The bank for a changing world

History of microfinance: small loans, big revolution

  • 17.08.2017

Microfinance involves supplying financial services and products to disadvantaged populations that are excluded from the traditional banking system. It all began slowly in Bangladesh, in the village of Jobra, before transforming into the global economic activity it has become today. Below is the exceptional history of the system that, in the words of its originator Muhammad Yunus, “liberates people’s dreams and helps the poorest of the poor to achieve dignity”.

Microcredit: encouraging entrepreneurship to combat poverty 

Many aspects of modern society trace their roots back through history and microfinance is no exception. Mechanisms for issuing loans to destitute populations have existed in various forms in Asia for thousands of years. In Europe, Franciscan monks formed the Mounts of Piety in the 15th century to reintegrate the poorest populations into community life. Nearer to our time, the first savings and loan cooperative opened in 1879 in Germany’s Rhineland. As the first mutualist financial institution, it primarily served working populations by giving them access to credit. That same mutualist principle would continue to prosper in Europe throughout the 20th century. 

But these financial inclusion models proved insufficient to stem the tide of poverty in what was still known as the “Third World” in 1970. Modern microfinance thus emerged in one of the world’s poorest countries: Bangladesh. Muhammad Yunus, an economics professor, came to a staggering observation: the free market had failed to keep famine from ravaging his country. The effort to fight poverty, including aid and subsidies, was not achieving its aim, and the banking system was incapable of providing for these poor populations.  

In the village of Jobra, Yunus decided to deliver a personal loan to a group of 42 women to help them start a business. And it worked: these female makers of bamboo stools took advantage of the loan to boost their productivity, before repaying the sum in its entirety. The act established the basic principles of modern microfinance: combatting poverty through microcredit, and primarily serving women in emerging countries. 

Global expansion: towards locally sourced loans

What happened in Jobra could have remained an isolated incident. But Muhammad Yunus was determined  to replicate this first microcredit experience elsewhere. After receiving a lukewarm reception from the banking system, he decided to create his own program: Grameen. The Grameen system turned traditional banking on its head. It offered small loans to poor populations, with no financial guarantees required in return. It also ushered in the principle of joint responsibility, which involves solidarity between the members of beneficiary groups. Finally, the program targeted women, who had been traditionally excluded from the financial system. Though it was a bold gamble, the program was an immediate success

In 1983, the program obtained the status of a banking establishment. Grameen Bank (known as the “Bank for the poor”) was thus born and would soon record stunning growth. The bank opened many new “branches”, which are now present in over 80,000 villages. Estimates suggest that the bank has extended credit access to over seven million beneficiaries in Bangladesh, 97% of whom are women

The 1980s and 1990s saw the model exported around the world through the intermediaries of NGOs and financial institutions. Soon a full-fledged microfinance industry emerged in developing countries. Many other institutions gradually expanded the global microfinance network: dozens of microfinance institutions (MFIs) set up shop in India; BancoSol and the ACCION network opened in South America, and ADIE began operating in Europe and the Mediterranean basin.  

The early 21st century marked the international rise of microcredit. While the first microcredit summit took place in Washington in 1997, the G8 outlined the principles of microfinance in 2004, tracing the contours of a new economic sector. The UN named 2005 the “International Year of Microcredit”, and Muhammad Yunus won the Nobel Peace Prize in 2006. 

“ Microcredit means helping each person to achieve their highest potential ”

Muhammad Yunus

economics professor and originator of microfinance

BNP Paribas and microfinance: 28 years of action for inclusive finance

BNP Paribas quickly recognized the revolution that microfinance represented in the global economy. Since 1989, the BNP Paribas Group has committed to promoting access to credit in emerging countries, financing MFIs and building ties with the sector’s major players. Notable among these leading institutions are Association for the Right to Economic Initiatives (ADIE) and International Solidarity for Development and Investment (SIDI).

A few key dates: 

  • 1989: 1st microfinance loan issued to an MFI 
  • 2006: Creation of the microfinance department
  • 2012: Integration of the microfinance department into the Group’s CSR activity 

Key figures:

  • €248 million euros in loans and investments in 2016
  • More than 18% of support in 2016 compared with 2015
  • 309,000 people, normally excluded from the traditional banking system, able to carry out a project and improve their standard of living through the Group’s indirect financing in 2016

From economic crisis to the redefinition of the model 

Critiques of microfinance began to emerge in the 2000s. The first cracks appeared in 2007 with the Compartamos scandal. Founded in the early 1990s to issue loans to poor Mexican women living outside of urban areas, this former NGO, valued at nearly two billion dollars, received a barrage of criticism including: high interest rates and consumer loans, intimidation of creditors, lack of transparency, and a focus on profits over its social objectives.

In 2010, a wave of protest also swelled in Andhra Pradesh, one of India’s first regions to have adopted the microfinance system. Following a series of suicides among borrowers and increased pressure from credit agents, borrowers rose up against the microfinance system, which was buffeted at the time by a wave of criticism from around the world. India’s leading microfinance institution, Swayam Krishi Sangam (SKS), saw its loan default rate rocket from 1% to over 80%.

For these reasons, the contours of microfinance have shifted in recent years. Management of MFIs is increasingly regulated by the development and standardisation of performance and social impact indicators (such as SPI4-Cerise, which aims to streamline social performance evaluations). Traditional financial institutions have also begun to support MFIs to ensure the lasting future of the microfinance model. 

Towards inclusive finance

Developed countries are also gradually adopting the tools of microfinance within their own economies. For example, BNL (BNP PARIBAS’s subsidiary in Italy) and PerMicro, Italy’s leading microfinance institution, have recently partnered to address the Italian economy.BNP Paribas also supports micro-entrepreneurs and micro-startups through Créajeunes, a program developed by ADIE to encourage young people between 18 and 32 years old to start a business.  

Finally, the expansion of microcredit to other financial products and services (like savings or insurance) tends to reinforce the viability and social vocation of microfinance services. The concept of inclusive finance refers to this new balance that is driving a virtuous economic cycle. 

Inclusive finance also relies on new technologies to give the poorest populations access to financial services. In Kenya, money transfer by SMS has enabled nearly 200,000 households to escape extreme poverty.  The digitalisation of financial services also represents a potential GDP boost of 3.7 trillion dollars for emerging countries by 2025.  

From its origins in a village of Bangladesh, microfinance has already left its mark on the past 40 years of economic history. In 2014, according to the microfinance barometer, 1,045 microfinance institutions have served a combined total of 111.7 million customers. The number of borrowers tripled between 2013 and 2014. The total amount of microcredits issued worldwide climbed to $87.1 billion dollars, representing an increase of more than 12.6% over the previous year. This form of ethical and responsible finance, in the service of business, has already laid the groundwork for overcoming the immense challenges ahead:  meeting the needs of 500 million people awaiting financing  and fighting against the economic exclusion of 700 million people still living in extreme poverty.  It’s a tall order that starts with a small sum.

Read more