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A Look into the History of Microfinance

Microfinance today has grown into a large movement that has as its objective giving the poor access to financial products and services. It involves not just microcredit but also savings and insurance. The terms have also evolved, from microcredit, it has become microfinance and now financial inclusion. Learn how it started and how it has evolved.

Beginnings

Even before microfinancing became popular in Bangladesh, the concept can be traced back as early as the 1800s when writings of theorist Lysander Spooner about the help of small credit to farmers and entrepreneurs were seen. In 1864, Friedrich Wilhelm Raiffeisen pioneered cooperative banking and credit unions in Germany to help farmers who then suffered from loan sharks. Centuries ago, visionaries such as the Franciscan monks founded community pawnshops and were supportive of local microcredit initiatives. Muhammad Yunus and Al Whittaker were the first to build institutions that provided financial services to the poor and socially marginalized people.

The Grameen Bank of Muhammad Yunus

Bangladeshi social entrepreneur, economist, and founder of Grameen Bank Dr. Muhammad Yunus was also the one to pioneer the concept of microcredit and microfinance. Determined to find solutions to rising poverty in Bangladesh, the Economics professor found out why many Bangladeshi could not get out of the cycle of debt. From his own pocket, Dr. Yunus lent money to 42 women in his country to help them sell the stools they made and get out of debt.

Grameen Bank or Village Bank was born in 1976. It started as a research project to look into credit delivery system for the poor. Today, it serves more than 7 million poor Bangladeshi women. It has also inspired numerous individuals and groups throughout the world. In 2006, the project and its founder won the Nobel Peace Prize for their contribution.

Rise

In the 1970s and 1980s, microfinance institutions grew rapidly, many of which were created by non-government organizations. Subsidies and grants came from both private and public sectors. The potential to become a viable business was also seen, since it has shown that the poor, even with no collateral, are able to repay loans.

New Models

In the 1990s, a new model was introduced in microfinance. Since the industry is growing, it cannot rely only on grant funding. Thus, many institutions began to attract investors and adopt formal business processes to work on improving sustainability.

In 1998, Positive Planet was formed. This international non-profit organization made use of the Internet and other communication technologies to help reach the objectives of microfinance.

Banking institutions have entered microfinance, thus veering away from NGO models. In the latter part of 2008, billion-dollar investments were channelled into microfinance institutions from commercial sources. Today, microfinance is the subject of numerous experiments and innovations making use of modern technologies, new loan methodologies, etc.

Microfinance has definitely diversified to adapt to local scenarios. Micro-savings and microinsurance are now more popular. The future of the industry is hard to predict, but one thing remains; its role to encourage entrepreneurship is significant in a global economy. According to Sharone Perlstein’s Microfinance site, the important role of the industry is empowering poor people in developing countries.

Image: Pixabay.com

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