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Microfinance

If you are interested in pursuing a strategy for poverty alleviation, you ought to look into entering the world of microfinance. Microfinance can be one of the most influential instruments to prosperity for the poorest of the poor, who will do whatever it takes to lift themselves out of the cycle of poverty into prosperity. In contrast to handouts and aid, it encourages recipients of the low-interest loan to become resourceful and self-sufficient. Nobel Peace Prize winner Muhammad Yunus – the pioneer of micro-lending and micro-credit, advanced the nature of lending to the ultra poor who hold no collateral. This was done through the founding of the Grameen Bank, an institution which has loaned billions to the world’s poorest women and men.

In the micro-lending program of the Grameen Bank, collateral is symbolized or replaced by trust or joint liability within a group. Loans are given to a group of persons and are not extended if one of the persons does not repay the loan (plus interest, typically approximately ten per cent). Joint liability ensures that the loan is repaid. Holding default rates of under two per cent, the Grameen Bank serves as an excellent model of inspiration for poverty alleviation through microfinance.

The Grameen model has led to an explosion of microfinance institutions throughout the world, such as Acción in Latin America, Bank Rakyt Indonesia and K-REP in Kenya. Innovative organizations such as Kiva amalgamate microfinance with the internet. Like the Grameen Bank, Kiva holds a default rate of under two per cent (or, precisely: hold a current repayment rate of 98.85%). As the world’s first online lending platform, it partners with existing microfinance institutions around the world. According the World Economic and Social Survey 2008, over seven thousand microcredit institutions were in existence in the year 2006, serving approximately eighty million people in sixty-five countries.

Microfinance leads to long-term poverty alleviation because it helps the poor to build an independent livelihood. Although donations save millions of lives, even economist Jeffrey Sachs has confessed that “the path to long-term development would only be achieved through private sector involvement and free market solution.” Genuine prosperity is efficiently achieved through microfinance, a tool that leads the poorest of the poor towards independence, confidence and self-esteem – intangibles which lift the poor out of poverty, immediately outweighing the costs of a microloan. Former UN Secretary-General Kofi Annan once said, “The great challenge before us is to address the constraints that exclude people from full participation in the financial sector…Together, we can and must build inclusive financial sectors that help people improve their lives.” Opposite of a short-term band-aid solution, microfinance serves as a brilliant blueprint for long-term and genuine poverty alleviation. Enter the world of microfinance.

Author Biography
Brenda Vongova writes for the HARBUS on international affairs. She has served in the cabinets of three Presidents of the United Nations General Assembly.

September 7, 2010
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