Microfinance is an idea pioneered by economist and Nobel Peace Prize laureate Muhammad Yunus in his native country Bangladesh to give small loans to the poor as a way to build their incomes and lift themselves out of poverty.
Traditionally, the poor were deemed uncreditworthy and could not gain access to finance from traditional banks. This forced many people living at the bottom of the pyramid to resort to loan sharks. Microfinance became an avenue for them to break the cycle of poverty and to better standards of living.
Being an idea that isn’t restricted to country or region, microfinance institutions have popped up all over the world. With that came a plethora of problems.
Certain criticism of microfinance stems from the fact that some microfinanciers were irresponsible in making loans – giving anyone and everyone loans, sometimes multiple. Some borrowers don’t know how to repay them, or manage their finances for that matter as they never had money to begin with, while others could not see the day they are freed from debt. As a result, some sold their organs to repay the debt, while others committed suicide. There are also microfinanciers that charge exorbitant interest rates.
In the latest issue of Philanthropy Management, Yunus voiced his frustration that the idea of microfinance isn’t always applied appropriately.
“For us, the idea of microfinance stemmed from the fact we wanted to fight loan sharks, but some of these microfinance organizations took the idea and became loan sharks themselves,” he said.
“The point of microfinance is to help people build a way out of poverty. It wasn’t a way to make money out of poor people. That’s the key distinction. Apart from that, I’m happy to see it spread.”
He added that he would not discourage foundations’ engagement with microfinance, but microfinance should not depend on donor finance in the long-term.
“I’d say to the foundation ‘It’s good that you’re lending money to microfinance, but this is a temporary solution.’ I want to create a microfinance bank so that I don’t have to go to anybody for money, because I take deposits and I lend money. Why should I have to go and beg money from a foundation? I’m a business.”
Photo from the Grameen Creative Lab.
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