Microfinancing, which provides small collateral-free loans of between $15 and $200 to help people in poverty set up their own businesses, is increasingly taking center stage in the battle to eradicate poverty. At the fifth World Chambers Congress in Istanbul in July, microfinancing’s chief cheerleader, Muhammad Yunus, said global poverty could be eradicated if more “social businesses” like Grameen Bank were established for the social good.
A long-time proponent of microfinance and the founder of Bangladesh’s Grameen Bank, which provides microfinancing to more than 7 million clients, Yunus was recently awarded a Nobel Prize. He has become a vocal proponent of similar projects around the world and is attempting to use his status to prompt more banks to set up microfinancing initiatives.
Since the creation of the Grameen Bank in 1983, a number of microfinancing institutions (MFIs) have been established, particularly in developing markets in Africa and Asia, to provide loans to help people break the cycle of poverty. In the majority of cases, microfinancing institutes tend to lend to women, who have high repayment rates of 95% to 98%.
Even mainstream banks such as Citi are participating in the microfinancing revolution—not via direct lending but by establishing loan guarantee and securitization facilities for microloans to help finance emerging MFIs.
At the congress in Turkey this summer, Yunus called on companies to “change the system” by rethinking the way they do business and focusing more on solving problems and less on maximizing profits. “All human beings have entrepreneurial instincts, even the very poor,” he said. “We need to create a society that gives everyone the opportunity to develop their entrepreneurial abilities.” He cited the example of a project in Bangladesh financed by the Grameen Bank that helped turn beggars into door-to-door salesmen by providing them with small loans to purchase useful products.
Despite the success stories cited by the Grameen Bank and other microfinancing institutes, Yunus’s lending model is not without its critics, some of whom claim it lures poor people into a cycle of increasing indebtedness. Patrick Bond, director of the Centre for Civil Society at the University of KwaZulu-Natal in South Africa, accused Grameen of “letting borrowers accumulate interest through new loans simply to keep alive the fiction of repayments on the old loans.”