What is Microfinance?
Microfinance started with Nobel Peace Prize Laureate Mohammed Yunus, who began with a simple but revolutionary concept: Loan poor people money on terms that are suitable to them and teach them sound financial principles so they can achieve financial self-sufficiency.
Grameen Bank (The word “Grameen” is derived from the word “gram”, which means “village” in Bangla language) was created in 1976 when Professor Muhammad Yunus, then head of the Rural Economics Program at the University of Chittagong, loaned $27 from his own pocket to 42 people in the tiny Bangladeshi village of Jobra. These women only needed just enough credit to purchase the raw materials for their trades. The borrowers repaid their small loans promptly and inspired Yunus to establish the Grameen Bank Project, which then spread among villages and districts across Bangladesh with the help of his devoted students and has now spread around the world and transformed the lives of many poor people.
Microfinance is considered one of the most effective and flexible strategies in the fight against global poverty. It provides basic financial services such as loans, savings, money transfer services, and micro insurance to clients that have been previously ignored by more traditional financial services providers.
Why is this different from other loan programs?
Unlike other loan programs, microcredit promotes the following:
– A mission to help the poor, especially women, help themselves to overcome poverty
– No collateral is taken from clients to receive loans. Loans are based on ‘trust’. This allows individuals in need of financing who would not qualify for traditional bank loans to receive credit.
– It is offered to create self employment for income generating activities as opposed to consumption.
– Microcredit institutions provide door to door services, as opposed to traditional banks where clients go to the bank, A few use focal centers where clients gather to conduct financial transactions and receive other social services are also common.
– Loans are offered to individuals who are in a group. The peer support system practiced by many microfinance programs is another unique feature. When clients gather to make loan payments, they share successes and discuss ideas for solving business and personal problems. Most importantly, they empower each other to stay on the path out of poverty.
– Employees of MFI’s share vital information and resources to improve their clients’ well being. Some MFIs provide support in other areas that improve client livelihoods and increase opportunities to succeed in their businesses.
Why do microfinance institutions focus on women?
Women have proven to be the best poverty fighters. Experience and studies have shown that women are more likely to reinvest their earnings in the business and in their families. In general, repayment rates are higher for women than men and women are a better credit risk. As families cross the poverty line and micro-businesses expand, their communities benefit. Jobs are created, knowledge is shared, civic participation increases, and women are recognized as valuable members of their families and communities.
Like other financial institutions, MFIs charge interest for the loans they offer to their clients. The interest charged to microcredit clients is higher due to the high operational cost associated with processing micro loans. The interest covers the high cost of processing very small loans, door to door service provided by loan officer in the field, providing personalized service to each client and covers the cost of managing the peer support group process. It may include the provision of information on social services, personal development, health, and other critical information that helps clients improve their lives and the future of their families.
MFIs rely on a variety of sources to generate capital for the loans they offer to clients. In countries where it is legal for MFIs to capture savings deposits, MFIs redirect a large portion of these savings funds toward lending. Whether or not they are capturing savings, young MFIs that have not yet achieved financial sustainability also rely on grants from donors and subsidized loans from funder organizations and social investors. As they mature and become sustainable, MFI turn to commercial sources for funding and recycle funds. This Continual reinvestment multiplies the impact of each dollar loaned
Grameen-Jameel supports the financing efforts of microfinance institutions at all stages of their development, providing loans for early-stage MFIs and guarantees for MFIs seeking to access local-currency commercial loans, as well as direct loans available in local currency. As of March 2012, Grameen-Jameel works with 17 microfinance institutions in 9 countries in the MENA region, and has reached 1,671,216 new clients through its partners.
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