Bangladesh is one of the poorest countries in the world. As many as 86% of people who live in rural areas in Bangladesh live under the poverty line (Rahman, 1996). Quality of health care services is very poor in Bangladesh. The percentage of available health service is 20 %. The percentage of access to safe water is 43 %. Infant mortality rate is 120 out of 1000 (ibid.). Also, there is lack of education in Bangladesh. The proportion of adult literacy rate is only 33 % (ibid.). Microfinance has played an important role to fight poverty in Bangladesh. Nevertheless, microfinance might be criticised because small credit does not change poor society. Moreover, it fails to solve some gender issues. However, this essay argues that microfinance has been successful in alleviation of poverty, bringing positive effects in terms of economic and social aspects in developing countries. Firstly, this essay begins with social backgrounds of Bangladesh and the Grameen Bank. Then, this essay will examine economic and social impacts of microfinance on the developing countries, using case study of the Grameen Bank in Bangladesh.
2. What Is Microfinance and The Grameen Bank?
Microfinance can be defined as small loans for low-income earners in order to encourage them to be independent financially (Schreiner, 2003:357). The idea of microfinance originated from the Grameen Bank which was established by Muhammad Yunus in Bangladesh. “Grameen” means village in Beng language (Schicks, 2007). Usually, commercial banks require physical collateral for loans, such as houses or land, in order to avoid the risk of repayment. Since the poor do not possess these assets, they cannot borrow money from formal financial institutions. As a result, they have no other choice other than borrowing money from moneylenders with undue interest rates of 300 to 400 % per annum (Rahman, 1996). In contrast, the Grameen Bank loans small credit to poor people who posse less than 0.5 acres of land without physical collateral (Hossain, 1945). Yunus realised that small credit is essential to encourage the poor, particularly women, to start small business, which leads to the alleviation of poverty. Many Bangladesh people are Muslims and women are at many disadvantages. Even though men and women are given equal right in Quran, few Bengal women have equal right to men, particularly economic opportunity. For example, in order to borrow money, women need to have permission from male relatives in Bangladesh (Rahman, 1999: 72). Therefore, Yunus tried to change this situation and established the Grameen Bank Project in 1976 (Rahman, 1999). This program was successful to empower women and advance sustainable development. Because of success of the effective project, it transformed as a bank in 1983, supported by the government. Now, the Grameen Bank has 2,567 branches, covering 81,382 villages, serving 8,375,456 members (the Grameen Bank’s Monthly Report, in July 2012). Thanks to the success of the Grameen Bank in Bangladesh, the number of microfinance institutions has been rapidly increasing around the world.
3. Economic Impacts of Microfinance
Some scholars might argue that small credit brings little change to poor societies. Roodman (2012:142) claims that even though microfinance looks effective for poverty alleviation in the first fifteen to eighteen months, it cannot lead to a reduction in poverty rates. Actually, 6 out of 40 Grameen Bank members still suffer from absolute poverty and 11 make a living under the poverty line (Todd 1996:220). Moreover, the poorest in a society are set aside from microfinance. Ciravegna (2004) points out that the extreme poor are reluctant to use micro credit because of the burden of strict regulations and penalties for overdue repayments. As it is too risky for the poor to loan money...