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Essentially Microfinance is about giving small credits at low interest rates and with no collateral requirements to the poor and destitute. Because the poor have no stable income, no collateral or guarantee to offer to lending institutions and because they lack knowledge regarding financial instruments and investment decisions they are denied access to traditional lending intuitions. Therefore, most of the poor and deprived have no access to financing at a reasonable interest rate. In times of need many turn to the informal market; to street lenders which ask for exorbitantly high interest rates. In cases where the borrower can not repay the sum due, he might be constrained to engage in illegal activities. This is the commencement of a vicious cycle. With carefully targeted microfinance projects the poor get an initial capital to invest in a productive activity ranging from seed for agricultural produce to raw materials to produce goods to sell on the market.
The reasoning behind microfinance is that long-term sustainable and effective development management can only take place if project benefactors are fully involved and committed to the project and are directly made responsible for the project’s success. Key factors for success are the fostering of a strong sense of co-operation and trust between project participants as well as mutual accountability. The project consultant’s role is to act as a facilitator, who manages the infrastructure and teaches relevant business skills for participants to start their entrepreneurial activity successfully. Microfinance clients are typically self-employed, often household-based entrepreneurs. In rural areas, they are usually small farmers and entrepreneurs who are engaged in small income generating activities such as food processing and petty trade. In urban areas they include shopkeepers, service providers, artisans, street vendors, etc.
Microcredit came to prominence in the 1980s.The concept goes back to Dr. Muhammad Yunus of Chittagong University who felt concern at the pittance earned by landless women after a long day's work labouring for other people. He reasoned that if these women could work for themselves instead of working for others they could retain much of the surplus generated by their labour, currently enjoyed by others. In 1976 he established the Grameen Bank, which has over 1000 branches (a branch covers 25-30 villages, around 240 groups and 1200 borrowers) in every province of Bangladesh, borrowing groups in 28,000 villages, with over 90% being women. It has an estimated annual growth rate of 20% in terms of its borrowers. Today the Grameen Foundation with its head office in Washington is the biggest organisation promoting Microfinance.
If you want to know more about microfinance check out this website, you will find a lot of reference material and links to other websites.
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