If micro-finance wonÊt save them, what will?
Arnav Kapur
The poor have always been denied financial services. To a bank, a poor borrower has no valuable assets to offer as collateral; no stable flow of income and limited potential gains from their small borrowings. In the 1970s a novel concept to make loans, at appropriate interest rates, accessible to the poor took hold; experts called it Âa cure for the poorÊ. Microfinance became so popular that in 2006 for the first time the Nobel Peace Prize was awarded to a firm and its founder - Grameen Bank and Muhammad Yunus. However four decades since its inception, nearly a billion people live on less than a dollar a day. Perhaps it is time to re-evaluate microfinance and its potential to reduce poverty. In this extended essay, I outline the evolution, effects and limitations of microfinance and explore what alternatives, if any, exist. In 1976 Muhammad Yunus, an economics professor at Chittagong University in Bangladesh decided he couldnÊt teach elegant economics theories and sit idly by whilst his country was being engulfed by poverty (Yunus, 2010). As a result, he decided to venture to a nearby village called Jobra where he found that the poor, after being denied by banks, had turned to loan sharks who could charge as much as 20% interest a day (Lewis, 2008). Shocked by these unfair terms which prohibited these villagers from growing their businesses, he decided to provide an alternative service. Initially he offered 42 small microloans, which amounted to $27, with no interest rate, collateral or deadline. To his amazement and delight its entirety was returned quickly. This gave him the confidence to continue lending and he gradually grew his idea till he set up the first The evolution and effects of microfinance
microcredit institution – the Grameen Bank in 1983 (Yunus, 1983). Grameen bank has since grown rapidly to 7.5 million borrowers and has lent 12 billion dollars with an astonishing repayment rate of 95-98%, Âbetter than that of student loan and credit card debts in the United StatesÊ (Yunus, 1983). Having recognized the poor as potential customers Professor Yunus was able to provide them the financial services they desperately needed. Microfinance has since had phenomenal expansion with 21 percent growth per year in the 2003-2008 period (Gonzalez, 2010) and currently there exist 641 microcredit companies serving over a 100 million people across the globe and loaning out $2.5billion (Forbes, 2007). Whilst the reach of microfinance has been extensive, the overall economic effects seem to be marginal. In 2010 a rigorous study surveyed 6800 households across 104 slums in Hyderabad, half of whom had received loans from Spandana (a prominent Bangladeshi microfinance bank). The study collected data on income, consumption, borrowing, and investment practices in a random sample of eligible households in treatment and comparison areas. Of households receiving loans, seven percent reported operating a business which was opened in the past year, compared to 5.3 percent in comparison areas (Banerjee, et al., 2010). This represents minimal economic change. Similar results have been found in other studies across the world. In rural Ethiopia, researchers concluded Âoverall, and despite the large weight of micro-loans in the study areas, we found mixed evidence of impacts of micro-credit operations on households' economic activitiesÊ (Tarozzi, et al., 2013). In Morocco, researchers concluded Âthere is also no effect on ÂpovertyÊ ...the probability of being poor is around 16% and
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