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Microfinance Effectiveness In Solving Banking Problem

1105 words - 5 pages

Wilibrordus Armand Amadus
10/22/2010
Draft 3

Microfinance Effectiveness in Solving Banking Problem

Have you ever tried to borrow some money from a bank? It is actually a very simple thing to do, since one of the primary services of banking practices is lending money. When you need some money under any circumstances, you can just go to the bank, fill in the application, and talk to the loan officer about why you need the money and how you can repay it on time. In a couple days he will let you know whether you are approved for the loan or not. Although the procedure may sound effortless, getting a loan from the bank is an arduous task to do. The most typical problem is that the loan ...view middle of the document...

The first reason why microfinance is better in solving banking problems is it trusts poor people’s abilities to pay back their loan. For-profit banking practices do not want to engage in considerably risky loans where the borrowers do not have enough monthly income to reimburse their credits. On the other hand, Bornstein (2004) writes that social entrepreneurs recognize that separation from the past and reconstruction of current system is very important to produce innovation which leads to sustainable changes. Microfinance, founded by social entrepreneurs such as Muhammad Yunus, breaks away from standard banking practices and creates a new practice which is willing to lend money for the deprived. The article “Nobel Winner Yunus: Microcredit Missionary” (2005), says Bangladesh’s Grameen Bank was created upon Yunus belief that poor people can be skilled entrepreneurs and trustworthy debtors. All microfinance practices have an analogous belief. The underprivileged are not poor just because they are lazy, illiterate, or unable to plan their incomes. They lack capital to do something which can generate money. When they are given this opportunity, they could find their own way to have enough income to get themselves out of poverty and repay the money they owe.
Beside of their unstable financial status, ordinary financial practices do not want to loan to the deprived because they do not have enough collateral to be repossessed in case of a default loan. Standard financial practices are oriented in profit-making. When the borrowers are unable to pay their debt anymore, the bank needs to cover up their liability by repossessing their properties. If from the beginning the bank thinks that the borrowers do not have enough collateral, the bank will not agree to lend the money. However, the article “Nobel Winner Yunus: Microcredit Missionary” (2005) tells that when Grameen’s Bank borrowers start their first loan, 73% of them were terribly poor. In other words, most of the borrowers in Grameen Bank, which practices microfinance, do not have collateral when they borrow money for the first time. While standard financial practices are not comfortable to engage in this kind of unsafe situation, Dees (2007) writes that social entrepreneurs are willing to use any possible way to achieve sustainable results. As a result, even though it is a little bit risky, microfinance does not...

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