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Grameen Bank: The Birth of Microlending

What is Microlending?

Microlending or microcredit refers to the small loans issued by individuals. Usually the recipients of these loans are small businesses in the developing world. These businesses can’t get access to credit using traditional means, whether that’s through banks or credit unions.

Interest rates for such loans are usually above market average. People that borrow the money do not possess high credit scores or enough collateral to ensure the repayment of the loan. The risk for the lender is higher but so is the reward due to the high interest rates.

Microlending is just one of the many advancements of the peer-to-peer economy boom. It traces its roots back in Bangladesh in 1976.

How Did it All Start?

Before unearthing the revolutionary effects of microlending on small business economics, let’s look at what existed before its arrival.

The basic idea of lending someone money is predicated on them actually needing the money.  The execution of such loan though has never been quite as simple. Traditional lending methods in the form of banks or credit unions were not as inclusive as one would think. They included strict terms and conditions making it hard for people to even be considered for a loan.

In a nutshell, poor people had a hard time getting a loan. Why? Because they could not provide reassurances of repaying the loan to the lender.

This is where Grameen Bank came in.

The bank’s inception was a result of battling these holes in the market. Its aim was to create access to credit for small businesses.

The Bank was founded by Bangladeshi economic professor Mohammed Yunus in 1983 but the story goes way back. Yunus studied in Chittagong University and earned a Ph.D. from Vanderbilt University. His career trajectory clearly showed he was influenced by his time in the United States.

He embraced the ideas of economic freedom, civil rights and an open, inclusive economy. His life trajectory and education, clearly played a vital role in the formation of the Grameen Bank ideology.

Allegedly, Yunus had his “eureka” moment during an afternoon in 1976. Taking a long walk through a village very close to Chittagong University, he ran into an old woman selling bamboo stools. The woman admitted of making a measly two cents a day from her business, causing Yunus to question the entire situation. The woman told Yunus about her inability to secure a small loan to buy materials and expand her business.

Firstly, she had to sell products at a ridiculously low price. Not only that, but sell it to the person that was lending her money in the first place. What that meant was that she was trapped in a vicious circle of debt, with no real prospect to be profitable. Yunus gave the woman a small loan of $27, which he eventually got back.

What is microlending and where did it originate? Read more about the birthplace of small business financing.

That was the birth of microlending.

A few years later, the Grameen Bank became the epitome, the definition of the microlending idea. The peer to peer to model allowed small businesses in developing countries to secure the small amounts of money they needed to kick-start their business.

What made Yunus’s model so special was that it accounted for the financial health of the people. The Bank was not simply lending money, to make money. Its ideology is encapsulated in this proverb: “If you give a man a fish you feed him for a day. If you teach him to fish, you feed him for a lifetime.”

The Bank’s Legacy

One could say that the 2006 Nobel Peace Prize awarded to Mohammed Yunus tells you everything you need to know about the Bank’s legacy. The award though, is nothing more than a symbol, a milestone.

The real value of the Bank lays in its cultural impact and overall change it brought in the finance world. What the Bank achieved to do was open the door to a new level of financial services. The microfinance world is relatively new if you compare it to the entire lifetime of the lending concept.

The introduction of the Internet and rapid growth of technology has taken the world of microfinance to the next level. Now, you have plenty of options to choose from. You can apply for a small loan from your phone and have the money in your account within days.

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