Small loans to the poor on special terms has existed for a long time in many countries.. In the 20 th century, many developing countries implemented Integrated Rural Development Programs IRDP , under which, public banks provided small loans to small farmers and agricultural labourers. While these early experiments are important, the modern form of microcredit is modeled on the Grameen Bank in Bangladesh founded by Mohammed Yunus in It has been argued that public banks historically neglected the credit needs of poor households on the grounds that they lacked collateral to surrender to the banks.
This was where a bank like the Grameen Bank stepped in. Second, is the screening problem - distinguishing the good creditworthy from the bad not so creditworthy borrowers. This problem arises from the fact that poor borrowers do not generally maintain accounts of their past business activity and are unable to furnish any documented plan for the business for which they are seeking the loan. Third, public agencies may not be able to monitor and ensure productive usage of loans.
There is also the problem of enforcement. If there are problems with loan repayment they may not be able to take legal action against the borrowers due to the absence of any collateral. According to Yunus, formal lending agencies often leave the poor unbanked due to the high levels of transactions costs incurred in lending to the poor.
Grameen Bank claimed that its model of microcredit addressed these problems in innovative ways. It attempted to overcome the screening problem by lending to groups of borrowers rather than to individuals. The concept of group borrowing was based on the idea that solidarity among like-minded people living in similar social and economic conditions is crucial to the success of this program. As a group, the poor were better able to understand the character and use of the proposed loan. Moreover, the loans were given only for activities for which repayment was guaranteed and which were certain not to turn into bad investments..
These included activities, such as poultry raising, paddy husking, cattle fattening, rice and other seasonal crop trading, handloom weaving and grocery shop-keeping. Finally, the problem of monitoring was taken care of individually as well as through the group. The Bank insisted that the loan be put to the use specified by the borrower within a period of seven days and required small weekly repayments.
In practice, the implementation of microcredit in most developing countries has been associated with the policy of financial liberalization.
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As I shall explain below, certain central features of microcredit fit in well with the requirements of financial liberalization. Typically, financial liberalization aims at reducing the central role of public banks in the financial system and promoting private financial interests. Where does microcredit come from? Which country ies was were the first to use microcredit? And why? As mentioned, the modern form of microcredit is heavily based on model of the Grameen Bank in Bangladesh.
The story of Grameen begins in Yunus previously worked in Jobra, a village surrounding the University at its Chittagong campus. Deeply moved, he and a few of his colleagues decided to help the villagers.
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Studies in the village led Yunus to the important recognition that the poor in Jobra, who were mostly engaged in bamboo-based small-scale self-employment, were caught in deep debt traps. Usurious rates of interest and oppressive terms and conditions set by the private moneylenders ensured a perpetuation of their indebtedness and poverty. Yunus concluded that credit was the major factor determining the economic position of people in this village. Yunus requested a bank in Jobra to provide inexpensive loans to the poor in the village.
However, the bureaucratic ways of working of the public sector bank prevented it from providing loans without any collateral.
Disappointed with their efforts to obtain inexpensive loans, Yunus and friends at the University finally decided to become moneylenders themselves. Thus was born Grameen, which was to spread later to other parts of Bangladesh and the world. According to Yunus, the requirement of lump sum repayments in banks made defaults a common feature.
When made daily, the repayment amounts would be so small that the borrowers would not find it difficult to repay promptly.
For example, a taka loan could be repaid in one year at the rate of one taka a day. However, Yunus found it difficult to implement this programme and later switched over to weekly repayments.
In order to obtain loans from Grameen, borrowers were required to approach the bank in groups, each group consisting of five members. The loans were provided first to one member and sequentially to the remaining members in pairs. The prompt repayment of installments by members at every stage was a pre-requisite for members at the following stages to become eligible for loans.
In Yunus's opinion, such sequential lending helped minimize the probability of default by imposing peer pressure. The target group of Grameen was women. Yunus justifies this targeting on two grounds. First, among the poor, women are socially and economically the most deprived. Second, they are more reliable than men in the repayment of loans.
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Moreover, women are more forthcoming and successful in improving the welfare of the household as a whole. How many people are involved today? And who are the people giving money? As a result, it is difficult to estimate the actual number of people involved in microcredit today. Another study by the World Savings Bank Institute WSBI in , using a different definition for microcredit, put the total number of borrowers at about million.
Data on the microfinance institutions MFIs that provide microcredit are also hard to come by. According to some estimates, there are more than 10, MFIs in the world. However, official documents report a much lower number of MFIs. The most widely used global database on the subject is the MIX Market database, where data is largely self-reported.
As per the latest information for , only 2, MFIs provided data to the database. For these 2, MFIs, the total number of borrowers was Please enable and try again. HuffPost is now part of the Verizon Media family. We Verizon Media and our partners need your consent to access your device, set cookies, and use your data, including your location, to understand your interests, provide relevant ads and measure their effectiveness.
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Your Access Options. Forgotten your password? Article available in:. Vol 54, Issue 1, The effectiveness of the microcredit programme in Bangladesh. M Twyeafur Rahman and more Local Economy. Is it time to regulate microfinance? Fakhruddin Ahmed and more Progress in Development Studies.