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A Brief History of Microfinance

Wednesday, January 25th, 2012


If you don’t know much about microfinance, you might assume that it is a relatively recent idea designed to help the poor. However, the idea of microfinance charity actually goes back centuries and a wide range of related organisations have existed for many years. For example, Indian chit funds, West African tontines and Indonesian arisan all have histories as credit groups in deprived areas.


The concept of microfinance arguably first came to prominence during the 1700s in Ireland. It was during this time that the Irish Loan Fund was set up by Jonathon Swift, who is better known these days as an author. The aim of this fund was to provide small amounts of credit to poor people who didn’t have the assets to back up bigger, more formal loans. This scheme was ultimately very popular and at one time was providing loans to around a fifth of all Irish households.


As time went on, other organisations started to develop in Europe – often these were bigger and not specifically focused on microfinance, but they still had a strong focus on the poor and were often started by poorer people. Credit unions are one popular example of this; the idea behind the credit union was to help the rural poor get away from their dependence on rich moneylenders. The movement was started in Germany before moving across the rest of Europe and eventually into developing countries.


Elsewhere in the world, other microfinance and poor-focused schemes were starting to come to prominence around the same time. One notable example is the microfinance scheme that was started in Indonesia in the late 1890s. This was the Bank Perkreditan Rakyat.


It was in the early 1900s that the modern microfinance system really started to take shape – previously, it was the poor themselves who had owned the new institutions, but as the idea of microfinance spread to Latin America, banks and government agencies started to get in on the act. This wasn’t always successful and one of the key concerns – particularly during the 1950s-1970s – was that much of the money meant for poor farmers didn’t actually get to where it was intended.


Meanwhile, during the 1970s, some schemes were set up to support women entrepreneurs in areas such as Bangladesh. These started to be very successful and there was generally a low default rate on the loans. NGOs and charities also started to get more involved and the poor themselves often gained greater ownership over the microfinance institutions. Today, microfinance still faces challenges but the system is much more sustainable than it once was and the core principle of helping the poor remains.


In more recent times, World Vision UK has focused on helping the public fund micro finance loans for entrepreneurs in need.  As for Microfinance in Africa, World Vision Microloans funds businesses in Rwanda and Kenya at the moment and work may be extended into new areas in the future. If you want to help a small business in a community in need, why don’t you fund a loan today?


Guest Post on behalf of World Vision Microfinance.