Micro-finance is one of the most effective development models that has come into play over the last decade. The concept originated with Grameen Bank in Bangladesh, founded by Muhammad Yunus. Micro-finance can loosely be defined as the provision of financial services to low-income clients, including consumers and the self-employed, who lack access to banking and credit services. Its ultimate goal is to create a world in which impoverished households have sustainable access to savings, insurance and fund transfers, along with the business skills to pull themselves out of poverty.
Grameen Bank was founded in 1976, as a research project to examine the possibilities of designing a credit system that would provide reliable banking services to the rural poor. Since being transformed into an independent bank in 1983 and incorporated under a grant from the Ford Foundation, the bank has loaned over $7.6 billion to the world’s poor. Currently, Grameen Bank has over 2,100 branches, and most notably, a payback rate of over 98%. Its huge success has inspired similar programs worldwide, resulting in close to 50 million people that have risen out of destitute poverty thanks to micro-lending.
One new organization, Kiva, is allowing us all to get in on the lending action. Through Kiva’s website, any lender (including you, me, or Joe Shmoe) can access entrepreneurs from communities all over the world, and help them build a small sustainable business to support their family and community by providing a small six to twelve month loan. Throughout the process you can receive updates from your lendee, track repayments, and when the full payment is returned you can relend to someone else. Kiva partners with existing micro-lending institutions in the field who approve the entrepreneurs and disburse the actual funds.
How can this business model be profitable? A survey published by the MicroBanking Bulletin with data from 62 self-sufficient micro-finance institutions revealed that the average return on assets for this group is 5.5%. When compared to commercial-bank returns, this is pretty favorable. There is some concern that profit driven models will steer MFIs toward wealthier clients who can afford larger loans. While this may be true in some isolated cases, MFI’s serving the rural poor are showing rapid financial improvement in payback rates and overall returns. Indeed, substantial progress is being made to deliver sustainable financial services to the poor and dedicated practitioners are hoping that microfinance can become attractive investment for mainstream retail bankers.