Microfinance !!?

Poverty is one of the difficult challenges that face world economies around the globe with more than

3 billion people who live on less than $2.50 a day. More than 1.3 billion live in extreme poverty and less

than $1.25 a day, numbers can say it all. However, regardless of all the difficulties involved in this

situation, a light at the end of the tunnel exists. Prior to the establishment of its sound regulation and

experiments in 1970’s by the Grameen Bank founded by Mohammad, Yunus microfinance saw

the light and proved its abilities to elevate a large scale of people from poverty. Microfinance

represented a mechanism of lending credit designed specifically to the world’s unprivileged

populations and a variety services that can of a beneficial outcome. Today, this industry faces every

day a new challenge from regulation and policies to commercialization and communication.

Microfinance was a form of a voluntary help when first started in the 1970’s, helping the poorest

populations. However today, microfinance have gained a more market share and created more

sophisticated solutions to mitigate from poverty and to create financial inclusion. The constant success

of microfinance triggered the interest of several institutions, nonprofit organizations, banks, and even

governments. The increasing number of participants in this field forced the regulatory authorities to accommodate

this interest with more structure, transparency, and regulation policies for this industry.

Today the microfinance industry has a more suitable structure for commercialization, more diversified

products, and more importantly it has more impact on the economy and the alleviation of poverty. This

a new role played by microfinance can only be tempting and demand in developing countries especially

the ones that are facing several economic challenges and high rates of poverty such as Tunisia, who has

1.6 million people who live under the poverty line1, with only 10.9 million habitants, Tunisia presents an

excellent candidate for the adaptation, implementation and reinforcement of such industry to bring

down this terrifying and alarming number.

Microfinance

Definition

According to Kiva2 microfinance is “A general term to describe financial services to low-income

individuals or to those who do not have access to typical banking services. Microfinance is also the

idea that low-income individuals are capable of lifting themselves out of poverty if given access to

financial services.” Another functional definition provided by MIX3 which is used for analysis purposes

defines micro-financing services as “retail financial services that are relatively small in relation to the

income of a typical individual. Specifically, the average outstanding balance of microfinance products

is no greater than 250% of the average income per person (GNI per capita).”

In general micro-financing is a typical banking service; however, it provides unemployed or low-income

individuals or even groups with different financial services that would not otherwise have from other

regular banks. The ultimate goal of micro financing is to create opportunities for low-income people to

become self-sufficient through providing them with means of saving and borrowing money and

insurance.

Microfinance provides financial sources and services for a wide range of entrepreneurs and small

businesses lacking access to these crucial elements. Micro financing has a broad category of services,

which include microcredit. Thus, in literature, the terms of microfinance and microcredit are often

confused, that is why it is important to highlight the difference between the two terms. Whereas

microcredit is referred to small loans, microfinance is appropriate where NGOs and MFIs that

supplement these small loans often provide it with other variety of non-credit financial services such as

savings, insurance, pensions and payment services.

Introduction

Gert van Maanen in his book (Microcredit: Sound Business or Development Instrument, Oikocredit ,

2004) states that “Microcredit, or microfinance, is banking the unbankable, bringing credit, savings

and other essential financial services within the reach of millions of people who are too poor to be

served by regular banks, in most cases because they are unable to offer sufficient collateral. In

general, banks are for people with money, not for people without.”

Microfinance is a set of financial services that targets lower income prospects, especially women.

Microfinance institutions (MFIs) takes into consideration the low income of its clients and their limited

access to other financial services, thus microfinance products offered tend to be in smaller monetary

amounts than traditional financial services. These services vary from credit financial services such as

microcredit to non-credit financial services such as savings, insurance, and remittances.

Microcredits are given for many purposes, in particular for micro enterprises development. The

diversification of products and services within microfinance reflects the financial needs of individuals,

households, and enterprises that can change dramatically over time, especially for those who live in

poverty. These unorthodox needs are met by the microfinance institutions by the use of non-traditional

methodologies, such as group lending or requiring other forms of collaterals not usually employed by

the formal financial sector.

Microcredit is actually an innovation created by the developing countries. It belongs to the group of

financial services under the term microfinance, similar to other types of services such as micro savings,

money transfer vehicles and micro insurance.

Microcredit target market is poor people that are unemployed, entrepreneurs, and farmers who cannot

afford the luxury of regular banks. The reason behind this is the lack of collateral, steady employment,

low income, and a verifiable credit history. Therefore, they cannot meet the minimum required

qualifications for an ordinary credit. Providing people with micro credits gives them more available

alternatives and opportunities with reduced risks. So far microloans have successfully enabled people to

start their proper businesses, generating and maintaining a sustainable stream of income and often

begin to build up wealth and exit poverty. All of this Starting with amounts that seldom exceed 100USD.

Muhammad Yunus a Nobel Prize winner and a pioneer in the microfinance sector said that,

“(Microcredit) is based on the premise that the poor have skills which remain unutilized or

underutilized. It is definitely not the lack of skills which make poor people poor….charity is not the

answer to poverty.

 It only helps poverty to continue. It creates dependency and takes away the

individual’s initiative to break through the wall of poverty. Unleashing of energy and creativity in each

human being is the answer to poverty.” That is why microcredit is the best fit for those with

entrepreneurial capability and possibility. Such as the poor people that works in growing economies, or

who can undertake activities that generate weekly stable incomes. For that reason, almost every

microfinance institution have created a special safety program for those who do not qualify because

they are extremely poor like the deprived or homeless that offer basic training and mentoring and later

reintegration to graduate these members in their microfinance program to be able eventually to make

ordinary microcredit.

History of microfinance

The history of micro financing is traced back to the middle of the 1800s when the theorist Lysander

Spooner was writing over the benefits from small credits to entrepreneurs and farmers as a way getting

the people out of poverty. However, it was prior to the World War II when the concept had a big impact.

in 1864, an economic historian at Yale named Timothy Guinnane has been doing some research on

Friedrich Wilhelm Raiffeisen´s village bank movement in Germany when it started, and by the year 1901

the bank had reached 2 million rural farmers. Timothy Guinnane, then, proved that microcredit could

pass the two tests concerning people’s payback moral, and the possibility to provide the financial service

to poor people.

Between 1900 to 1906, Another organization, The “Caisse Populaire” movement established by Alphonse

and Dorimène Desjardins in Quebec was also concerned about the poverty, and passed those two

tests. When they founded the first caisse, they approved a law governing them in front of the Quebec

assembly; they risked their private assets and must have been very sure about the idea about

microcredit.

Joseph Blatchford is considered one of the founding fathers of the modern microfinance for his efforts in

this field. 1959 When he was a law student at the University of California, he founded the non-profit

organization Accion. He then started sending small loans to urban centers and rural communities in

Colombia to help lifting them from poverty. His operation was such a success, that he expanded Accion

model to 14 other Latin American countries over the next decade. Accion now have reached 5 million

clients in over 21 countries.

Many pioneering enterprises began experimenting with loaning to the underserved people. Shore bank

was the first microfinance and community development bank founded 1974 in Chicago. However, it's

Bangladesh's Muhammad Yunus who is credited with being the pioneer of the modern version of

microfinance. In the 1970s, Yunus started offering small loans to indigent basket weavers. Yunus

consisted on his mission for almost 10. In 1983 he finally founded the Grameen Bank, as a way to reach

a much wider audience. Today, with 2,500 branches Grameen Bank serves more than 8 million

borrowers in approximately 81,000 locations. According to Grameen Bank, 97 % of its clients are

women, who repay loans more than 97 % of the time, a recovery rate astonishing compared to any

other banking system. In 2006, Yunus and Grameen Bank won the Nobel Peace Prize for their micro

financing work.