- March 19, 2013
- Posted by: essay
- Category: Term paper writing
Poverty is unnecessary.
A range of financial services, that provide the help for poor people, in order to help them to manage their small business initiatives are referred as microfinance. Microfinance consists of such sub-elements as microinsurance, microsavings, and microcredit.
Microcredit means providing the financial support (small loans or so called microloans) to poor individuals, for a range of various entrepreneurship purposes.
A number of obstacles for these individuals like no steady employment or a verifiable credit history should be demonstrated that will not allow them to meet the basic requirements for the traditional credit policy.
Microcredit gives an opportunity for entrepreneurs to initiate their own small businesses that they couldn’t afford to start in the other case. Why is it seen as an important tool in the fight against poverty? The main argument is that, when microcredit works in the way it should, it provides an opportunity for poor households to make purchases, start or expand a business. This tendency allows poor people to escape out of poverty and be more productive.
Currently millions of dollars are given to the microcredit programs by wealthy philanthropists (for example, among active supporters of microcredit such people as George Soros and eBay co-founder Pierre Omidyar can be found).
Besides it, microfinance funds are established by world known banks, such as Citigroup Inc.
Taking in account all facts mentioned in the introduction, I should make a note that without a doubt, microcredit can’t be perceived as universal panacea and there are many options of abuses; various problems with microcredit happen frequently.
Microcredit origin and current investment situation
Microcredit innovation has considered having an origin in Bangladesh, when it was presented by a Bangladeshi economist Muhammad Yunus. Nobel Peace Prize was granted to Yunus and Grameen Bank for this excellent economic initiative in 2006. (Morduch 1998)
Bangladesh has a good experience in helping its impoverished citizens to start self-employment projects and to escape poverty this way. The credibility of finance industry to the microcredit issue is constantly increasing, and many of traditional finance organizations consider microcredit as a perspective source nowadays, although they experienced big doubts in the beginning. Bangladeshi Grameen Bank has 2,500 branches in Bangladesh nowadays and it borrows more than $100 million a month (it presents wide range of loans starting with less than $10 to $1,000 microcredit). These bank branches depend only on deposits from ordinary Bangladeshis, i.e. they are financially successful. Savings accounts are opened by the borrowers at the bank and the balances of many accounts are actually larger than their loans. Therefore Grameen Bank, also return the profits in the form of dividends to it’s clients (most of them are microcredit customers at the same time).
In Yunus’s opinion, this model has to be adopted by more microcredit institutions. The original definition of microcredit must be reaffirmed and it has to serve the poorest first of all.
Yunus believes that the cost of the fund hasn’t to be exceeded by the maximum interest rate and it needs to be strictly regulated by government. The current cost of fund is 10 percent according to Grameen Bank’s official information, and they believe that the maximum possible interest could be as high as 25 percent. They charge the interest rate of 20 percent for the lenders and absolutely sure that the ideal difference of the cost of the fund and the interest rate should be about 10 percent. To keep this kind of combination every state where microloans are popular needs to provide professional regulatory authorities. (Bangladesh Will Send Poverty to Museum by 2030: Yunus 2007).
In the case of Bangladesh, the country that has the highest concentration of the microcredit customers in the whole world, this kind of regulator has been successfully operating for a number of years. It’s goals are the lending transparency guarantees and avoiding of excessive interest rates and control over practices. Other states, like India, that has an emerging microloans activity, desperately need this kind of regulating authority.
Yunus also comments on the social side of the microloan’s programs. Financial organizations should not seek an advantage of the vulnerable people in a desperate life situations, therefore the definition of microcredit should not be mentioned in the case of credit opportunities that are specifically aimed to gain the profit from the poorest people. Owners of this kind of credit organizations in fact should not be allowed to use the positive image and advantages of real microcredit banks that have earned the real thrust of the population. And this is a state’s responsibility to find the way to prevent this kind of abuse.
Generally speaking, the whole community benefits from the development of economic climate, and it usually helps to improve the living standards and to provide employment and decrease poverty. (Bangladesh Will Send Poverty to Museum by 2030: Yunus 2007).
Despite it, some analysts note that individuals that will get the most benefits from the microcredit trend are land owners. The improvement of living standards influence the rise of land’s cost. The countries that initiate the microcredit usage should first of all adjust its laws, in order to regulate the situation with land; this is very substantial for poverty regulation.