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Abstract

Microfinance, banking to the poor, is a recent global phenomenon introduced by Nobel Prize winner Dr. Mohammed Yunus of Bangladesh in the 1970’s. Before Dr. Yunus, the poor were not allowed access to credit and loans due to the widespread belief that the poor could not repay loans. Dr. Yunus’ project, Grameen Bank, began with loans of less than $50 to poor basket weavers in Bangladesh. In the past 30 years Grameen has grown to over 3.7 million borrowers worldwide with a 98% repayment rate, higher than any commercial bank. Dr. Yunus has proven that the poor are indeed responsible enough to manage credit and repay loans.

There are several unique traits of microfinance: village banks, group lending, social collateral, and focus on women. Village banks are small lending institutions located in poor villages that dispatch employees called loans officers to disperse and receive money. Clients of microfinance form groups of five and if one member defaults on a loan, the other members pick up the tab. Clients not required to put up collateral. The closeness of small communities ensures that any default client will be motivated to pay the debt for fear of public disgrace. Microfinance has a unique focus on women since studies show women to be the most reliable with payments and most likely to use the extra income for their children and families.

There are five major criticisms of microfinance: it is does not reach the poorest members of a population, it is not financially sustainable for institutions, it is potentially harmful to women (domestic abuse may result from husbands jealous of their wives’ new financial power), it can create a large debt for the poor, and it is not universal in application. Though these criticisms are valid, there is ample evidence to show that the benefits of microfinance outweigh the costs. Studies show that microfinance can lead to an increase in income, better nutrition for families, greater high school attendance, empowerment of women, and alleviation of poverty. There is abundant support to demonstrate that microfinance can lift families out of poverty and is also able to expedite the completion of six of the seven millennium development goals.

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