EaSI Technical Assistance for Microfinance entering a new phase | European Microfinance Network
Microfinance as Anti-Poverty Tool
Lecture 9

Introduction
•The word “microcredit” was not existent before the seventies. But now it has turn out to be a
buzzword among development practitioners.
•Professor Mohammad Yunus, the founder of Grameen Bank in Bangladesh and the originator of the
concept of microfinance, believes that 5% of Grameen Bank’s clients exit poverty each year.
•However, there are surprisingly few credible estimates of the extent to which microcredit actually
reduces poverty
•Entrepreneurship is the fundamental basis of the microfinance approach to poverty alleviation.
•As Bruton et al. (2013: 688) state, ‘market-based solutions such as entrepreneurship offer the
best opportunity to create substantial and significantly positive change within poverty settings’.
> Self-employment: elephant in the room | Mint

Definitions of Microfinance



> Codes on papers
Characteristics of microfinance
•Small amounts of loans and savings
•Short- terms loan
•Payment schedules attribute frequent installments (or frequent deposits)
•Installments made up of both principal and interest, which is remunerated over the course of time.
•Higher interest rates on credit - MFIs in the Asia-Pacific region charge rates ranging from 30 to
70% a year.
•Easy entrance to the microfinance
•Application procedures are simple
•Short processing periods (between the completion of the application and the disbursements of the
loan).
•The clients who pay on time become eligible for repeat loans with higher amounts.
•The use of tapered interest rates (decreasing interest rates over several loan cycles) as an
incentive to repay on time.
•No collateral (surety, guarantee) is required contrary to formal banking practices.

The impacts of microfinance



Criticisms to microfinance
•Microfinance led to increasing levels of indebtedness among already impoverished communities and
exacerbated economic, social and environmental vulnerabilities
•Inability to repay loans eroded the assets of the communities and led to poor health outcomes
while undermining household relations and social capital
•People mostly use credit for consumption purposes not investments
•

Vijay Mahajan (2005), a social entrepreneur “Microcredit is a necessary but not a sufficient
condition for micro-enterprise promotion.