A Brief History of Microfinance
The notion of a microloan is not a new one. Before its modern form, there have been several, the notion of direct lending has taken several forms. The notion first surfaced in the form of credit cooperatives where the members of the financial institution were in control of the institution itself.. This technique was implemented first by Friedrich Wilhelm Raiffeisen in Germany in 1864 and also by Gabriel-Alphonse Desjardins in Quebec in 1901.
The first major attempt to institutionalize micro development loans came with the Comilla Model in rural Bangladesh. Akhtar Ahmed Khan founded the East Pakistan Academy for Rural Development in what is now Bangladesh. This was a system where rural villagers were organized in a top down system to coordinate the administration of rural economic activities with government officials in order to develop a stable and progressive agricultural sector. The goal was to improve the conditions of the farmers, and provide employment to the rural labour force. While the Comilla Model serves as an early example of the microfinance model, the model faced difficulties as larger stakeholders were able to take advantage of looser controls for their own advantage.
The modern incarnation of microfinance came with Dr. Muhammad Yunus, an economics professor at the University of Chittagong. Yunus created a project to aid the nearby village of Jobra. In an attempt to increase their agricultural output, Yunus attempted to obtain credit for the farmers, but was unable to do so as the villagers did not qualify as acceptable risks. Dr. Yunus then turned to a notion of social collateral and provided loans to villagers with the idea that the loans would continue if the recipients were to make regular payments. His first loan was for $27 which he lent from his own pocket to 42 residents in the community. This led to the formation of the Grameen Bank in 1976.
Since 1976, Dr. Yunus and the Grameen Bank list of clients has grown to more than 7 million, with more than $5 billion loaned. Of these clients, over 96% of recipients were women. Although the model initially served men and women equally, continued growth showed a much higher rate of return by female clients as well as a greater portion of earnings serving the needs of the entire family. For his work, Dr. Yunus was presented with the 2006 Nobel Peace Prize.
Following the success of the Grameen Bank, many new microfinance institutions (MFIs) have implemented these practices to provide much needed aid to the world’s poorest people.
For more information on microfinance, please see:
Web Site of the bank set up by Muhammad Yunus, known as the founder of modern microcredit.
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