Microfinance System and Poverty

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Introduction The purpose of the microfinance (MFI) is to reduce poverty in developing countries. The micro credit program was conceived by Muhammad Yunus, an economist who wanted to help poor come out poverty in Bangladesh. It started initially in Bangladesh, but soon sprad all over developing world. Yunus started Grameen Bank which gives out small loans to poor. In the first section of the paper I look into the background of the MFI, and the role of the NGO’s and Grameen Bank in Bangladesh. Then I look into the need for microfinance, why is it needed in the developing world, and what was the role of money lenders. At the end of the paper I critique the claim that Poor people are natural entrepreneurs. Background Microfinance was conceived in Bangladesh in the early 1970’s by Dr Muhammad Yunus. It is the supply of credit to poor people who might otherwise have no access to it. Microfinance institutions (MFI) specialize in delivering these services (Todero and Smith, P742). They have come up with group lending scheme, a group of potential borrowers who form an association to borrow funds from microfinance institution. Group gives money to the individual, and group is responsible for the repayment of the loan (Todero and Smith, P742). Individual members join together to make a group to reduce the cost of borrowing. Women are the primary beneficiaries of the program. They used to suffer the most from the lack of credit; no one would lend them money because they didn’t own anything to offer as “collateral” (Todero and Smith,743). Certain conditions have made it difficult for female entrepreneur to get credit. They didn’t have any collateral to give in place of a loan, it was difficult for the bank to screen the micro borrower, and... ... middle of paper ... ...ould go ahead and innovate (Banerjee and Duflo, P20). They don’t have appetite for risk; giving them credit is not a way out of poverty. It can help people survive, but not take them out of poverty. Conclusion There is no doubt that MFI is one of the most innovative tools to help out poor in the developing world. It does make life survivable for poor people. They do become optimistic about their lives and health. MFI has its and strengths and limits, it doesn’t eliminate poverty. The claim that all poor people are entrepreneurs doesn’t apply on everyone in the world. There must be some people who are poor and innovative at the same time, but all poor people are not entrepreneurs. Most of them would prefer to have a job than to start a risky business where they can lose everything. MFI is indeed a good program, but it is not enough to take people out of poverty.

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