Understanding Microfinance

By | January 24, 2014

Have you heard of the term microfinance and wondered what it means? Do you envisage that it is some fancy name for some fancy investment banking?

Microfinance

The beginning of microfinance

You would be completely wrong! It is a term that is used to describe banking and finance that are on low incomes or they are not in work to have some form of banking facilities. These were first introduced in India by the Grameen Bank and Muhammad Yunus have been awarded the Nobel Peace Prize for their work in this sector.

But it is changing; to begin with it was all about non-profit and helping people in poor countries. To educate them to understand how to manage their money, how to budget and what the interest rate on a loan means. These are all things that many people are unsure about and helping them to understand these terms made them wise to the loan sharks and the high interest rates that are offered on alternative loans.

The present

But now there is an increase in the companies that are offering these loans and they are there to make profit, they are not interested in the non-profit options. This has angered many people who think that they are making money from these people is wrong. The average default on these types of loans is just 10% that means that 90% of the money that is lent out is paid back and this is fantastic in the lending industry. These statistics are unheard of and this has attracted the big names to the microfinance area.

It started with the Mexican Compartamos Banco this was a non-profit bank with the need to look after the locals in the microfinance area, until in 2007. They then moved into the for-profit area and released the company on the Mexican Stock Exchange this move financial gain to the tune of $400 million dollars. They have been followed into this area by some great names Barclays, Citigroup and General Electric have all moved into the microfinance area to make money.

This has caused some debates in this area of banking because the idea is to help these people improve their lives and to become educated in the finances so they are able to move out of the poverty that many of them are in. This becomes difficult when they are then charged interest for the loans, it can potentially make these people in worse situation than what they were originally.

But what is important is that they are still learning about the way to budget money and it is typical that these loans are very seldom higher than $100 dollars. The banks work differently to encourage the payments of these loans. They are lumped together with other investors so the peer pressure is used to make sure that they pay the loans on time.

The disadvantages of these types of banking facilities are the ethics behind the loans, should these banks be making money from the poor? Many argue that this isn’t the way that we should be helping the poor people, but at the end of the day no matter what your opinion is on the situation there is a system in place that is there to help those that are less fortunate. They are educating these people to protect themselves from being exploited from people that are going to be making more money from them. Loan sharks operate, they are out there and they target these people, promising them so much and just taking everything from them.

The Grameen Bank is different they are taking the education even further with encouraging their customers to sign up to the ‘16 decisions’ this is designed to encourage the people to have better quality of life they do this by:

‘At every branch of Grameen Bank, the borrowers recite these Decisions and vow to follow them. As a result of the Sixteen Decisions, Grameen borrowers have been encouraged to adopt positive social habits. One such habit includes educating children by sending them to school. Since the Grameen Bank embraced the Sixteen Decisions, almost all Grameen borrowers have their school-age children enrolled in regular classes. This in turn helps bring about social change, and educate the next generation.’  Wikipedia

This is the way forward with the developing world, education to help them and others to have a better quality of life. Whilst at the same time helping them to a better future for them and their families, with improved education for their children and an understanding of the principals of how to use their money wisely.

 

 

 

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