History of Microfinance

Microfinance did not magically appear within the last 20 years, the concept has existed since the 1700s. The susus of Ghana, chit funds in India, tandas in Mexico, arisan in Indonesia, "cheetu" in Sri Lanka, "tontines" in West Africa, and pasanaku in Bolivia, are a few examples of saving and credit groups that have been in operation for centuries. These organizations provided customers who were traditionally neglected by larger banks an opportunity to use financial institutions to better their lives.

One of the earliest and longer-lived micro credit organizations providing small loans to rural poor with no collateral was the Irish Loan Funds system. Jonathan Swift, author and nationalist, began it in the early 1720s. He used capital from donated resources and allowed the Irish access to interest-free loans. The organization witnessed very rapid growth due to a special law in 1823, which turned the charities into financial intermediaries thus creating the Loan Funds Board in 1836. This board regulated and supervised the acquisition of resources and capital. At their peak, the Irish Loan Funds systems were making loans to 20% of all Irish households annually. Unfortunately commercial banks used their power and influence to stop the funds by getting the government to put a cap on the interest in 1843. The funds finally disappeared in the 1950s. Hamburg established a similar community owned financial system in 1778 but unfortunately this also ended due to outside intervention.

From the 1880s-1950s, microfinance institutions began spreading to different parts of the world such as Latin American and Indonesia (Indonesian People's Credit Banks). The new institutions focused mostly on rural areas. The goal of the more rural finance interventions was modernization for the agricultural sector, increasing commercialization of the rural sector, as well as eliminating oppressive feudal systems that reinforced indebtedness. One of the main problems facing the new rural microfinance institutions was the fact that most of these banks for the poor were not owned by the poor, as they had been in 18th and 19th century Europe. The banks were controlled by government agencies or private banks that did not always the welfare of the people in mind. Over time, these institutions became inefficient and at times, abusive. They lost the trust of the people and had to close down the banks.

In the 1970s, experimental programs in Bangladesh, Brazil, and a few other countries extended tiny loans to groups of poor women to invest in micro-businesses. This type of micro-enterprise credit was based on group lending; meaning every member of the group guaranteed the repayment of all members. These "microenterprise lending" programs focused on credit for income generating activities and targeted very poor (often women) borrowers. This type of lending guaranteed accountability, which was a key missing factor in other microfinance enterprises. Because each member of the local group assured the repayment of all other participants in the loan, if an individual was unable to repay their own loan, the group would support the member financially and emotionally thus encouraging a better business results.

Formal credit and savings institutions for the poor have been around for centuries, they provided customers who were traditionally overlooked by commercial banks a method of obtaining financial services through cooperatives and innovative finance institutions.

Fausia Mahama

Sources: http://www.globalenvision.org/library/4/1051/1/ and http://www.microfinancegateway.com

Microfinance in Asia and Africa