Microfinance: A Cure for Poverty
When Muhammad Yunus founded the Grameen Bank in Bangladesh, little did he know that his idea would become so successful that there would be debates as to whether it can significantly reduce poverty from the entire planet?
Microfinance has rapidly risen from its humble beginnings in the remote villages neighbouring Chittagong in Bangladesh. Many financial organizations in the world have backed the idea of microfinance. Organizations like the World Bank are amongst the leading investors as more than $20 billion have been aggregated to replicate Muhammad Yunuss experiment on a very large scale globally.
In this article, we will discuss the concept of microfinance as well as how it is supposedly assisting in reducing poverty.
The Logic behind Microfinance
Believers of the free market are of the opinion that politicians cannot possibly legislate poverty out of existence. They believe that magical laws and social schemes which promise to eradicate poverty are mere pipe dreams used by politicians for their own sinister purposes. In reality, the only people that can drag the poor out of poverty are the poor themselves. The poor need to be industrious and create micro industries which allow them to fend for themselves and not depend on seasonal employment for their sustenance. Hence, microfinance believes in alleviating people out of the cycle of menial employment in the form of landless labor or labor intensive jobs.
According to this doctrine, the poor do not require welfare handouts and neither do they require trade unions or minimum wage laws. Instead, they need some seed capital, a small loan which they can use to kick start their micro industry. They can then use this seed capital to fend for themselves and end their dependence on exploitative corporations. This premise is the building block of the concept of microfinance.
How Microfinance Works ?
Microfinance is the business of providing these poverty ridden people with these seed loans that will eventually help them come out of poverty. Microfinance institutions typically make unsecured loans to people below poverty lines. A traditional banker would frown at this idea calling it infeasible. People below poverty lines are notorious for not repaying their loans, and they dont have any assets that can be held as collateral. Hence these loans seem to be heading for disaster the moment they are made.
This is where the microfinance model became innovative. Instead of giving out loans to individuals, the microfinance organization provides loans to groups. If one person in the group defaults, the others are held jointly liable for it. This exerts social pressure on all the individuals in the group. The group, therefore, acts as one cohesive unit and loans tend to get repaid.
Sustainable Business Model: Why for Profit ?
Muhammad Yusuf argued that the business model needs to be for-profit for it to be scalable as well as sustainable. Business models which are based on the benevolence of their donors are simply not scalable. Not everybody is benevolent all the time. However, if the model generates its own profit, it is both sustainable as well as scalable. Therefore, microfinance institutions all over the world try to manage their social responsibility with their economic responsibility. If they lean excessively on any one side, the business model may implode.
Also, the business model is based on rising profits as a result of a growing relationship with customers. When Grameen Bank was successful in pulling many of its customers out of poverty, they would sell other financial products like insurance to them. This is where the microfinance organization was able to make substantial profits.
Microfinance allows for the unifications of social as well as economic goals. The beauty of this business model is that eliminating poverty and generating profits cease to be at odds. Instead, both these goals can be simultaneously achieved at the same time. Time and again multiple organizations have proven that this is possible. In countries like India, some microfinance institutions have grown so profitable that they have been able to conduct public issues of their shares and raise millions of dollars from equity markets.
At the same time self-help groups, which are the primary benefactors of microfinance have witnessed a massive increase in self-employment. The number of micro industries and microservice based businesses in rural areas has grown exponentially.
Microfinance institutions do provide a lot of social benefits. The youth finds itself gainfully employed as a result of microfinance. Their time is spent thinking about a business opportunity which they can utilize to climb out of poverty. As a result of this anti-social activity like crime and addiction have reduced substantially. Fewer people are likely to engage in criminal activity when they have a viable economic alternative.
The idea of microfinance has now become a global phenomenon. There are institutions trying to alleviate poverty by giving out loans in South America, Asia, Africa as well as Eastern Europe! However, many believe that the model is broken and that in due course of time the flaws will become visible to the investing population. In the next article, we will have a look at the disadvantages of the microfinance model.
|❮❮ Previous||Next ❯❯|
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
- Corporate Finance - Introduction
- Nominal and Real Value of Money
- Fundamental Rules of Corporate Finance
- Present and Future Value of Money
- Net Present Value Calculations
- Compounding Intervals and Interest Rate
- What Are Negative Interest Rates ?
- The Consequences of Negative Interest Rates
- Opportunity Cost of Capital
- Valuing Cash Flows in Different Periods
- What is Perpetuity ?
- Growing Perpetuity
- What is Annuity ?
- Ordinary Annuity vs. Annuity Due
- Types of Annuity Calculations
- What is Bond Valuation ?
- Bond Market Conventions
- How Interest Rates Affect Bonds ?
- Stock Valuation Models
- Discounted Cash Flow Approach
- Assumptions During Stock Valuation
- What is Cost of Equity ?
- What is Payback Period ?
- What is Internal Rate of Return (IRR) ?
- Problems With Using IRR
- Capital Rationing & Profitability Index
- Types of Capital Rationing
- Capital Controls: Meaning, Types, Benefits and Downside
- Estimating Project Cash Flows: Part 1
- Estimating Project Cash Flows: Part 2
- Estimating Project Cash Flows: Part 3
- Capital Budgeting and Inflation
- Capital Budgeting and Depreciation
- Equivalent Annual Costs
- Investing and Financing Decisions
- Getting Creative with Capital Budgeting
- The Fallacy of Creative Destruction
- Companys Risk vs. Project Risk
- How Governments around the World are Bankrupting Future Generations for Present Consumption
- Role of Credit Rating Agencies in Determining Attractiveness of Companies and Countries
- Federal Reserve Announcement to Taper Quantitative Easing
- How Do Funds Transfer Systems Work
- The Importance of KYC (Know Your Customer) Norms and Procedures in Banking
- Difference between Corporate, Retail, Investment Banking, and Private Banking
- Impact of Geography on Banking and its Functions
- Functions of a Central Bank in Modern Economies
- Lease Rental Discounting
- Lending Against Intangible Assets
- Real Reasons behind FDI in Retail in India
- Microfinance: A Cure for Poverty
- Microfinance: Indebting the Poorest in the World
- Behind the Scenes of an Initial Public Offer (IPO)
- Pros and Cons of Going Public
- Snapchat IPO: Is this the New Tech Bubble ?
- Benefits of Delaying Profitability
- Why Do Corporations Get Away With Tax Avoidance ?
- After Effects of the Nirav Modi Scam
- The Panaya Acquisition
- The Flipkart and Wal-Mart Alliance
- The Worlds Largest IPO
- Initial Coin Offerings: A Primer
- The Aftermath of the Qualcomm Deal
- What are Demergers: Its Pros and Cons
- Benefits of a Holding Company
- The Economics of Lawsuits
- Protectionist Sentiment over Flipkart Takeover
- The Impact of Tariffs on the Energy Sector
- Venture Debt A Primer
- Interest Rates and Automobile Sales
- How Should Companies Communicate With Wall Street?
- How an Interest Rate Hike Will Affect the Government of USA
- Is Tesla Close to Bankruptcy?
- Myths Surrounding Toys R Us Bankruptcy
- The Economics of 'Soda Taxes'
- Why Elon Musk's Tesla Should Go Private and Why It Won't?
- Why the Xiaomi IPO Failed?
- How A Whatsapp Message Nearly Took Down A Company
- The Case for Index Funds
- The Sears Bankruptcy
- The Socialization of Losses
- The Sudden Downfall of IL&FS
- Why Healthy Corporate-Regulator Tussle is Good for Free Market Capitalist Economies
- What Happens When Businesses Go Bankrupt? Insolvency, Aftermath, and Recovery
- Alibabas Singles Day
- Ubers New Businesses
- Goldman Sachs and the 1MDB Scandal
- The Amazon Divorce
- Are Index Funds Not A Good Investment In India?
- Can Brick And Mortar Stores Compete With Amazon?
- Why is the Fed Still Raising Interest Rates?
- Problems Related to Facebook, WhatsApp, and Instagram Mega Merger
- The Whatsapp-Facebook-Instagram Merger
- What Is The DHFL Scam?
- Financial Troubles In the Fracking Industry
- Flipkart Circumvents Indias FDI Norms
- Subprime Automobile Loans in America
- The Jaguar Land Rover Debacle
- The Kraft - Heinz Fallout
- Why Uber Should Be Regulated?
- Is Regulation of the Tech Sector Long Overdue with the Tech Giants being Too Big
- The Fall of An Ambani Scion
- Litigation Funding: A Primer
- The Finance behind the Plastic Problem
- The MasterCard Visa Duopoly
- Is the Lyft IPO Overpriced?
- The Alliance between Car Companies and Ride Hailing Apps
- The Amazon Divorce Deal
- The Lawsuit Between Spotify and Apple Corporation
- The Story Behind the L&T- Mindtree Takeover Bid
- Do IPOs Affect Competitive Firms?
- Can Cost Cutting Turn Out To Be Expensive?
- The Economic Impact of Facebook Outage
- The Apple-Qualcomm Legal Battle
- Cross Border Credit Reporting
- The Sudden Deluge of Unicorn IPOs
- The Wow Airline Debacle
- The WeWork Business Model
- Problem with Private Securities Offerings
- The Amazon FedEx Breakup
- The Decline of the Big Corporation
- The Gap-Old Navy Breakup
- Apples Acquisition of Intels Modem Business
- Mergers and Acquisitions: A New Perspective
- The CBS-Viacom Merger
- Why are Sprint Wireless and T-Mobile Funding their own Competition?
- Why are Corporations Hoarding Trillions in Cash?