In 2006, Muhammad Yunus and Grameen Bank received the Nobel Peace Prize for their work in Microfinance. Muhammad Yunus was cited for developing “micro-credit into an even more important instrument in the struggle against poverty”. What is micro-credit? Why do poorer people need micro-credit? Discuss how the availability of credit might be able to help someone move out of poverty. Make sure to discuss empirical evidence as well.
Having ‘about one billion people globally live in households with per capita incomes of under one dollar per day’, with ‘policymakers and practitioners who have been trying to improve the live of that billion facing an uphill battle.’(Murdoch,1999,p.1569); microfinance, and in particular micro-credit, has been key in the gradual alleviation of world poverty. This has been most apparent in the developing part of the world in countries such as Bangladesh (where Muhammed Yusuf founded the Grameen Bank), Bolivia, Indonesia and Pakistan.
Before going into detail about the role of micro-credit and how its availability might help move someone from poverty, it is important to establish the definition of microfinance, and more crucially, micro-credit. Microfinance is a term that is used to describe financial services catering to poor and low-income clients, and is offered by different types of service providers (known as microfinance institutions) offering those less well-off, loans and other financial services such as savings, remittances, insurance and credit in order to better their financial well being and standard of life. The added bonus would be the fact that these institutions take little or no collateral when handing out credit. The availability of microfinance has shattered stereotypes of the poor as not bankable…[and shown] that it is possible to provide cost-effective financial services to the poor”(Islam,2007,p.2).
When looking at what characterises micro-credit, you can identify the point that it comprises of very small loans being provided to unsalaried borrowers, with little or no collateral, with these loans being handed out by legally registered institutions. This is done in the hope that economic and social structures can be fundamentally transformed and that poverty can be alleviated(Murdoch,1999). The loans are created exclusively to serve “clients that have been excluded from the formal banking sector”(Murdoch,1999,p.1569). Women who are less well-off in particular, have hugely enjoyed from the availability of micro-credit, being able to take out these small loans to initiate some form of self-employment. “Between December 1997 and December 2005 the number of microfinance institutions rose from 618 to 3133. The number of people who received credit from these institutions increased from 13.5 million to 113.3 million (85% of this increase resulting from women taking out loans), during the same period(Hermes and Lensink,2007,p.1).
Logically, the next issue to be discussed, after having established a definition for micro-credit, would be why do poorer people require the existence of micro-credit? Many people would argue that all people should be able to get loans from respective lenders and banks. Unfortunately, and especially in the third world, these financial institutions tend to charge interest rates that allow loans to surpass the financial restrictions of the poorer people’s incomes. This then, acts as a deterrent in taking out a loan for the less well-off, and hence results in no improvement for their financial well being; and on a national as well as international scale, no real reduction in poverty. “Almost all of the borrowers do so to finance self-employment activities, and many start by taking loans as small as $75, repaid over several months or a year”(Murdoch,1999,p.1569). With only a very small number of programmes that require borrowers putting up collateral, micro-credit accommodates for would-be entrepreneurs that have few assets to escape...