Read an Academic Passage

The Principles of Microfinance

Microfinance refers to a variety of financial services, such as small loans, savings accounts, and microinsurance, provided to low-income individuals and small business owners who lack access to traditional banking. The central objective of microfinance is to provide a pathway for the poor to achieve financial independence. By offering small amounts of capital, it enables aspiring entrepreneurs, particularly in developing nations, to start or grow a business, generate income, and improve their standard of living.

The modern concept of microfinance was largely pioneered by Muhammad Yunus and the Grameen Bank, which he founded in Bangladesh in 1983. A key innovation of the Grameen model was providing loans without requiring collateral, as the poor rarely have assets to offer as security. Instead, the bank utilized a system of "solidarity groups," where small groups of borrowers were collectively responsible for repaying their loans. This group-lending model was surprisingly effective and led to very high repayment rates.

Despite its successes in empowering many individuals, microfinance is not a universal solution to poverty and has faced criticism. Some critics argue that the interest rates charged by microfinance institutions can be excessively high, potentially trapping borrowers in a cycle of debt. Others suggest that it places too much emphasis on individual entrepreneurship rather than addressing systemic economic issues. In response, the field continues to evolve, seeking a balance between financial sustainability and social impact.