An interesting article on how small loans don't have top be given out at ridiculous rates of interest, aka Wonga.com)
Muhammad Yunus is an economist and Nobel Peace Prize winner who has further
developed the concepts of microcredit and micro-finance. In 2006 Muhammad Yunus
and Grameen Bank received the Nobel Peace Prize for their work in microcredit
and their efforts to create economic and social development.
How it works
The concept of micro-credit loans is centered on the idea that the poor have
not been able to fully utilize their skills and thus with right incentive can
earn more money. When providing loans, Grameen bank uses a group-based credit
approach in order to make sure that social pressure within rural communities
ensures that borrowers uphold their end of the contract (making repayments on
time and achieving a good credit standing).
Grameen bank’s credit policy focuses on providing the under-served
populations with support and as a result 94% of its borrowers are women. In most
developing nations like Bangladesh, gender inequality is still a major issue.
Grameen Bank helps empower women by mainly providing them with the micro-credit
loans, which in turn offers them the opportunity of self-employment and access
to money.
In addition, reports have proven that the overall impact on
development is greater when loans are given to women as opposed to men since
women are more likely to use their earnings to improve their living situations
and to educate their children. The value of loans starts at $35 and average $200
but mainly depend on the needs of the borrower and her level of credit (based on
their previous borrowing and repayment record).
Since the bank’s primary focus is on alleviating poverty rather than
generating high returns, interest rates are kept relatively low and as close as
possible to commercial rates.
Further Projects
Given its success, Grameen bank has diversified its services among different
applications of microcredit. The Village Phone program allows female
entrepreneurs to start businesses that provide wireless payphone services in
rural areas. The Program has improved the livelihoods of many villagers, farmers
and other people who previously did not have access to critical market
information and lifeline communications in over 28,000 villages in Bangladesh.
Today, more than 55,000 phones are being utilised, with over 80 million people
benefiting from access to market information.
In 2003, Grameen Bank launched it struggling members program, exclusively
targeted to the beggars in Bangladesh rather than its famous traditional
group-based lending scheme. This program distributes small loans to beggars. The
loans are interest-free, the repayment period can be arbitrarily long, and the
borrower is covered under life insurance free of cost. For example, a beggar
taking a small loan of around 100 taka (about US $1.50) may pay back only 2.00
taka (about 3.4 US cents) per week.
Lessons from Grameen Bank’s success
Providing the poor with micro-credit loans can help spur economic growth.
Companies such as M-PESA have also implemented the idea of micro-finance in
Africa as well. Although they do not function like Grameen Bank, both companies
rely on the idea that financial inclusion and helping the poor fulfill their
potential is necessary for development. Efforts are being made all over the
world to embrace this idea (e.g. Nepal) as it can ultimately help lift the
poorest out of poverty.
Related exam questions:
(a) Assess the causes of absolute poverty in a developing country of your choice (20)
(b) To what extent is reducing the number of people living in absolute poverty
sufficient to achieve economic development? (30)
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