An Evaluation of Microfinance and its Impact on Traditional Financial Lending

Essay by briandanielolearyCollege, UndergraduateB+, March 2009

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Chapter 1: Introduction1.1 IntroductionThe objection of this study is to examine the idea of microfinance and the role that it plays in financial lending. Microcredit is the extension of small loans to the unemployed, poor entrepreneurs and others living in poverty, which otherwise would have no access to credit. These individuals lack the collateral, a steady income and an adequate credit history to meet the most minimal qualifications of banks and other traditional financial lending institutions. Microcredit is part of microfinance, which is the provision of a wider range of financial services to those in need (Gibbons, 1992).

The introduction of microfinance came in the 1970's giving people, who previously had no access to credit, small loans to set up and grow their personal wealth or small businesses. It gave people a chance to use their entrepreneurial skills that otherwise would not have had a chance. In areas like Bangladesh, loan sharks were king at the time and if one wanted a loan from them then there were faced huge interest rates, 200 to 300% a year and rapid repayment dates (Gross, 2008).

Microfinance has only been around for a brief while in terms of traditional banking and lending but only in the past few years has it started to gather momentum. This chapter will give a brief background into the history of microfinance before exploring what it has achieved and what there is still to be done. This study will highlight the impact microfinance has had on people and places, with use of case studies, in its brief existence. There is a lot of information written on this topic, both positive and negative. Through this study both sides will be discussed in order to understand microfinance and its impact on financial lending.

1.2 BackgroundMicrofinance has evolved and adapted to...