The Pragmatic Reality Of Microfinance In The Developing World

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The pragmatic reality of Microfinance in the developing world.

Microfinance is the provision of financial services to low-income, poor, and very poor people.

From its inception in the 1970s, microfinance has evolved in astounding ways, incorporating

practical social and economic development concepts, as well as principles that underlie global

financial markets. This combination has led to the creation of a growing number of sustainable

microfinance institutions around the developing world. As microfinance continues to evolve as

a developmental strategy, it will be successful only if it is able to strike the right balance between two frameworks--development and finance--that underlie its core practice’s.

Modern microfinance has existed for almost four decades, it’s principals exist around the

premises that the lending institution considers credit as a human right. The first modern example

of microfinance was the Grameen Bank in Bangladesh founded by Professor Muhammad

Yunus. The Grameen Bank began as a research project by Yunus and the government of

Bangladesh at the University of Chittagong to test his method for providing credit and banking

services to the rural poor. The chief principal of the Grameen Bank is that “loans are based on

trust and not collateral.”[1] This principal establishes that the poor are not dumb and do in fact

possess skills and ambitions beyond their socio-economic stations in life. The value system of

the Grameen Bank are based on the tenant that charity is not an answer to poverty, it only helps

poverty to continue as it creates dependency and takes away the individual's initiative to break

through the cycle of poverty.

The very essence of Liberal Economic Perspective can be summed up as “Economic Growth is

best achieved with a minimum of Government intervention and a maximum of people willing to

invest their capital.”[2] This view that individuals within the developing nation must be willing

to invest into the the nation’s economic future intersects directly with the microfinance core

concept that encourages all borrowers to eventually become savers so that their local capital can

be converted into new loans and thereby self-perpetuating and creating an independent economic

growth strategy. In contrast dependency theorists advocate governmental interventions at all

levels of developing nations economies. This is in polar opposition to the self-help and

solidarity lending practices established and proven by the microfinance movement.

Participatory development theory offers a “do-it-now” approach to raising the economic

conditions of the world’s poor through technology and not industrialization. The

applications of Participatory development and microfinance are relatively close in standard

appearances. Both function to improve the developing economies directly and by-pass the

trickle down method seen in industrialization. The major difference between Participatory

development and microfinance is the latter’s focus on growth first whereas the former follows a

“basic needs strategy”[3] to provide life improvement essential’s first. Participatory

development theorist’s would argue that microfinance is pure commercial application of fighting

poverty and does not take into consideration the larger threat of natural disasters such

as drought or unsustainable population practices. For example: a labor intensive project to

improve infrastructure or population policy such as the adaptation of the Kerrala region of India

can vastly and quickly improve the quality of life of its people, it may not directly improve their

economic
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