By Robert Anderson
A weapon in the battle against world poverty and starvation is giving people the tools to help themselves.
Microfinance, also known as microcredit, is the practice of providing poverty-stricken families in third-world nations with small loans to assist them in financing small family businesses and other productive activities.
“It”s not the magic bullet,” said Alfonso Vega, a microfinance analyst for the Cunsultative Group to Assist the Poorest. “However, it reduces the vulnerability of people.”
According to the consultative group, the typical microfinance clients are low-income persons that do not have access to formal financial institutions such as banks or credit bureaus.
“Experience shows that microfinance can help the poor to increase income, build viable businesses, and reduce their vulnerability to external shocks. It can also be a powerful instrument for self-empowerment by enabling the poor,” the consultative group Web site states.
Norm Nemrow, an accounting professor at the BYU Marriott School of Management, said microfinance is an innovative and promising solution to third world poverty.
“The best way to help somebody in poverty is not through the giving out of handouts, but to help them help themselves,” Nemrow said.
“One of the ways to do that is to lend them the capital necessary to start or grow a small business enterprise.”
An example of microfinancing in action is that of the Grameen Bank in Bangladesh.
In 1976, Professor Muhammad Yunus, a current United Nations Expert on Women and Finance and founder of Grameen Bank in Bangladesh, began a system under which he and his partners would lend small amounts of money to struggling entrepreneurs in third world nations.
The loans were to be repaid with interest. According to Grameen Bank, the loans were paid back in full in the vast majority of cases.