Grameen means “rural” or “village” in the Bangla language
- Economic theory provides ample caution against lending to low-income households that lack collateral to secure the loans.
- The concept of effective demand, as applied to the theory of demand and supply, fortifies the view that it is only those with the means to purchase who are welcome in the market.
- However, in the 1970s, Mohammad Yunus, an economics professor at the Chittagong University of Bangladesh, came up with a novel idea of making small loans to local villagers based on trust (or local information about borrowers).
- Professor Yunus’s experiment was based on the premise that over time his venture would make profits, which it did.
- In 1976, he founded the Grameen Bank of Bangladesh, which does not require collateral to extend credit to its low-income customers, who were traditionally excluded from the banking system.
- By the end of 2003, Grameen Bank had over 3.1 million customers served by over 1000 branches in Bangladesh.
- The majority of Grameen Banks clients are women who use the credit to improve their standard of living through small scale enterprises such as pottery, basket making and textiles weaving.
- Today, Grameen banks success in Bangladesh has been used as a model in many developing countries, including Grameen Trust Chiapas in Mexico, Bancosol of Bolivia, and in Kenya, the K-REP Bank and Kenya Women Holdings, a microfinance company.
- A survey by the Microcredit Summit Campaign established that by the end of 2002, there were 2500 microfinance institutions serving over 67 million microfinance clients worldwide.
- The success of microfinance in many developing countries has forced economists to rethink the assumptions about how poor households save and accumulate assets, and how institutions can overcome market failure to serve the credit needs of the poor.
- One of the objectives of introducing the economics of microfinance course is to study and describe the innovations that have created and popularized microfinancing.
- The study of microfinance will help economists to clarify the puzzles, debates and assumptions of risks associated with advancing loans to the poor.
- The debates include:
- Whether the poor are best served by loans or by subsidies
- Whether credit should be provided before, during or after training and other complements of microfinance
- Which aspects of microcredit lending have driven the successful performance of microfinance institutions (MFIs)?
- The second objective is to refute the myth that high rates of repayment of microfinance loans are tied closely to group lending operations.
- Finally, the objective of this course is to support or disabuse the belief that microfinancing is the panacea or the magic bullet against poverty and can work everywhere or for everyone to make a profit.
- Before the emergence of microfinance, when the poor did not have access to credit from the established banking system, the poor people’s only recourse was to borrow from moneylenders (shylocks), neighbours, relatives and local traders, who had good information and effective means of enforcing contracts with the borrowers.
- Microfinance has come to change this entrapment.
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