Last week, a plane was detained at Los Angeles Airport because a passenger on the flight was showing flu like symptoms. The passenger admitted to having been in Africa recently, which caused an elevated level of alarm amongst passengers and airline officials. According to a spokesman for the Los Angeles Fire Department, Capt. Jamie Moore, it “turned out that there had been some miscommunication. This person had been to the continent of Africa but not near West Africa. As a matter of a fact, it was South Africa.”
This incident was amusing, given that South Africa is rather far from the affected area in West Africa and has not had a single case of the virus since the outbreak. This story illustrates the level of fear and anxiety that has gripped the US in the past few months. It also reminded me of just how often people misinterpret the size of certain continents and countries. In this case, the size of Africa:
Two of the most widely recognized microfinance institutions in the world today are both located in Bangladesh: the Grameen Bank and BRAC.
The Grameen Bank was founded by Mohammed Yunus in 1976. Since then, they have loaned nearly 13 billion US Dollars to almost 4.5 trillion borrowers. In November of 2012, the bank had 8.4 million active borrowers with more than one billion US Dollars in outstanding loans. The Grameen Bank’s repayment rate for all its loans is nearly 97%.
The Bangladesh Rural Advancement Committee (BRAC) was started in 1972 as a relief organization following the War of Liberalization. In the early 1970s, BRAC began lending microcredit to landless people in some of its development projects. In November 2012, BRAC had 5 million active borrowers with outstanding loans totaling 725 million US Dollars. BRAC has a repayment rate of 99.36%.
In Bangladesh, the poor account for one fifth of the total loan portfolio for the entire country.
Both of these microfinance institutions (MFIs) follow a similar structure in the way that they lend to their borrowers. They provide “solidarity group lending” in which prospective borrowers must be part of a lending group in order to receive a loan from one of these institutions. Every group member is accountable to, and liable for, all the other members’ loans. Given that the poorest communities in Bangladesh lack financial capital or assets that can be used as collateral for loans, these lending groups act as a form of “social capital”:
These organizations have become increasingly powerful and important to the economic environment in Bangladesh. According to their financial statistics they seem to be doing rather well. But, are they having the desired economic impacts set out in their mission?
About a year ago, I was first introduced to the idea of microfinance through the website Kiva.org. I was fascinated by the idea and inspired by the organization. In fact, last year instead of purchasing Christmas presents for my family members, I donated $100 to the Kiva website and my family and I chose entrepreneurs from the website to invest in.
The idea of directly investing in an entrepreneur’s personal development from halfway across the world was something really exciting. As my parents themselves are entrepreneurs, they liked the idea that they were not “donating” money, but rather “investing” in fellow entrepreneurs. It is not a donation, it is a loan; this is not only important for us, but is also important for the borrowers. They are improving their own economic situation.
As Jessica Jackley, co-founder of Kiva, explains in her TED Talk, when she went to Kenya, Uganda, Tanzania:
I never once was asked for a donation, which had kind of been my mode, right. There’s poverty, you give money to help — no one asked me for a donation. In fact, no one wanted me to feel bad for them at all. If anything, they just wanted to be able to do more of what they were doing already and to build on their own capabilities. Because the best way for people to change their lives is for them to have control and to do that in a way that they believe is best for them.
The idea of being able to allow people to improve their own lives, in their own manner, was what really attracted my family and I to microfinance.
My family and I lent $50 to two borrowers in Kiva last Christmas.
Mrs. Rajalakshmi displays loan cards issued to borrowers enrolled in Mahasemam Trust’s Microfinance Loan Program. Chennai, India.
Over the last few decades, microfinance, or microcredit, has become a popular mechanism for economic development and poverty reduction.
Microcredit can be defined as “programmes that extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families”. This “contemporary” idea of microfinance is widely believed to have been created by Mohammad Yunus, who began lending to poor women in Jobra, Bangladesh in the 1970s. He later founded his own microfinance institution (MFI) known as the Grameen Bank. In 2006, Yunus, along with the Grameen Bank, won the Nobel Peace Prize for “their efforts to create economic and social development from below”.
Microfinance, however, is not a new concept; it has played a large role in civil society for centuries and has taken several different forms outside of the modern, formal banking sector. In Latin America, for example, the use of Tandas is the most popular form of saving and financing among poor populations. Tandas are formed among a small group of people who agree to give a specific amount of money to the Tanda every week. The collected money is then given to one of the Tanda members on a rotating basis. Each member will receive the total amount of the Tanda one week during the arrangement. This system has proven to be a popular model for those communities in which “modern” financial services through the banking sector are not available. A good list of the different microfinancing models can be found on the Grameen Bank website.