Microfinance 101


Most of us keep our money in banks, where it grows in value. We also sometimes need to borrow money from banks to start a business, buy a home or pay for school. Unfortunately, banks won’t lend to a poor person because they may never be able to pay it back. Some of these people are then reliant on various forms of ‘moneylenders’ who charge much higher rates of interest than banks do. Frequently, poor families end up paying back these loans over long periods of time. They then remain helpless and in poverty and so do their children, and so on. It’s like an unfortunate legacy of poverty that is passed on for years.

Credit: Wikipedia

To end this cycle, Professor Mohammad Yunus, a teacher in Bangladesh, created the concept and practise of Microfinance. This is a kinder way of lending to these people of limited means, especially to women, to start or run tiny businesses. The idea was to help poor families generate income. He created a bank which would:

– lend a small amount of money at a lower rate of interest than big banks, so that the borrowers would have smaller payments to make to return the money.

– keep the size of the loan small, not more than Rs 5,000, so that people are able to pay it back.

– give people a longer time to pay back the loan.

– not demand that borrowers give up their homes or other forms of guarantees if they were late in paying back a loan

This is quite a revolutionary and positive way to help these people living mostly in rural (village) areas.


If a woman sells bananas, with a small loan of say 10,000, she can also add apples or oranges to her basket. This will allow her to sell more fruits, make more money, pay off her loan and grow her business. If she has a small tailoring business, with a loan of Rs 15,000, she can buy another sewing machine, and also run a stitching class to earn extra money. So it’s a small loan but ends up having a much bigger impact.

Sounds amazing! Has it been successful?

Poverty in Bangladesh reduced by 20 percent because of microfinance, and Professor Yunus was awarded a Nobel prize. This kind of lending, also known as microcredit, has been adopted by countries like India, where poor farmers and women in villages take small loans of Rs 25,000 or less from SEWA, NABARD and other organizations for farming, creating small businesses and paying school fees. Microfinance is ONLY for poor people, who are otherwise left out of the financial system that we take for granted.

To quote Nelson Mandela, who would have turned 100 years old a few days ago, “Overcoming poverty is not a gesture of charity. It is an act of justice.”

Devna Gandhi –  Reporter, anchor, writer and eloquent communicator


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