The principle objective of those involved with development is that of poverty alleviation. In recent years perhaps the most potent tool available with which to tackle this problem is that of Microfinance. Microfinance is probably most accurately described as the lending of Microcredit, which is the provision of small loans to people who would usually not have access to any kind of financial services. The hope attached to Microfinance is that through the lending of credit economic growth will ensue, that if people who live in poverty with little realistic hope of economic advancement will at least have access to the financial tools with which to help themselves.
The idea of lending money to people to encourage them into micro enterprises is not new. It was practised in the nineteenth century and again in the 20th. However it was not until the 1970’s when a Bangladeshi economist named Muhammad Yunus decided to resurrect the idea starting with loans from his own pocket.
Muhammad Yunus (below left), it can be said has provided a figurehead for those who support the adoption of Microfinance practices. He founded the Grameen Bank in Bangladesh in the early 1970’s and his life’s work led to the Bank and himself been awarded the Nobel Peace Prize in 2006. His description of why he founded the institution is a reminder to all of what should be the purpose of Microfinance;
“Bangladesh had a terrible famine in 1974. I was teaching economics in a Bangladesh University at that time. You can guess how difficult it is to teach the elegant theories of economics when people are dying of hunger all around you. Those theories appeared like cruel jokes. I became a drop-out from formal economics. I wanted to learn economics from the poor in the village next door to the university campus”.
This approach by Yunus, his realisation that perhaps development is advanced best in the hands of the people, so long as they have the tools and the means by which to achieve this is the central thought of the Grameen Bank. This model, now well established is known and imitated around the globe and in differing contexts as governments and NGO’s attempt to replicate the work carried out in Bangladesh in other parts of the world.
Important innovations by Yunus are now seen as crucial in the implementation of a successful Microfinance program. Group lending for example is seen as an important step forward. Although the funds would be distributed to all within the group, it is the groups’ responsibility as a whole to ensure that the funds are repaid. This peer pressure has proved to be very important in maintaining high rates of repayment. If one member of the group ever defaults the whole group does. This demonstrates a coming together between modern economic practice and traditional informal finance practices as the even the threat of violence is sometimes used within the group to ensure repayment by all its members. As alien as that may seem to those in the developed world who take access to financial tools for granted the group method as employed by many Microfinance Institutions in the Developing World is aiding the outreach of such programs.
There are no set of definitive goals and targets in the issuing of Micro credit. Measuring its success can be open to lengthy interpretation. Academics studying the topic have given suggestions and guidelines as to how to measure a program’s success. Some for example suggest that the measure of a successful Microfinance program is how they adhere to their original social goals. That they set their own targets in terms of any ‘Social Mission’ that a program may set out with. Many believe that ultimately this is the best measure of any program.
Indicators of the success of a Microfinance program also include many measures beyond the payment and repayment of loans. Interaction with Microfinance institutions gives people access to many other types of information, for example on health and environmental issues. The access to funds allows for clients to take preventative measures with Health rather than waiting for conditions to worsen whilst having to wait to secure extra funds for medical treatment.
A strong social performance is the key aim of most Microfinance institutions but this can only be sustained by profitability. The fact remains that many micro lenders are still not returning a profit. The long term viability of this and whether or not Donors are prepared to indefinably keep up the supply of funds or whether they want microfinance institutions to look to long term sustainability is therefore a question that surely must be faced at some point.
Some doubt about Microfinance’s ability to reach the very poorest of the poor. Though today with many Microfinance programs running across the world there are increasingly growing questions as to whether or not given the range of contexts with which Microfinance is now being practised it is very hard to affix rules and regulations and indeed measures of success.
The best performance model will be hard to pin down as the demand for Microfinance spreads into many varying parts of the Developing World and even into the Developed World. The early innovations by Muhammad Yunas have been added to by others in consoltation with Lenders and communities. What is becoming clear overall is the positive impact this form of base economics can have on the world’s poorest people, not only through the lending of affordable loans to better their lives but through the knock-on effects of better access to healthcare information, education materials and even the empowerment of women.
Microfinance Gateway – Good overview site of current writing on this topic
The Times – Interesting article charting the rise in the number of Microfinance Institutions
Wikipedia – Microcredit definition
