Fighting Poverty with Microfinance

Grinding poverty remains the reality for one fifth of the world’s people.
1.3 billion people subsist on less than one dollar a day.
Nearly thirty thousand children under the age of five die each day from poverty-related causes; and poverty is the root cause of so many other human tragedies: malnutrition; lack of health care; environmental devastation; the spread of HIV-AIDS.

You know, the change in our pockets is what some people can comfortably survive on.

The struggle against global poverty can seem daunting – even overwhelming; but Microfinance offers the most powerful anti-poverty strategy ever developed and a new hope for the millions of poor. It is leading a movement that has already helped millions break through to a better life. This answer to poverty did not come from an Ivy league college or a Washington think tank.
It came from Bangladesh.

The ‘Grameen’ phenomenon…
In 1976, Muhammad Yunus, a young economics professor, encountered a group of women who appeared to be running profitable cottage industries; yet, they and their children were starving. Village loan sharks charged them so much interest that the women could barely scratch out a living. Mohammad Yunus lent $27 from his own pocket to these women. The women flourished and Grameen Bank was born. Grameen Bank has grown into a powerful force for social change. It has lent more than 5.7 billion dollars, and now serves more than six million borrowers; 95% of which are women. The bank boasts of a repayment rate of over 98%; thanks to its focus on women borrowers. Women have been found to fight poverty better and have a better sense of social responsibility.
Today the Grameen Bank has over 12 business ventures associated with it. One of them even sponsors the Bangladesh cricket team!!! Some of GB’s ventures include Grameen Phone, Grameen Telecom, Grameen Software Limited, Grameen Motsho (Fisheries), Grameen Shakti (Energy) to name a few.



What is Microfinance?
Microfinance is the practice of providing financial services, esp. micro-credit, micro-savings or micro-insurance to poor people.
Micro-credit is the extension of very small loans (micro-loans) to the unemployed, to poor entrepreneurs and to others living in poverty who are not considered bankable. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit.
‘Solidarity lending’ is the most important building block of microfinance. Solidarity lending takes place through ‘solidarity groups’. Each borrower must belong to a five-member group, the group is not required to give any guarantee for a loan to its member. Repayment responsibility solely rests on the individual borrower, while the group and the centre oversee that everyone behaves in a responsible way and none gets into repayment problem. There is no form of joint liability, i.e. group members are not responsible to pay on behalf of a defaulting member
Solidarity lending also lowers the costs to the financial institution related to managing and collecting loans, and eliminates the need for collateral.
Any institution which helps in setting up microfinance facilities is called a Microfinance Institution (MFI).

Of the 50 million families or so that Grameen Bank has served, over 50% of them are reported to have emerged out of the clutches of poverty.
Microfinance plays a major role in the development of many African, Asian, and Latin American nations. Its impact is substantial enough to have warranted acknowledgment by the United Nations who declared 2005-The international year of microfinance.

The Indian Perspective..
In the late ‘60s and thro the ‘70s and into the ‘80s Congress government’s Garibi hatao slogan was the main propaganda with which they held the seat of power. ‘Congress toh hatgaya lekin Garibi nahi hata’.
Microfinance has been present in India in one form or another since the 1970s and is now widely accepted as an effective poverty alleviation strategy. India has supported social banking for a long time in the form of Self-Help Group (SHG) model with banks lending to groups of poor men/women without collateral. These groups build up and rotate savings amongst themselves, open bank accounts and take responsibility for lending and recovering money financed by banks.

The new generation microfinance was relatively slow in coming to India.
Commercial banks in India have been involved in providing finance to the poor especially in rural India, but they turned out to be loss making ventures due to low repayment rates, inability to provide loans without collateral. The banks were also not cost-effective enough to run in the rural areas. SHG-based microfinance nurtured and aided by NGOs, has become an important alternative to traditional lending without incurring a fortune in operating and monitoring costs.

With the concerted efforts of the National Bank for Agriculture and Rural Development (NABARD), insights gained by NGOs, the increasing enthusiasm of bankers and politicians and emerging successes in repayment and social impacts, this national movement now encompasses 1.4 million such groups (over 20 million members).

Some of the active MFI’s in India are:
Activists for Social Alternatives (ASA) Tamil Nadu
CASHPOR Financial and Technical Services Uttar Pradesh
Grameen Koota Karnataka
SHARE Microfin and Swyam Krishi Sangam(SKS) Microfinance Andhra Pradesh






Social empowerment and development through Microfinance
On 13 October 2006, the Nobel Committee awarded Grameen Bank and founder Muhammad Yunus the 2006 Nobel Peace Prize, "for their efforts to create economic and social development”. The fact that GB and Muhammad Yunus weren’t awarded a Nobel prize for economics but for peace shows just how much of an impact MF can have on the social development.

The MFIs due their extensive reach are best suited for exploring how microfinance can be a platform for multiple socio-economic empowerment strategies. Initiatives which are aimed at providing the basic necessities like say for example a telephone line or internet facilities to the poor in the rural areas offer opportunities for development of the backward regions as well as offer a profitable venture for the poor.
The Grameen bank has an innovative venture where in beggars are given small loans and are encouraged to use the loans to generate income by selling low-priced items. These loans are absolutely interest free and the bank even insures the beggar!

The Future…
There is no doubt that the huge market for microfinance cannot be ignored by the commercial banks and are developing profitable microfinance ventures. Another initiative is to merge MFI’s into the capital market and considering the buoyant market scenario that developing economies are enjoying, the future in anything but bleak for Microfinanace.

For more information visit
www.grameenfoundation.org
www.microfinancegateway.org/section/faq
http://www.sksindia.com/
http://www.grameen-info.org/bank/