In the 1970s, Bangladeshi economist and entrepreneur Muhammad Yunus created the microfinance. Microfinance starts with Grameen Bank, the first microcredit institution.
Its growth was spectacular in the 1990s and the information really spread in the 2000s, especially when the >>United Nations >>>> declared 2005 the year of microcredit”. The consecration came in 2006 when Professor Yunus and the Grameen Bank were jointly awarded the Nobel Peace Prize for their work.
Microfinance refers to the provision of financial services to people excluded from the traditional banking system, i.e. the population that receives low incomes. This part of the population is not profitable enough for conventional banks.
The disadvantaged populations of developing and developed countries are therefore concerned. This includes a set of financial needs for the poor including microcredit, microinsurance, savings and remittances.
Microfinance outstanding loans in the world of Microfinance Institutions (MFIs) represented US$62.5 billion in 2009 and 1,900 microfinance institutions were registered by MixMarket in 2010.>
Microcredit puts people and individual freedom, including the freedom to undertake, at the heart of its priorities. Organizations tailor their loans to those who need them most. It is based on a new target: the poorest. Microcredit allows them to enjoy the same benefits as the rest of the population by granting them loans adapted to their needs while considering their ability to repay.
These financial services allow them to start a business and get out of poverty. Thus, it is not the working methods that are revolutionary in microcredit organizations but the population in difficulty that they target. The IMF are responsible for granting this type of loan, which is set at higher borrowing rates than traditional rates. This system benefits in particular women, enabling them to acquire a certain degree of independence, which is not insignificant in developing countries.
Microcredit has grown worldwide, both in developing countries (in South Asia, Africa and South America) and in developed countries. There are many large organizations known in the world such as the Gramen Bank in Bangladesh, BIS in Indonesia or Bancosol in Bolivia. In France Maria Nowak has created the association for the right to economic initiative (Adie) which allows the poorest to benefit from microcredits to create their own business.
Microfinance could provide a response to the current financial crisis. It represents a more ethical and responsible finance that puts the client at the heart of the system. It is the borrower’s needs that are favoured, unlike the subprime crisis, where banks sought to obtain as much return as possible without worrying about their clients’ ability to repay. Indeed, the main cause of the subprime/subprime crisis is the excessive use of credit granted to insolvent households.
With microcredit there is a real follow-up of the client with frequent repayments and credits adapted to their income so that they do not go into debt as with subprime loans. The creation of their small business allows them to support themselves, so it gives them financial independence. Especially since an MFI that does not generally practice securitization (only the most mature institutions), it therefore keeps loans on its balance sheet, so the risk cannot be transferred.
With microcredit the subprime crisis could not have happened. According to an article by Jacques Attali, President of Planet Finance, it is necessary to grant microfinance “much more means to develop, to reach more poor people, thus boosting global demand saturated in the North by excess debt, and thus contributing to the emergence of a new, more balanced, fairer world, whose birth will mark the beginning of the end of the current disorder”.
In theory, microfinance represents a good alternative to current finance, in 2008 and 2009 it was able to resist the crisis and even attracted new investors. However, it is now more and more contested. Their primary objective was to fight poverty, but they have moved away from this objective to make way for the financial inclusion of populations rejected from banking services.
The MFIs have been encouraged to be more profitable financially, but this is not very compatible with the main goal of microfinance. In addition, interest rates remain relatively high and there have been many suicides of indebted customers in recent years. Some accuse microcredit “of ruining local economies”.
Also microcredits are mainly concentrated in financing small family businesses which, while allowing their owners to live, does not represent remarkable growth on a global scale.