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What is microfinance?

- Matt

Even if you read my first post, you still might be wondering: what exactly is this microfinance mumbo jumbo?

Well, here’s a one way to explain it:

According to Kiva.org, the leader in web based microloans, microfinance is:

“a general term to describe financial services to low-income individuals or to those who do not have access to typical banking services.”

It is all based on the idea that impoverished people in developing countries could pull themselves out of poverty if they only had the opportunity to access a line of credit. They then invest that money in expanding their small businesses, paying back the money a little at a time. It allows people to keep their dignity while still giving them help, preventing possible embarrassment from offers of charity.

http://onphilanthropy.com/wp-content/uploads/2011/03/yunus.jpg

Yunus

The first experiments with modern microfinance were done by Bengladeshi Economics Professor Muhammad Yunus in the 1970s. He founded the microfinance institution Grameen Bank in 1983 to further this cause. The latest spike in popularity for microfinance began in 2006 after Yunus won the Nobel Peace Prize for his efforts.

Many people in developed countries want to help fund low-income people using microloans, but just are not able to travel to Ghana or Bangladesh to do so. That is where websites like Kiva.org come in. They allow users to fund microloans for as little as $25 at a time, and it’s all done online. And it’s not charity: the users get their money back once the loan is paid back, usually 4-6 months later depending on the conditions of the loan. The best part is that users get to pick who they want to fund. If their focus is on women or agriculture, or Asian livestock owners, they are able to pick exactly who they want to loan to and how much they want to loan.

Other websites have jumped on the bandwagon in a multitude of creative ways. LendforPeace.org uses microfinance to promote political reconciliation in the West Bank area of the Middle East. Vittana.org uses the online microloan model to distribute student loans to students in developing countries, allowing them to emerge from poverty through advancing their education and earnings potential.

One important thing to note about microfinance, however, is that it is not the “be all, end all” solution to poverty. It does not work in every situation, so we should not stop all of the other great programs in place to help the disadvantaged. But it is one step towards eradicating poverty for good. People working their way towards a better life, one microloan at a time.

If you’re wondering how this relates to travel, read my first post. I went to Ghana this summer and volunteered with a microfinance organization there. This is just to give a little background on what kinds of things I worked with while on my trip.

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