Micro-financing provides hope.
Living the life of poverty in a Third World country is an experience many can not truly identify with. For large, poor rural populations with no money or other resources, there is often no chance of ever escaping this life, for generations to come. Making any positive changes on a large scale can be monumentally difficult, but micro-finance may just be making inroads to improving the quality of life for some of the world's poorest people.
Micro-Finance Defined
Micro-finance is a type of private assistance that provides very small loans, termed "micro," to people living in developing countries. Loans are provided to poor people who do not have access to credit. Even if they do, the rates are typically so high they are rarely ever able to pay the loan off due to exploitation by local money lenders. Micro-finance loans average about $100 and current micro-finance interest rates are typically 40 percent to 50 percent when expressed as annual percentage rates. These rates may seem high, however, they are still lower than other sources of small loans for the poor.
Goals of Micro-Finance
One of the goals of micro-finance is creating opportunities for the large population of unemployed in rural areas. Helping the poor, mostly women, with an organizational structure they can monitor and oversee themselves is another goal.
Typical aid programs are historically unsuccessful, due to stifling levels of government control or corruption. Micro-finance is one of the very few large scale aid programs proven to work because it is run by the private sector to support the private sector, and is not a government agency or nongovernment organization.
The First Micro-Finance Bank
Grameen Bank was the first micro-finance bank, and has now been in existence for over 30 years. It started as a project formed in 1976 by Professor Muhammad Yunus, an Economics Professor at Chittagong University in Bangladesh. He wanted to help village women in Bangladesh raise themselves from poverty, lending them money to buy cell phones, then encouraging them to charge neighbors who wanted to use the phones. His project started based on the notion that abilities of the poor are underestimated, and he viewed them as people who learned thrift, persistence and creativity due to living on $1 to $2 per day. What they were lacking was access to funding to start and grow businesses.
Professor Yunus received the Nobel Peace Prize in 2006 for his humanitarian work in founding and running Grameen Bank. The bank has been profitable since 1983, but does not mark up its interest rates to what the market will bear, which businesses typically do to maximize profits. Professor Yunus feels the only important thing to accomplish when helping the poor is to recover costs.
Success or Failure?
Today the micro-finance field has become crowded with continued rapid growth. What started out as nonprofit work has been infiltrated with commercial investors and for-profit entities. More than 1,200 micro-finance institutions have appeared in recent years, and the industry is still growing at 25 percent per year with approximately 64 million individuals borrowing money.
Future Prognosis
Success and progress can be very slow, sometimes taking more than a generation. Micro-finance raises standards of living slowly but surely, and The Grameen Foundation, a separate nonprofit entity from Grameen Bank, has performed several studies that support this assertion.
The ultimate outcome of micro-financing, which may take a significant amount of time, is to change the vicious low income, low savings and low investment cycle of the poor into one that results in the ability to create business income with a loan, make enough profit to invest more in the business, continue growing revenue and the business, and finally have the ability to start saving.
