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1.1 Problem Background
There are about three billion people, half of the world’s population, living on the income of less than two dollars a day. Among these poor communities, one child in five does not live to see his or her fifth birthday. One study in 2006 showed that the ratio of the income between the 5% richest and 5% poorest of the population is 74 to 1 as compared to the ratio in 1960, which was 30 to 12. To enhance international development, the United Nations Organization (UNO) announced the millennium development goals,aimed to eradicate poverty by 2015. In this regard, microfinance is the form of financial development that has its primary aim to alleviate the poverty. Governments, donors and NGOs around the world responded enthusiastically with plans and promised to work together towards the realization of these goals. In the recognition of microfinance, the UNO celebrated the year 2005 as a year of micro-credit, as a result this financing instrument is perceived worldwide as a very effective mean against hunger and poverty, mainly in developing countries.
Microfinance is a credit methodology, which employs effective collateral substitute for short-term and working capital loans to micro-entrepreneurs.The level of a country’s poverty has long been linked with measures of its economic development. Little consideration was given to the social reorganization of the natural resources (e.g empowerment vs. alien ation of people, sustainable use vs. depletion of the environment).
The economies with positive growth rate of Gross National Product (GNP) were measured by their poverty mitigation. This gratitude emphasized on the achievement of wealth and technology as a path for development and assumed that improved lives for all would be the natural consequence.
Microfinance is not a new development. Some developed countries as well as developing countries particularly in Asia hav e a long history of microfinance. During the eighteenth and nineteenth centuries, in number of European countries, microfinance evolved as a type of the informal banking for the poor.Informal finance and self-help have been at the foundation of microfinance in Europe. The early history of microfinance in Ireland can be traced back to 18th century. It is a history of how self-help led to financial innovation, legal backing and conductive regulation, and creating a mass microfinance movement. But the unpleasant regulations prompted by commercial bankin g brought it down. The so-called Irish loan funds appeared in early eighteenth as charities, initially financed from donated resources and offering interest free loans.They were soon replaced by financial intermediation between savers and borrowers. Loans were granted on short–term basis and instalments were scheduled on weekly basis. To enforce the repayment, monitoring process was used.
In Latin America and South Asia, the microfinance has grown out of experiments, but the best-known start was in Bangladesh in 1976, following a widespread famine in 1974 and a hard-fought war of liberation in 1971. Its origin can be traced back to 1976, when Muhammad Yunus set up the Grameen Bank, as an experiment, on the outskirts of Chittagong University campus in the village of Jobra. The inspiration of Grameen Bank came to Muhammad Yunus’ mind when he lent the equivalent of $26 to $42 to exploited women who were working as bamboo furniture maker. He saw that, they were enthusiastic about it and paid back their loans on time. In the beginning, Muhammad Yunus focused the activities of Grameen Bank mainly on...