February 7, 2008

Unraveling Microfinance: The Industry’s Origins

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To start out in this historical review, let’s note that the term microfinance asks us to imagine a very specific financial scale. At the apex of the macro world sit those individuals and conglomerates that see billions of dollars fly easily between their guiding hands. Transactions of the micro world are hardly visible in comparison, but are additionally confined to the present and recent past. In truth, if all transactions that fell within the relative micro range were considered members of microfinance, existence of microfinance would reach back millennia into our history. In the long and exquisite trail of social interactions that precedes us, coordinated savings schemes have been marked at least to 3000 B.C. where Babylonian temples served as banks. The available archeological evidence also speculates that by at least 1800 B.C. Babylonian priests were lending in some widely organized fashion to merchants. The word microfinance , on the other hand, holds a special linguistic weight. It stands to contrast the workings of modern financial giants, and serves to counter the assumptions that have been placed upon today’s poor.
In this sense, the origins of microfinance could extend to include savings and lending models from at least the 1700s. At this point in time, charitable groups in Ireland became financial intermediaries while making interest-free loans to the poor. Banks eventually entered disgruntled by a loss in profit and no compromise could not be made, so that the demise of these intermediaries eventually arrived in the 1900s. Across the continent in the 1800s, urban and rural savings and credit cooperatives budded in Germany to serve lower income classes. These models eventually gained extensive popularity and spread globally. Following their movement westwards, some of the next developments can be owed to Indonesia. In 1895, People’s Credit Banks arose there and by the 1970s Bank Dagong Bali began offering commercial microfinance (savings and credit) profitably and without the support of subsidies. In the same decade, Muhammad Yunus conducted a range of innovative lending experiments in Bangladesh that by 1983 had produced the Grameen Bank. And it is here it seems, that microfinance as we now know it to be began to collect attention.