f_0016633_14375 - Poverty and Microfinance: An...

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The Whitehead Journal of Diplomacy and International Relations Poverty and Microfinance: An Investigation into the Role of Microcredit in Reducing the Poverty Level of Borrowing Households in Bangladesh and the Philippines M. Jahangir Alam Chowdhury I t is often argued that the formal and informal financial sectors in developing countries have failed to serve the poorer section of the community. Collateral, credit rationing, a preference for high income clients and large loans, and lengthy bureaucratic procedures of providing loans keep poor people outside the boundary of the formal sector financial institutions in developing countries. 1 On the other hand, the informal financial sector has also failed to help the poor. Monopolistic power, excessively high interest rates, and exploitation through the undervaluation of collateral have restricted the informal financial sector in providing credit to poor people for income generating and poverty alleviation purposes. 2 The limitations of both financial sectors in providing financial services, especially credit, have encouraged microcredit programs to evolve. These programs were initiated with the objective of providing poor people with small credit without collateral. The harmony among group members, the strict discipline in providing credit and collecting repayments, and supervision of borrower’s activities in the microcredit system have replaced the provision of collateral. Muhammad Yunus, the Nobel Peace Prize winner in 2006 and founder of the Grameen Bank in Bangladesh, calls this process of collateral substitution the “freeing of credit from the bondage of collateral.” 3 He further criticized collateral provisions for keeping poor people outside the credit facilities of formal financial sector institutions, stating that it constitutes a form of “financial apartheid.” 4 In 1976, Muhammad Yunus initiated the first microcredit program in Bangladesh with the promise of providing credit without collateral, in an attempt to alleviate poverty and unleash the creative potential of the poor. Years later, in 1986, Yunus founded the Grameen Bank, thus paving the way for future microcredit programs in developing and developed countries. In a speech at the microcredit summit in Washington, D.C. in 1997, Yunus compared his dream to eradicate poverty M. Jahangir Alam Chowdhury is an Associate Professor in the Department of Finance, and the Executive Director of the Center for Microfinance and Development at the University of Dhaka. 19
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CHOWDHURY The Whitehead Journal of Diplomacy and International Relations completely from this world with man’s desire to fly 100 years ago. He mentioned that, in their first successful attempt in 1903, the Wright Brothers could stay in the air for only 12 seconds and fly for only 120 feet. Sixty-five years later, however, man was able to go to the moon and successfully return to Earth. Yunus mentioned that he would also be able to go to his moon, a poverty-free world, in fifty-five years time
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This note was uploaded on 02/01/2012 for the course POLS 351 taught by Professor Shaw during the Fall '08 term at Boise State.

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f_0016633_14375 - Poverty and Microfinance: An...

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