In 1983, Nobel Peace Prize winner Dr. Muhammad Yunus visited a Bangladesh village where he loaned $27 to stool makers who paid him back with interest. After that he created the Grameen Rural Bank which has lent over $983 million to over seven million borrowers.
Kiva.org, a person-to-person microfinance website, defines microfinance as “the supply of loans, savings, and other basic financial services to the poor.” The 2005 Commission for Africa report pointed out that access to financial services, including credit, is very hard for poor people. Microfinance gives small entrepreneurs access to credit.
Microfinance is growing exponentially. In 2007 Deutsche Bank Research estimated the amount of total microfinance loans to be around $25 billion in 2006, up from 2001′s estimated $4 billion.
Providing microcredit is the core service of microfinance, according to a 2008 whitepaper for the Indian company, Vihaan Networks Limited. The whitepaper listed four reasons microfinance is important:
1. The basis of it is the recognition that the working poor can “act in an entrepreneurial manner, and are, in principle, creditworthy.”
2. It is the only alternative for the working poor to paying excessive interest rates that unofficial money lenders or pawnshops charge.
3. It provides a development model that is “bottoms up.”
4. It promotes entrepreneurship and helps the working poor fight poverty.
Is microfinance recession proof?
Despite the current economic recession, according to the March issue of Microfinance Insights, equity investors are still interested in investing in large microfinance institutions (MFIs) because they are confident they can “weather the crisis.” A recent survey on microfinance revealed that over four-fifths of investors have not reduced their portfolio allocation to MFIs.
Earlier this month, MicroPlace, a microfinance investment site, announced the launch of the first microfinance investment opportunity with a six percent annual return for investors. MicroPlace also offers an investment that allows investors to their money back. Last month, MicroCredit Enterprises launched a five percent security in March.
“We are optimistic that taxpayers will act charitably again with our growing portfolio of investments, including the recent 6 percent security,” said Ashwini Narayanan, general manager of MicroPlace. “We are thrilled at the opportunity that new investment products like this can create, in terms of additional value for our investors, and most importantly, the impact it can have on the lives of low-income entrepreneurs around the world.”
Last weekend, Obama announced the creation of a $100 million microfinance growth fund to help small lenders in the Western hemisphere continue loaning. The fund will partner with Multilateral Investment Fund at the Inter-American Development Bank, the U.S. Overseas Private Investment Corporation and the Inter-American Investment Corporation.
“The fund will provide stable medium- and longer-term sources of finance to microfinance institutions and microfinance investment vehicles to help rebuild their capacity to lend during this difficult period,” the White House said in a statement.