User:Omenezes

Microfinance

Microfinance is the process of giving people in less developed areas of nations the use of money management systems like insurance and banking that they would not usually have. It is a widely used form of development support. The two most common forms of microfinance are: (1) Relationship banking for one person and small businesses; and (2) group banking where people apply for loans together. Microfinance has many different parts, one is microcredit. Microcredit is giving credit to poor people in very small amounts, mostly between $100 and $500 US dollars. Microcredit is only one part of microfinance and the two are mixed up a lot. People will attack microcredit when they mean microfinance. Because microfinance is so general, it is hard to measure its effect. It is said that it helps people become less poor, but we only know that it helps people with smart financing.

Small Enterprise Foundation - microfinance meeting

Purpose

Normally, banks will not give credit to people who have little or no money because they don’t think they will pay it back. Poor people also do not have much to offer as a trade if they can’t give the money back. When people try to make banks in less developed countries they often fail for this reason. When poor people borrow money they mostly get it from family or moneylenders (street lenders) that set the price too high. Even though a lot of help has been given, the difficulty has not been fixed. Most of the people who make less than $1 a day are still not able to use microfinance. The industry would need $250 billion to help all the poor people who need it.

History

Microfinance can be seen as far back as the middle of the 1800s, where Lysander Spooner was writing about helping poor people with borrowing small amounts of money. The new microfinance system was formed in the 1970s when Muhammad Yunus made the Grameen Bank of Bangladesh and was the first to have good effects with the idea by giving small amounts of money to groups of women. He thought of the idea while living in Bangladesh during the famine of 1974. Another beginner microfinance company was ACCION, a development program started by law student Joseph Blatchford in Venezuela.

Types

• Informal Financial Service Providers: These are people who live in the same place and are able to give money to others to borrow. The time that the money can be kept is very short and the cost can be high if the person is a moneylender.
• Member-Owned Organizations: A Member-owned organization is made by poor people and the cost is low. They are easily taken over by one or two leaders and people can lose their money.
• NGOs: These are companies that don’t want profits and have the main goal of helping people. They are many times controlled by monetary gifts from other people.
• Formal Financial Institutions: These include banks and other financial companies. They are watched and controlled and are able to help in more ways than many of the other types of places. Still, they do not always focus only on helping people and can’t help people who are farther away.

Ways Poor People Manage Money

The biggest problem that poor people face is getting enough money for it to be useful. This is done mostly by keeping money until it is needed. When these people don’t have enough money when they see a need, they borrow. Microcredit says that people become less poor by borrowing and making businesses. When they need money, they might find it helpful to borrow for other reasons. There needs to be a way to help these people save money and use it when they need it to manage family safety.

Scale

About 665 million people at over 3,000 microfinance banks are being helped. The highest number of people are in India (18% of the population). The lowest number of people are in Latin America (3%) and Africa (4%).

Difficulties

Selection Bias

Many times when people are picked to get money from microfinance, there is one person who makes the decision. When this happens, race, and other things can affect the offer.

Commercialization

The number of microfinance companies that there are now cannot be supported by monetary gifts only. The way that they keep running is by commercializing. Commercializing means that the companies then have to work with profits while helping poor people. When this happens it is said that they can become almost like normal banks and soon will not serve the poorest people because of the risk.

Internal Structure

When it comes to the inner workings of a microfinance company, there are many things that can go wrong. Bad deals is one of the largest difficulties. People are changed by power and lose sight of the idea of helping people.

Long Term

The largest difficulty in microfinance is that the jobs it makes are simple. When a country has enough of these simple jobs adding more people to the mix does not help. There needs to be more development instead of simple sales.

Effects

Microfinance is said to help get people jobs and more money and through that help to improve food amounts and education for children. Some say that microcredit helps women get power in the house, though there is no proof. In the United States and Canada, people say that is helps the poor leave government housing.