The Indian subcontinent was the first place where modern microfinance, at the time called “micro credit,” really became a phenomenon. While small scale lending has been going on for centuries, it was in the 1970s that Muhammad Yunus began to put together ideas which eventually led to the Grameen Bank being established in Bangladesh. The Bank, which provided small loans to extremely poor group borrowers, has been marked out by its success (leading eventually to it being awarded the Nobel Peace Prize in 2006, and by the fact that the vast majority of its borrowers (who are also its shareholders) are women.
When India’s finance minister, Palaniappan Chidambaram, announced his budget on the last day of February, one particular item stood out for those familiar with microcredit; that was the nearly $185 million appropriated to establish a small public bank for the poor run by and for women.
India already has several institutions which perform a similar task to the one described by Chidambaram. The Mann Deshi Mahila Sahakari Bank is a rural cooperative bank specializing in microfinance loans to women. Others, such as the MahilaSewa (Self-employed Women’s Association) Cooperative bank, perform similar functions. Some have argued that such co-op banks are more effective than public banks in performing such a role (lending to women, alleviating extreme poverty.)
Microfinance enterprises can also potentially be very profitable undertakings as excess urban capital is redirected to credit starved rural areas. Although traditional bankers who have become accustomed to talking millions or billions might doubt the impact a few hundred dollars can have, but the “bottom billion” effect makes this area one with huge potential.
For really small scale microcredit to work, some of the traditional tools of finance, such as credit history checks and requirements for collateral, have to be discarded. This naturally makes many bankers weary, and yet there are cases such as those highlighted above where genuine benefits can be achieved without the system collapsing into “charity disguised as something else.” Problems with credit history for example, (in the case of Grameen Bank), were dealt with by the institution adopting a “group lending” approach, capitalizing on the close sense of community in small rural villages.
