Microfinance is a term for the practice of providing financial services, such as microcredit, microsavings or microinsurance to poor people.^[1] By helping them to accumulate usably large sums of money, this expands their choices and reduces the risks they face.^[2] As suggested by the name, most transactions involve small amounts of money, frequently less than US$100.^[3] Financial services is a term used to refer to the services provided by the finance industry. ... Microcredit is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs and to others living in poverty who are not considered bankable. ... Microinsurance is the provision of insurance to poor and low income households. ... The United States dollar is the official currency of the United States. ...

History

The origin of microfinance is often dated as late as the 1970s. Only then, it is often argued, did any programs pass two key tests:

• to show that poor people can be relied on to repay their loans, and
• to show that it's possible to provide financial services to poor people through market-based enterprises without subsidy.

Recent evidence gathered by Timothy Guinnane, an economic historian at Yale, raises questions about this view. Guinnane demonstrates that the success of Friedrich Wilhelm Raiffeisen's village banking movement in Germany, which actually began in 1864 and reached 2 million rural farmers by 1901, resulted in large part from its ability to pass both these tests. YALE (Yet Another Learning Environment) is an environment for machine learning experiments and data mining. ... Friedrich Wilhelm Raiffeisen (May 3, 1818, Hamm - May 11, 1888, Heddesdorf, currently known as Neuwied, Germany) was a German cooperative leader. ... Masouleh village, Gilan Province, Iran. ...

Guinnane shows how the village-based bonds of association of these early credit unions gave them both the information and enforcement advantages needed to make loans to people who were both too poor and too remote to access bank loans.^[4] Raiffeisen was moved to action by the poverty of the recently freed serfs, and by the degree of exploitation they faced from local moneylenders.^[5] The ‘bond of association’ or ‘common bond’ is a basic building block of credit unions and co-operative banks. ... Credit unions emerged to meet the demand for banking services from professional, middle class and poorer people who were not being served by banks. ... For other uses, see Bank (disambiguation). ...

The caisse populaire movement founded by Alphonse Desjardins in Quebec, also met these tests. Desjardins and his wife Dorimène had strong faith in these principles, founding the first caisse in 1900 (which she managed), until 1906, when a law governing them was passed in the Quebec assembly.^[6]. A credit union is a cooperative financial institution that is owned and controlled by its members. ... There have been two people, contemporaries from Quebec, named Alphonse Desjardins: Alphonse Desjardins, founder of Mouvement Desjardins credit unions Alphonse Desjardins, mayor of Montreal and Canadian cabinet minister This is a disambiguation page — a navigational aid which lists other pages that might otherwise share the same title. ... This article is about the Canadian province. ...

Like Raiffeisen, Desjardins was concerned about poverty. But he was spurred to action by his outrage over usury. In 1897 as parliamentary reporter, he learned of "one notable [court] case in Montreal within the last few days, in which a man obtained a loan of $150, and was sued for, and was compelled to pay in interest, the sum of $5,000".^[7] A boy from an East Cipinang trash dump slum in Jakarta, Indonesia shows what he found. ... Look up usury in Wiktionary, the free dictionary. ...

In the 1970s, a new wave of microfinance initiatives introduced many new innovations into the sector. Solidarity lending emerged as a distinctive new methodology, made famous by Dr. Muhammad Yunus, the founder of Grameen Bank, who was awarded, together with Grameen Bank, the Nobel Peace Prize in 2006. Solidarity lending involved collateral-free loans through solidarity groups and village organizations like this one in Bangladesh. ... For the Indian diplomat, see Mohammad Yunus (diplomat). ... The Grameen Bank (Bangla: গ্রামীণ ব্যাংক) is a microfinance organization and community development bank started in Bangladesh that makes small loans (known as microcredit) to the impoverished without requiring collateral. ... Lester B. Pearson after accepting the 1957 Nobel Peace Prize The Nobel Peace Prize (Swedish and Norwegian: Nobels fredspris) is the name of one of five Nobel Prizes bequeathed by the Swedish industrialist and inventor Alfred Nobel. ...

Microfinance and development

Today, microfinance plays a major role in the development of many African, Asian, and Latin American nations. Its impact is substantial enough to have warranted acknowledgment by the United Nations who declared 2005 "The international year of microfinance", reminding people that millions worldwide benefit from microfinance activities.^[8] UN and U.N. redirect here. ... Year 2005 (MMV) was a common year starting on Saturday (link displays full calendar) of the Gregorian calendar. ...

Development of the sector in India

In India, microfinance traces its roots to mid 1970s when some prominent Indian NGO like Myrada & Pradan started using the Self Help Group (SHG) model. The SHG is used as a platform for social mobilization and finance is one of the various services provided to the grassroot community through this model. It was widely replicated across other developmental NGOs. A political lobby movement organized by a network of citizens. ...

It is a community driven and managed microfinance model where the NGO plays the role of a facilitator, for instance providing capacity building services to the groups and building relationships with banks. A community is a social group of organisms sharing an environment, normally with shared interests. ... Look up model in Wiktionary, the free dictionary. ... NGO is an abbreviation or code for: Non-governmental organization Nagoya Airport (IATA code) This is a disambiguation page — a navigational aid which lists other pages that might otherwise share the same title. ... Capacity building is assistance which is provided to entities, usually developing country governments, which have a need to develop a certain skill or competence, or for general upgrading of performance ability. ...

During the late 90's , the Grameen model promoted by Muhammad Younus of Grameen Bank and the ASA model promoted by the Association for Social Advancement, both from Bangladesh, found rapid acceptance amongst the newer breed of microfinance institutions in India. This was due to the models' capability for rapid scaling in terms of client outreach. Also these models are less dependent on donor funds and passes the actual service charge to the clients while retaining a margin for its own growth. These models have proven to be robust revenue models. For the Indian diplomat, see Mohammad Yunus (diplomat). ... The Grameen Bank (Bangla: গ্রামীণ ব্যাংক) is a microfinance organization and community development bank started in Bangladesh that makes small loans (known as microcredit) to the impoverished without requiring collateral. ... The current version of the article or section reads like an advertisement. ... An institution is a group, tenet, maxim, or organization created by a group of humans. ... A service charge is a fee added to a customers bill. ... Economics distinguishes between the intensive margin and the extensive margin when decomposing an aggregate variable into its components. ... Look up revenue in Wiktionary, the free dictionary. ... Model may refer to more than one thing : For models in society, art, fashion, and cosmetics, see; role model model (person) supermodel figure drawing modeling section In science and technology, a model (abstract) is understood as an abstract or theoretical representation of a phenomenon,see; geologic modeling model (economics) model...

Slowly a distinct trend of shifting from non profit, grant supported organizations to for profit institutions (non-banking financial corporations) became visible in Indian microfinance sector. A non-profit organization (often called non-profit org or simply non-profit or not-for-profit) can be seen as an organization that doesnt have a goal to make a profit. ... Look up Grant, grant in Wiktionary, the free dictionary. ...

Criticism

There is, however, criticism towards microfinance institutions. In 2001, a Wall Street Journal article raised questions about the Grameen Bank,^[9] including repayment rate, collection methods and questionable accounting practices. Year 2001 (MMI) was a common year starting on Monday (link displays the 2001 Gregorian calendar). ... The Wall Street Journal is an influential international daily newspaper published in New York City, New York with an average daily circulation of 1,800,607 (2002). ... The Grameen Bank (Bangla: গ্রামীণ ব্যাংক) is a microfinance organization and community development bank started in Bangladesh that makes small loans (known as microcredit) to the impoverished without requiring collateral. ...

On a larger scale, some argue that if microfinance is a successful anti-poverty program, then government welfare could be shrunk or eliminated as inefficient.^[10] This article is about financial assistance paid by government organizations. ...

Research on the actual effectiveness of microfinance as a tool for economic development remains slim, in part owing to the difficulty in monitoring and measuring this impact.^[11] Questions have arisen regarding whether microfinance can ever be as important a tool for poverty alleviation as its proponents and practitioners would submit.^[12]

It is not widely known that interest rates charged to borrowers frequently range from 2.5% to a 4% a month (about 31% to 50% a year), depending on the country.^{[citation needed]} This is justified to pay staff salaries and technical assistance from rich countries.^{[citation needed]} Microfinance institutions argue that rates are not really high compared with those charged by local money lenders (often over 10% a month). They also point out that if their interest rates were not fair, they would have fewer borrowers and more delinquencies than in fact, they do. But it is quite controversial that they charge such high interests to poor individuals, with money that is often donated.^{[citation needed]} The type of interest rate charged to the borrowers is rarely disclosed by the non-government organizations which receive donations.

There are other critics in the section of critics to microcredit. Microcredit is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs and to others living in poverty who are not considered bankable. ...

Key debates

One key debate within microfinance has been whether donors and practitioners should focus on impact, i.e. improved living standards for the poor, or financial sustainability. The former approach has been called 'poverty lending' or 'the welfarist approach', whereas the latter is sometimes termed 'the institution-building' or 'financial system approach'.^[13] Whereas the welfarist approach often supplements financial services with other services such as education and health, institution-builders focus solely on financial service.

The arguments for this approach are that:

1. if poor people are willing to pay to use the institution, it must be offering them value
2. only by ensuring financial sustainability can the huge demand be met
3. donors are best to direct subsidies to other services like education and health through separate non-profit organizations.

Examples of the welfarist approach are FINCA International, and Freedom From Hunger. Examples of the institution-building approach are Accion International, BRI Unit Desa, and Women's World Banking. http://www. ... The United Nations Food and Agriculture Organisations five year campaign, Freedom from Hunger, was launched in 1960. ... ACCION International is a non-profit organization founded in 1961 whose mission it is to provide small loans to those around the world who are under-serviced by local banks. ... Womens World Banking (WWB) is a non-profit organization, based in New York, whose mission is to expand the economic assets, participation and power of low-income women entrepreneurs by helping them access financial services and information. ...

Another key debate centers on the appropriate target group for microfinance services. One view is that the most important form of microfinance is credit targeted to poor people who are also talented entrepreneurs. If these people gain access to credit, they will expand their businesses, stimulate local economic growth and hire their less entrepreneurial neighbours, resulting in fast economic development. While this approach has had significant results in the cities of the developing world, it has failed to reach the majority of poor people, who are rural subsistence farmers with little, if any, non-farm income. As urban-rural income inequities continue to rise in the developing world, this result is increasingly viewed with dissatisfaction.

The World Bank estimates that of approximately 1.2 billion people who subsisted on less than US$1 a day in 2003, 850 million lived in rural areas.^[14] There is increasing recognition that poor people can and do save informally at home -- but lose much of their savings because home is a risky place to save.^[15] There is also recognition that before rural farmers will have the confidence to start businesses, they must be able to gain more control over other household risks such as hunger, disease and natural disaster. This requires access to safe, flexible small-balance savings accounts.

A new microfinance paradigm is taking shape, with the goal of developing full-service for-profit banks for all poor people. This approach is exemplified by the transformations at Grameen Bank (referred to as 'Grameen II') since 2000 and has been championed by practitioners such as Stuart Rutherford, Graham Wright, Madeleine Hirschland and Marguerite Robinson. The Consultative Group to Assist the Poor (CGAP) has also published extensively on the new microfinance. These banks will be able to support their clients' efforts to control family risks as well as capitalize on business opportunities. They will offer savings, insurance, remittance services, and personal and business loans, to help clients grow their assets while increasing their incomes. The Grameen Bank (Bangla: গ্রামীণ ব্যাংক) is a microfinance organization and community development bank started in Bangladesh that makes small loans (known as microcredit) to the impoverished without requiring collateral. ... The Consultative Group to Assist the Poor (CGAP) is a consortium of 33 public and private development agencies working together to expand access to financial services for the poor in developing countries. ...

See also

Sustainable development Portal

• Sustainable development

Image File history File links Sustainable_development. ... Sustainable development is a socio-ecological process characterized by the fulfilment of human needs while maintaining the quality of the natural environment indefinitely. ...

Notes