Micro finance is a term used for the practice of providing financial services, such as micro credit, micro savings or micro insurance, to poor people. By helping the poor accumulate usable sums of money, they are able to expand their choices and reduce the many risks they face. As suggested by the name, micro finance, most transactions involve small amounts of money, frequently less than $5,000. Some governmental organizations define micro finance as amounts below $25,000.
Micro finance is usually dated as starting in the 1970s, but earlier experiments in Germany and Quebec have been observed historically. The movement gained momentum in Bangladesh in the early 1970s where Economics professor, Mohammad Yunus, starting a micro lending enterprise that became the Grameen Bank. In 2006, Yunus was awarded the Nobel Peace Prize for his efforts.
Yunus believed in the character and dignity of every human being. He saw each human being as an entrepreneur and he believed that, by working with these poor people, they could get themselves out of poverty. From those philosophical beginnings, he started the Grameen Bank in Bangladesh. The Grameen bank philosophy was based on Yunus’ training as an economist and his belief that access to capital was a key component in the poor rising above poverty.
The Grameen Bank loan mechanism was based on a simplified loan process. The loans lasted one year, installments were paid back weekly and the interest rate was 20% (simple interest). Each loan was associated with a group of five borrowers from a village that provided accountability to keep the borrowers on track for repayment. One of the mechanisms that Grameen used was the concept of group lending where groups of poor borrowers acted as guarantors for each other. If one failed to pay back a loan or missed a payment then all would be held accountable.
The Grameen bank system provided for an increased loan amount following successful repayment of a previous loan. Grameen rewarded successful loans with the ability to gradually increase the amount of future loans.
Yunus also did something counterintuitive by not providing any training for these people. He observed that requiring borrowers to attend a training program would scare them away. In many poverty households, formal training or education is not a part of the culture.
Success of the Grameen Bank has been duplicated throughout the world, mostly in developing countries. There are also many offshoots of Grameen that have succeeded in Mexico, Indonesia, India and Africa. While there have been numerous efforts by governments, both federal and state, to encourage micro lending, they seem to get bogged down in bureaucracy, require too much paperwork and too much legal process to reach and impact the really poor in America.
Recent American history has been permeated with a punishment mentality toward the poor. There are those who sincerely believe that the poor are at fault for or the cause of their own poverty. The recent frenzy over illegal immigration shares undertones of that mentality. The former safety net of the welfare state has been greatly dissolved.
What is the current shape of micro finance in America? Grameen America is an organization sponsored by Grameen Bank, operates in New York City and Omaha, Nebraska. Accion, Inc. has operations in Texas and New Mexico. Mercy Corp, with headquarters in Portland Oregon, operates in the American Northwest. Kiva, headquartered in San Francisco is a very successful organization with an emphasis in the global arena, recently expanded to support entrepreneurs in the United States. Micro finance operations in Arizona include Chicanos por la Causa, Inc. and other small micro loan organizations.
It would appear that the recession of 2009 has revitalized the American micro finance movement. Readers are urged to study and support local and national micro finance institutions with their donation of time and/or money.