Role of Microfinance Institutions
Microfinance is a term that is receiving a lot of attention from the world community. It holds tremendous promise for helping the poorest in the world. Microfinance works by providing capital to the world's poorest people. This capital arrives in the forms of low to no cost loans. They are then able to use this money to start businesses or to engage in other economic activities.
History
Microfinance is not a new practice. According to some historians, microfinance has existed since the 1700's. Originally, microfinance institutions provided loans to peasant Irish farmers. These loans required no collateral and allowed many of them to start their own farms.
From these humble beginnings, microfinance has continued to evolve. Throughout the 1800's and early 1900's interest in microfinance grew briskly. By the 1970's, microfinance started receiving backing from large financial institutions. In particular, these institutions sought to bring capital to the poor and thwart political advances by the Soviet Union.
How it works
Microfinance works by providing the world's poorest with access to credit. Due to the severe economic conditions these people suffer, the amount of the loans can be small and still have a large impact. People in countries with currencies that are valued far below the major currencies of the world can benefit the most from microfinance programs. The generous exchange rate acts a multiplier on the money that is loaned.
Most modern microfinance institutions take donations, and then loan these donations to people in underdeveloped areas. These loans are low to no cost loans. In other words, the institutions attempt to keep the interest rates on these loans as low as possible.
The Future
The Internet is paving the way for microfinance initiatives throughout the world. Spearheaded by international charities, these microfinance projects are bringing the power of capitalism to the least developed places in the world. By harnessing the Internet, these organizations are able to quickly raise and distribute capital to these underdeveloped nations. The future remains bright for this revolutionary economic practice.