BANKING: Microbanking

BANKING: Microbanking
▪ 1997

      One of the simple truths of the financial world had been that it was necessary to have money to make money. Generally, banks would not extend credit or approve a loan unless the borrower had sufficient collateral to guarantee repayment. While this system ensured the solvency of banks by protecting them against default, it had also effectively barred a significant percentage of the world's population from acquiring the capital necessary to rise out of poverty. In 1976 Muhammad Yunus, a U.S.-educated Bangladeshi economist, began a program designed to address this problem. Commonly known as microbanking, this program operated on the assumption that small loans, guaranteed by members of the borrower's community and payable within a short time, could provide the poor with enough capital to enter the mainstream of commerce.

      As a testing ground for his theory, Yunus picked his native Bangladesh, one of the world's poorest nations. Yunus founded Grameen Bank, an institution designed to serve those whom traditional banks ignored. Grameen's clients were the poorest of the poor, many of whom had never possessed any money and relied on a barter economy to meet their daily needs. Through loans of as little as $1, Grameen provided these people with the means to rise above their hand-to-mouth existence. Some were able to purchase livestock or start their own businesses. By 1996 Grameen had extended credit to more than three million borrowers and was the largest bank in Bangladesh, with more than 1,000 branches. More impressive, the default rate on Grameen's loans was only about 2%.

      One of the main reasons for Grameen's success was that it did not operate as a charity. Potential borrowers had to join small groups before applying for their first loan. These groups operated as guarantors of the loan and, as such, were responsible for payment in case of default. The groups also had the authority to approve or deny the loan application. Enlightened self-interest dictated that loans not be extended to bad credit risks, and peer pressure ensured that the borrowers made every effort to repay the loans in full. Having also discovered that women were better credit risks than men, Grameen organized its lending policies accordingly. With rare exceptions it extended credit only to women.

      The success of microbanking in Bangladesh led to similar programs in other less-developed nations, including Bolivia and Indonesia. Even wealthy nations benefited from microbanking, as was evidenced by programs in the United States aimed at extending credit to those in poverty-stricken city neighbourhoods and on Indian reservations. (JOHN H. MATHEWS)

* * *

Universalium. 2010.

Look at other dictionaries:

  • Village Banking — is a microcredit methodology developed by FINCA International founder John Hatch. Among US based non profit agencies there are at least 31 microfinance institutions (MFIs) that have collectively created over 400 village banking programs in at… …   Wikipedia

  • Economic Affairs — ▪ 2006 Introduction In 2005 rising U.S. deficits, tight monetary policies, and higher oil prices triggered by hurricane damage in the Gulf of Mexico were moderating influences on the world economy and on U.S. stock markets, but some other… …   Universalium

  • Microfinance — Community based savings bank in Cambodia. There are a rich variety of financial institutions which serve the poor. Microfinance is the provision of financial services to low income clients or solidarity lending groups including consumers and the… …   Wikipedia

  • Micro-finance — Microfinance Banque d épargne communautaire au Cambodge Les services de microfinance consistent en la fourniture d’un ensemble de produits financiers à tous ceux qui sont exclus du système financier classique ou formel[1 …   Wikipédia en Français

  • Microfinance — Les services de microfinance fournissent un ensemble de produits financiers à tous ceux qui sont exclus du système financier classique ou formel[1]. Ils concernent en général les habitants pauvres des pays en développement. De façon plus générale …   Wikipédia en Français

  • Solidarity lending — is an important building block of microfinance. How it WorksSolidarity lending takes place through ‘solidarity groups’. These groups are a distinctive banking distribution channel used primarily to deliver microcredit to poor people. Solidarity… …   Wikipedia

  • List of banks in the People's Republic of China — This is a list of incorporated banks in the People s Republic of China (PRC). The big four banks are marked with asterisks (*). Contents 1 Banks owned by the central government 2 Banks owned by local governments 3 Privately owned banks …   Wikipedia

  • Microcredit — This article is specific to small loans. For financial services to the poor, see Microfinance. For small payments, see Micropayment. Microcredit is the extension of very small loans (microloans) to those in poverty designed to spur… …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.