very important in the overall assessment of microfinance and its impact on conventional financial lending and will be referred to throughout the study.

The major concept behind microfinance is that poor persons, who can supply no collateral, should have get access to to some sort of economic services. Microfinance started with microcredit: the provision of little borrowings (20-50 euros) to very poor families to assist them enlist in creative and self-sustaining activities. Since the thriving initiation of formalised microcredit in the 1980's several other complementary services have popped up ...