"Visions of World Benefit & Global Responsibility: Perspectives of McGill Students

Tuesday, July 31, 2007

Fighting Poverty with Microfinance

Our world provides us with countless possibilities: possibilities to travel, possibilities to learn, and possibilities to build relationships that enrich our lives to the fullest, to name a few. We have made great strides as a generation, witnessing how our capabilities can make positive change to the world. A few examples of our positive contributions are the development of the Internet uniting the world into a global community, the end of the Great Cold War bringing about peace and prosperity, and the creation of participative democracy and NGOs who have shown how social involvement has brought awareness to many of today’s global issues.

However where there is sun, there is shade and as a technologically based generation, we have cast our fair share of shadows, as well. Today, nearly three billion people (half of the world population) live on less than US$2 a day. World poverty has become an epidemic that has spread throughout the developing world, and is the root cause of many of the other problematic trends that we hear about today, including civil conflicts and wars, health problems, and illiteracy which not only aggravate poverty, but eliminate any chance of economic and social development. Poverty takes a child’s life every two seconds, as well as leaves behind thousands of orphan children forced into self-dependency. Fighting poverty is not a simple task, but one man has made the road to poverty eradication much brighter by introducing one simple concept: microfinance.

Muhammad Yunus is a Bangladeshi banker and economist who won the 2006 Nobel Peace Prize for his efforts to create economic and social development in poor communities by establishing a system of microfinance. Yunus first got involved in the fight against poverty after witnessing the damaging effects of the 1974 famine in Bangladesh. He states: “When tiny, tiny things start happening a million times, it becomes a large thing. It lays down the foundation of a strong economic base. With women participating in building this economic base, it becomes the foundation for better social and economic future”. Two years later, the young economics professor at Chittagong University visited the village of Jobra and saw the difference a small amount of money can make in the life of a poor person. Loans went out to 42 different women who all started their own bamboo furniture business, and the total amount of money lent was only US$27. After personally paying these loans back, Yunus committed himself to serve as a volunteer guarantor for larger loans from traditional banks, kindling the idea for a village-based enterprise that would allow for reliable borrowers and eager entrepreneurs to take out loans and start their own self-sustaining businesses without any requirements for collateral.

Today, Yunus runs Bangladesh’s Grameen Bank, whose principles have spread throughout the world as the leading practice of poverty eradication. Microfinance is one of the most effective and adaptable strategies in the fight against poverty. It provides collateral free loans, as well as other financial services and technology to support income-generating businesses. At relatively low interest rates (30%-60% compared to over 300% that they would normally have to pay through local village money-lenders), the Grameen Bank uses its non-profit principles and uses repaid loans to loan to others, multiplying the impact of each dollar loaned by the bank.

What makes the microfinance approach different from other poverty reducing strategies is a combination of two focuses: sustainable businesses and women borrowers. Business sustainability is one of the most important ingredients for poverty alleviation. In order to get out of the borrowing cycle, families must use the initial loans to start a business that will create profit and last without depending on further outside support. An example of a sustainable business is a chicken farm selling chicken eggs. Families can use the initial US $50 loan to buy chickens that can lay eggs to sell, as well as reproduce so there is no longer a need for further loans. As the business grows larger, jobs begin to open up for others in the community who profit from the new businesses helping the nation’s economy to grow.

Grameen Bank first started with 50-50 men to women ratio of borrowers because of the strong Muslim culture that made it initially difficult to empower such a marginalized sector of society. However today, 96% of Grameen’s loans are made to women. Grameen’s focus on women borrowers allows for the greatest benefit from the microloan. Women use the loan and the profit from their business to send their children to school, improve their family’s living conditions and nutrition, and expand their businesses—something not commonly seen with men borrowers. Investment in these areas allows for the next generation to be educated, healthy and apprentices to take over a flourishing family business. Women also represent a suitable clientele because they have less access to traditional credit lines.

Muazzam Jan is a Pakistani vase vendor in a village just outside of Islamabad who took out a loan from Grameen Foundation after realizing that products were too expensive to experience any significant profit. With the loan, she and her husband were able to travel to Lahore to purchase their products at a much lower price, multiplying their profits substantially back in the village. With Muazzam’s second loan, they increased their inventory, and with the third loan, they hired someone to assist them. Now, Muazzam’s house is colorfully decorated, and she has built a successful business that allows for her three children to attend school.

Today, Grameen Bank serves more than six million poor families with loans, savings, insurance, and other financial services. Since the introduction of microfinance, we have seen a considerable increase of families getting out of poverty throughout the developing countries—however the job is still far from complete.

The success of microfinance has allowed for the ability to effectively improve other problems in the developing world. Educational systems can be used to their full potential without having children forced to drop out to start working; a higher rate of literacy and a more educated population will improve health because women will know how to protect themselves from HIV infections; birth rates with drop and will help stabilize the economy and lower dependency rates; and a more stable economy will bring investors to the country and expose businesses to the world economy.

With the reduction of poverty well on its way, Yunus has expanded his ideas in the developing world with his new innovative experiment: a partnership between Grameen Bank and France’s Group Danone called Grameen Danone Food Company. Their aim is to make a nutritious and inexpensive baby formula to improve infant mortality rates. Yunus also has an aim to provide low-cost eye care and rural hospitals with video-conferencing between villagers and doctors in Dhaka.

“Invisible Berlin Walls must go. We are not even trying to make it happen. Whenever we talk about the people at the bottom or the poor people, our usual reaction is to write a check. Okay, take care of them, feed them, clothe them, and give them some place to live. But we don't touch the wall. We simply say, let them stay on the other side of the wall, but feed them a little. What I'm saying they don't need your throw-away money, they don't need handouts. They need an opportunity, a fair deal. They don't get a fair deal right now. Poverty is the denial of all human rights. I am talking about establishing their human rights. If we do that the walls will disappear. Poverty will go”.
- Muhammad Yunus

We have surmounted the force of gravity, we have shed national borders that divide humanity, and we have abolished slavery while establishing universal human rights. It is now time for us to make poverty history by bringing capitalism to the poor so that we can move forward as a global civilization.

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