What is microfinance/microcredit? Cont'd

As I mentioned before microcredit is a portion of the work done in microfinance. Microcredit is the idea of loaning small amounts of money to people so they can have the opportunity to begin to pull themselves out of poverty. The loans are given with an interest rate but usually at a very reasonable rate that will not overwhelm the borrower. Although there are some companies that do this to solely make a profit and they may charge a higher interest rate but I will wait for another post to address that way of business. As I began to tell you in the previous post microcredit is an extremely important part of microfinance, and in the 1970s a few experimental programs were really seeing success. The main one I plan to focus your attention to is The Grameen Bank in Bangladesh. This bank was able to find great success with the way they approached the idea of microcredit.

The Grameen Bank was founded by Professor Muhammad Yunus. The story goes that he went that in 1974 during a terrible famine Professor Yunus visited a nearby village named Jorba. There he was astonished to find how $27 can change the lives of 42 people (Microplace). He let them borrow $27 out of his pocket that day so that they could buy the bamboo for the stools that they produced to make money. After he realized the power microcredit had in helping people make their way out of poverty he began to think of a more formal way of doing business. He founded the Grameen Bank in 1983 and it has grown quickly since then. According to the Grameen Bank website they were able to make many loans by implementing new strategies in microlending. One of their most important principles is to work with their borrowers when making loans. They work out repayment plans with what may work best with their borrower. They may choose to pay back weekly, bi-weekly, monthly, or whatever is most convenient. Also, when the borrower is struggling to make payments officials from the bank will reschedule their payments to make it easier without making the borrower feel like they have done something wrong (Grameen). They also believe that interest should never be more than the amount of the loan. The point of the loan is not to make money on the loan and cause stress but it is to help people with their struggles in poverty. The Grameen Bank also makes loans to women. This is very different for a country that is male dominant like Bangladesh. The bank says that women are more likely to pay back the loan and have better entrepreneurial ideas that will ultimately help their family. That is why most of the loans made by the bank are made to women. Lastly, the bank does not allow loans to be made unless they are part of a group of borrowers. The group only is allowed more loans if previous loans are paid back. This is to help ensure a better repayment record from the borrowers. Grameen Bank has been very innovative in the way they have taken on this challenge. They led the way in microcredit and are still prospering. This is just a single example of many that are making a difference.

But microfinance and microcredit is not all positive experiences. It is difficult for many of these MFIs (Microfinance Institutions) to make enough money to cover their operating costs. This will cause many MFIs to start to consider harsher requirements for their borrowers and will start to deteriorate the real motive behind microfinance. Although MFIs still face many challenges they have been flourishing. There are now international conferences for MFIs held around the world with thousands of MFIs that participate. Even large conventional banks like Citigroup are now offering microcredit investment options for their clients. High net worth people are also beginning to invest in microfinance opportunities around the world and making a real difference.


Now that you know what microfinance please stay tuned for more posts on upcoming events, news, and highlights on companies and tactics used by MFIs.