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history-of-microfinance/
History of microfinance
The history of microfinancing can be traced back as long
to the middle of the 1800s when the theorist Lysander
Spooner was writing over the benefits from small credits
to entrepreneurs and farmers as a way getting the people
out of poverty. But it was at the end of World War II with
the Marshall plan the concept had an big impact.
The today use of the expression microfinancing has it
roots in the 1970s when organizations, such as Grameen
Bank of Bangladesh with the microfinance pioneer
Mohammad Yunus, where starting and shaping the
modern industry of microfinancing. Another pioneer in
this sector is Akhtar Hameed Khan. At that time a new
wave of microfinance initiatives introduced many new
innovations into the sector. Many pioneering enterprises
began experimenting with loaning to the underserved
people. The main reason why microfinance is dated to the
1970s is that the programs could show that people can
be relied on to repay their loans and that its possible to
provide financial services to poor people through

marketbased enterprises without subsidy. Shorebank was

the first microfinance and community development bank
founded 1974 in Chicago .
An economical historian at Yale named Timothy Guinnane
has been doing some research on Friedrich Wilhelm
Raiffeisens village bank movement in Germany which
started in 1864 an by the year 1901 the bank had
reached 2million rural farmers. Timothy Guinnane means
that already then it was proved that microcredit could
pass the two tests concerning peoples paybackmoral and
the possibility to provide the financial service to poor
people.
Another organization, The caisse populaire movement
grounded by Alphone and Dorimne Desjardins in Quebec
, was also concerned about the poverty, and passed
those two tests. Between 1900 to 1906 when they
founded the first caisse, they passed a law governing
them in the Quebec assembly , they risked their private
assets and must have been very sure about the idea
about microcredit.

Today the World Bank estimates that more than 16 million

people are served by some 7000 microfinance institutions
all over the world. CGAP experts means that about 500
million families benefits from these small loans making
new business possible. In a gathering at a Microcredit
Summit in Washington DC the goal was reaching 100
million of the worlds poorest people by credits from the
world leaders and major financial institutions.
The year 2005 was proclaimed as the International year
of Microcredit by The Economic and Social Council of the
United Nations in a call for the financial and building
sector to fuel the strong entrepreneurial spirit of the
poor people around the world.
The International year of Microcredit consists of five
goals:
Assess and promote the contribution of microfinance to
the MFIs
Make microfinance more visible for public awareness
und understanding as a very important part of the
development situation

 The promotion should be inclusive the financial sector

Make a supporting system for sustainable access to
financial services
Support strategic partnerships by encouraging new
partnerships and innovation to build and expand the
outreach and success of microfinance for all
The economics professor Mohammad Yunus and the
founder of Grameen Bank were awarded the Nobel Prize
2006 for his efforts. The press release from nobelprize.org
states:
The Norwegian Nobel Committee has decided to award
the Nobel Peace Prize for 2006, divided into two equal
parts, to Muhammad Yunus and Grameen Bank for their
efforts to create economic and social development from
below. Lasting peace can not be achieved unless large
population groups find ways in which to break out of
poverty. Micro-credit is one such means. Development
from below also serves to advance democracy and
human rights. Muhammad Yunus has shown himself to be
a leader who has managed to translate visions into
practical action for the benefit of millions of people, not

only in Bangladesh , but also in many other countries.

Loans to poor people without any financial security had
appeared to be an impossible idea. From modest
beginnings three decades ago, Yunus has, first and
foremost through Grameen Bank, developed micro-credit
into an ever more important instrument in the struggle
against poverty. Grameen Bank has been a source of
ideas and models for the many institutions in the field of
micro-credit that have sprung up around the world.
Every single individual on earth has both the potential
and the right to live a decent life. Across cultures and
civilizations, Yunus and Grameen Bank have shown that
even the poorest of the poor can work to bring about
their own development.
Micro-credit has proved to be an important liberating
force in societies where women in particular have to
struggle against repressive social and economic
conditions. Economic growth and political democracy can
not achieve their full potential unless the female half of
humanity participates on an equal footing with the male.
Yunuss long-term vision is to eliminate poverty in the
world. That vision can not be realised by means of microcredit alone. But Muhammad Yunus and Grameen Bank

have shown that, in the continuing efforts to achieve it,

micro-credit must play a major part.

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By Rob Krieger

In most Western or developed countries, it's relatively easy to obtain credit through large banks or money
lending institutions. But in the developing world, where many people lack steady employment, credit
history or collateral, there's often no way for legitimate small businesses to receive a loan.
In many ways, microfinance changed all of this. Generally defined as small lending to the rural poor in
developing countries, microfinance has made great strides in the latter half of the 20th century. The 2006
Nobel Prize awarded to Dr. Muhammad Yunus, one of the founders of modern microfinance, has helped to
push the industry even further into the spotlight. But the idea of microfinance has existed for hundreds of
years -- in many regions and in many forms.
The Origins of Small Lending

Microlending often starts in small villages, where family members and friends get together in moneysharing groups. Mary Coyle, director of the International Institute at St. Francis Xavier University in Nova
Scotia, Canada, has studied the history of microcredit and says that these savings clubs can be traced to
all parts of the world. "They have operated for centuries -- probably since the introduction of currency."
From region to region, these clubs developed their own names. In West Africa, they were known as
"tontines;" in Bolivia, "pasanaku;" and across Mexico and Central America, "tandas." Tanda means "shift"
in Spanish and works on the premise that members of the group contribute to a pool of money, which
shifts to a single member that has the most need. The tontines of West Africa can be traced back to 17thcentury Europe and are named for the Italian banker Lorenzo de Tonti.
An early version of microlending was the Irish Loan Fund system, introduced in the early 1700s, by writer
and nationalist Jonathan Swift. Swift's early success helped the Irish when many were living in
impoverished conditions. Swift's original system was standardized in 1837, when hundreds of independent
loan funds were brought under the control of the Loan Fund Board. By law, no loan could be more than
10 or run for longer than a 20-week term, with weekly repayments. As with many contemporary
microcredit institutions, interest rates were low in this case around 8 percent per year much lower than
those charged by local profiteers.
The Pioneers of Modern-Day Microfinance

The concept of microloans took a big leap in the 1960s and 1970s, when groups such as ACCION
International, in Venezuela, and Yunus's Grameen Bank, in Bangladesh, began to institutionalize the

process. By formalizing and expanding the basic concept of sharing programs, these microfinance
institutions helped to build capital for small businesses rather than just loaning for basic necessities such
as food, water and clothing.
Yunus first came across the idea of microcredit while studying the lives of poor entrepreneurs in his native
Bangladesh during the famine of 1974. He began by loaning to groups of women, and his program soon
proved that small loans could not only quickly improve lives but were paid back with interest and on time.
The next step was setting up a consistent on-the-ground program. In the case of the successful
institutions, this meant sending a representative, or "field manager," to the prospective region to educate
and advise and to oversee the loans locally.
After a few members of the group were accepted for a loan, the rest had to wait for that initial loan to be
repaid before they could obtain their own loans. "Peer pressure" from other members of the group to repay
the initial loan helped to set the bar high.
In 1961, another early pioneer, ACCION, opened its doors in Caracas, Venezuela, when law student
Joseph Blatchford raised $90,000 to start a community development program to help the poor jump-start
their own businesses.
Over the next two decades, ACCION set up scores of independent microfinance institutions and expanded
across Latin America. It, too, offered people a choice besides the local loan shark, who would charge rates
as high as 500 percent a year and often pushed people into permanent debt.
Like the founders of ACCION, Yunus realized that if individuals who wanted to start their own businesses
could not free themselves from start-up debt, they would never be able to grow.
Since the Grameen Bank was founded, it has paid out more than $5.7 billion in loans, and more than $5.1
billion of that has been repaid -- a recovery rate of approximately 98.9 percent. It has made more than
950,000 loans and has 6.7 million members, around 96 percent of whom are women.
In October, the Norwegian Nobel Committee said of Yunus and his work, "Yunus's long-term vision is to
eliminate poverty in the world. That vision cannot be realized by means of microcredit alone. But
Muhammad Yunus and Grameen Bank have shown that in the continuing efforts to achieve it, microcredit
must play a major part."
Following the success of these early institutions, other microfinance organizations began to launch
throughout the developing world. Among the largest is FINCA International, established by economist and
Fulbright scholar John Hatch. Hatch believed that using locals' knowledge rather than bringing in outsiders
was key to building successful local economies. Using an approach he has always stood by, Hatch said,
"Give poor communities the opportunity, and then get out of the way!" By 2005, FINCA had 400,000 clients
in 21 countries across Latin America, Africa, Central Asia and Eastern Europe.
One year after the United Nations called 2005 the International Year of Microcredit, the World Bank
estimates that there are more than 7,000 microfinance institutions now operating around the world.

Microfinance Has Its Detractors

Despite the fact that microcredit has become something of a cause celebre for its potential to help the
developing world, there are some serious and credible criticisms of its success.
Critics of microcredit say that many of the poorest of the poor still do not qualify for a loan, because they
pose too much risk; and those that do qualify use much of their loan, not for business, but for simple needs
such as food for their families.
"Grameen borrowers are staying poor," said Gina Neff, an economic journalist writing for the Left Business
Observer in 2006. "After eight years of borrowing, 55 percent of Grameen households still aren't able to
meet their basic nutritional needs."
Others insist that microfinance is not a complete solution, charging that those who have benefited from the
industry overstate its value in order to keep the model going. Institutions like the World Bank and the
International Monetary Fund have also come under fire for funneling into microcredit institutions money
that could have gone to funding for education, health or other basic social infrastructure needs.
In Jonathan Morduch's book, Does Microfinance Really Help the Poor?, he questions the real impact the
industry has had in helping the poor.
Morduch, who is professor of public policy and economics at New York University, writes, "Households that
are eligible to borrow and have access to the [microfinance] programs do not have notably higher
consumption levels than control households, and, for the most part, their children are no more likely to be
in school."
Morduch also found that microcredit doesn't reach those who are truly destitute, and those who benefit
most are already above the poverty line.
There's no doubt that microcredit has reached the poor in many places overlooked by mainstream banking
sources. And even when the rate of return is less than 100 percent, as is the case for most if not all
microlending institutions, putting capital into the hands of small businesses can have benefits for the
future.
"The real outcome will manifest itself in the education and choices that will open up for their children," says
Maria Otero, president of ACCION International. "The power of putting capital in the hands of poor people
enables them to create their own wealth and invest in their children."
SOURCES: World Bank; Grameen Bank; The Consultative Group to Assist the Poor; ACCION
International; Globalenvision.org; BBC; The New York Times; The Year of Microcredit; Clinton Global
Initiative Fund; Does Microfinance Really Help the Poor? By Jonathan Morduch; Left Business Observer;
United Nations Development Program.

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In this paper we will be trying to find the origin of microfinance. Mainly after the 1970s, some personal
attempts had been made to build microfinance institutions, like ACCION, Grameen Bank etc. Before that,
several institutions had been working in many countries but the effect was too small.
So we will mainly concentrate on the post 1970 era.In the late 1970s, the concept of microfinance had evolved.
Although, microfinance has a long history from the beginning of the 20th century we will concentrate mainly
on the period after 1960. Many credit groups have been operating in many countries for several years, for
example, the chit funds ( India), tontines ( West Africa), susus (Ghana), pasanaku (Bolivia) etc.
Besides, many formal saving and credit institutions have been working for a long time throughout the world.
During the early and mid 1990s various credit institutions had been formed in Europe by some organized poor
people from both the rural and urban areas.
These institutions were named Credit Unions, Peoples Bank etc. The main aim of these institutions were to
provide easy access to credit to the poor people who were neglected by the big financial institutions and banks.
In the early 1970s, few experimental programs had started in Bangladesh, Brazil and some other countries.
The poor people had been given some small loans to invest in micro-business. This kind of microcredit was
given on the basis of solidarity group lending, that is, each and every member of that group guaranteed the
repayment of the loan of all the members.
Many banks and financial institutions has been pioneering the microfinance program after 1970. These are
listed below:
ACCION International:
This institution had been established by a law student of Latin America to help the poor people residing in the
rural and urban areas of the Latin American countries. Today, in 2008, it is one of the most important
microfinance institutions of the world. Its network of lending partner comprises not only Latin America but
also US and Africa.
SEWA Bank:
In 1973, the Self Employed Womens Association (SEWA) of Gujarat (in India) formed a bank, named as
Mahila SEWA Cooperative Bank, to access certain financial services easily. Almost 4 thousand women
contributed their share capital to form the bank. Today the number of the SEWA Banks active client is more
than 30,000.
Grameen Bank:
Grameen Bank (Bangladesh) was formed by the Nobel Peace Prize (2006) winner Dr Muhammad Younus in
1983. This bank is now serving almost 400,0000 poor people of Bangladesh. Not only that, but also the
success of Grameen Bank has stimulated the formation of other several microfinance institutions like, ASA,
BRAC and Proshika.