Global Perspectives: Microcredit, an effective way to combat global poverty
Natalia Rivera
Issue date: 10/7/08 Section: Opinion
Global poverty continues to be an unsolved malady that perplexes even the most knowledgeable economists. One of the few convincing approaches to combating global poverty was developed by the Nobel Peace Prize-winning economist, Muhammad Yunus. Yunus invented Microcredit, a brilliant system that allows the poor to take out loans for small projects without the need of collateral (a security for the repayment of a loan). The development of Microcredit is outlined in Yunus' Banker to the Poor.
In 1976, Yunus traveled to Bangladesh and realized people had difficulty producing and selling goods. Most of these people didn't have enough money for materials, so they depended on moneylenders and traders for financial assistance. However, moneylenders often imposed high interest rates (around 10 percent), adding additional costs to the already unaffordable materials. Traders would force borrowers to loan and sell back, leaving them with little or no revenue.
Yunus figured that since most borrowers would only need about 22 cents to buy materials, he could go to a major bank and demand that loans be given to the poor. The bank, however, insisted that in order to request a loan, a person would need to fill out a series of complicated forms that would require credit history and ensure collateral.
There were two problems with this approach: Poor borrowers usually did not develop a credit history, and 2.75 percent of the population in Bangladesh was illiterate, so there was high probability that a borrower would be unable to fill out the required forms. Yunus then decided to create a system that would simplify the process of obtaining a loan. He eventually founded the Grameen Bank, which continues to employ this system.
An impressive aspect of Yunus' Microcredit is its emphasis on supporting poor women. Yunus identified women as the "majority of the poor, the underemployed and the economically and socially disadvantaged." However, Yunus stressed that women "more readily and successfully improve the welfare of both children and men." He explains that when a "destitute mother…earns income, her dreams of success…center around her children."
In 1976, Yunus traveled to Bangladesh and realized people had difficulty producing and selling goods. Most of these people didn't have enough money for materials, so they depended on moneylenders and traders for financial assistance. However, moneylenders often imposed high interest rates (around 10 percent), adding additional costs to the already unaffordable materials. Traders would force borrowers to loan and sell back, leaving them with little or no revenue.
Yunus figured that since most borrowers would only need about 22 cents to buy materials, he could go to a major bank and demand that loans be given to the poor. The bank, however, insisted that in order to request a loan, a person would need to fill out a series of complicated forms that would require credit history and ensure collateral.
There were two problems with this approach: Poor borrowers usually did not develop a credit history, and 2.75 percent of the population in Bangladesh was illiterate, so there was high probability that a borrower would be unable to fill out the required forms. Yunus then decided to create a system that would simplify the process of obtaining a loan. He eventually founded the Grameen Bank, which continues to employ this system.
An impressive aspect of Yunus' Microcredit is its emphasis on supporting poor women. Yunus identified women as the "majority of the poor, the underemployed and the economically and socially disadvantaged." However, Yunus stressed that women "more readily and successfully improve the welfare of both children and men." He explains that when a "destitute mother…earns income, her dreams of success…center around her children."
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