MICROLENDING - MICROLENDING Humanitarian Implications and...

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MICROLENDING – Humanitarian Implications and Proper Application The History of Microlending- Although microlending is a recent phenomenon, its origin dates back centuries. One of the earliest microlending organizations was the Irish Loan Fund system founded in the early 1700s by the Irish author and essayist Jonathan Swift. In order to help alleviate poverty, the Irish Loan Fund system provided credit without collateral to the poor. The modern microlending revolution did not occur until the 1970s. One of the first pioneers was Accion International. Accion International began as a student-run volunteer organization that sought to relieve poverty in Latin America through construction and infrastructure projects but turned their efforts toward microfinance. In 1973, Accion offered some of the first modern microloans to the poor in Recife, Brazil seeking to establish small businesses. Accion’s experiment proved to be a success; within four years, they had provided 885 loans with a repayment rate higher than 90%. Additionally, the loans helped the creation and stabilization of 1,386 new jobs. Perhaps the most important and successful pioneer in microlending is Muhammad Yunus, a Bangladeshi economist and economics professor. In 1974, famine struck Yunus’ native country and Yunus became involved in poverty reduction. Yunus determined that small loans were capable of greatly alleviating the condition of the poor. In 1976, he founded the Grameen Bank in Bangladesh, the world’s largest and most successful microfinance institution or MFI. Since its inception, Grameen has provided more than $5 billion in loans to several million borrowers and boasts a repayment rate as high as 98%. Last year, the institution made a profit of $20 million. Most importantly, Grameen Bank has laid forth the business model for most other modern microfinance institutions. Typically, the poor have no access to formal lending institutions because of the high costs in terms of time, money, and bureaucracy, the collateral requirements, and the unwillingness of these institutions to administer microcredits to the poor. The poor do have access to informal money lenders, but they charge enormous interest rates and are often linked to organized crime. For the most part, microlending has proved that a small loan can become the start of a virtuous economic cycle, the benefits of which extend beyond individual borrowers because their businesses generate jobs and help improve living standards in their communities. For a commercial bank, microlending is not attractive for several reasons. First, small loans are more expensive to administer and bring lower returns: administering a small loan is not much cheaper than administering a larger one, but the return on the latter is considerably greater. Second, vulnerable groups, especially the poor, have difficulties in providing collateral. Third,
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This note was uploaded on 04/14/2008 for the course ECON 201 taught by Professor Wadell during the Spring '08 term at University of Oregon.

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MICROLENDING - MICROLENDING Humanitarian Implications and...

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