Dhirubhai Ambani International Model United Nations 2019

Forum: GA2: Economic and Financial

Issue: Improving microcredit systems to help eradicate poverty

Student Officer: Sahil Rane

Position: Deputy Chair

Introduction

More than 3 billion people live on less than $2.50 a day and an estimated 1.3 billion live in extreme poverty, making do with $1.25 or less daily. Economists have been trying to come up with various innovations in order to counter poverty; microcredit is one such innovation. Microcredit is used to describe small loans granted to low-income individuals that are excluded from the traditional banking system.1 It extends financial opportunities to the poor by providing more reliable . The microcredit sector is a dynamic and fast growing sector with annual growth of over 9% in the global portfolio of loans and the number of active borrowers including a growth rate of up to 50% in some countries like India.23 Financial inclusion, today, is extremely important for the progress of a country; it is the provision of financial services to all in an equitable manner and for affordable costs. Financial inclusion has great potential to help improve the standard of life that people enjoy in Less Economically Developed Countries (LEDCs) by promoting investment in business ventures. Globally, 1.7 billion adults remain unbanked, yet two-thirds of them own a mobile phone that could help them access financial services. This further emphasises the necessity of financial inclusion and the scope for the use of technology in microcredit.4 Furthermore, the World has identified financial inclusion as an enabler for 7 of the sustainable development goals.5 Most financial institutions do not provide financial services to the poor because of perceived high risks, high costs of transaction, and the inability of the poor to provide collateral for loans. All of the above being obstacles that microfinance institutions must overcome. Today, promoting financial

1("Story of the microcredit")

2("Microfinance Barometer 2017: global trends of the sector...")

3(Pti "Microfinance industry clocks over 50% growth in Q2" 2018)

4("Financial Inclusion on the Rise, But Gaps Remain, Global Findex Database Shows")

5 ("Overview")

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Dhirubhai Ambani International Model United Nations 2019 inclusion has been a developmental theme in several countries around the world especially in Asia and the Pacific helping to achieve balanced economic growth. The impact of financial inclusion on the poor includes better access to credit and working capital, risk management, asset building and increase in income.6

For many centuries, microcredit has existed in various forms; however, the birth of modern microfinance is said to have occurred in rural Bangladesh in the 1970s. This is when Dr. Muhammad Yunus founded the Grameen Bank, one of the most prominent microfinance institutions in the world. It worked on a model that was the complete opposite of the conventional banking system. He played an important role in the development of microfinance institutions. He promoted the idea that anybody could become an entrepreneur thus promoting private ownership. The Grameen Bank gives credit to those in need in Bangladesh without any collateral and has thus transformed the conventional banking system replacing it with microcredit.

After the Grameen Bank was founded, several microfinance institutions followed. Many of them were started by NGOs (Non-Governmental Organizations) and funded by grants and subsidies from public and private sources. They proved the concept that the poor could be relied on to repay their loans and hence that microfinance was a potentially viable business.7 During the 1990s, the microfinance institutions began to realize that they could not continue to grow at such rates while continuing to rely on grant funding. As a result, many began to restructure themselves to attract commercial investors, adopting more formal business practices and working to improve their efficiency and sustainability.8 Slowly focus moved away from the NGO structure towards promoting a sustainable industry that could provide financial services to the poor at fair prices while offering a reasonable return to commercial investors. The end of 2008 had channelled nearly $15 billion of foreign investment channelled into micro-finance institutions.9 In recent years, micro-finance has been the subject of various innovations and experiments from leveraging the hugely popular industry for the purpose of micro-finance, where mobile phones are used to send and receive money, to diversification in loan methodologies such as machinery loans.10

6(Elmer "Financial Inclusion and Microfinance" 2016)

7("Story of the microcredit")

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Microfinance has received a major boost due to the involvement of several NGOs and microfinance institutions (MFIs). Several Self Help Groups (SHGs) have also been created where people having homogeneous backgrounds form groups of around 20 each and pool money, which is then lent to the needy in the group. It is an efficient and unique approach for financial intermediation through self-management. The Peer-to-Peer Lending Model has begun to gain popularity. This approach helps to reduce the operational costs in the MFI model. Peer- to-Peer lending, also known as P2P Lending, is a financial innovation, which connects verified borrowers seeking loans to investors. Peer-to-peer (P2P) lending enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman. However, P2P lending comes with its risks. People who consolidate consumer debt through peer-to-peer lending sites tend to wind up with even more overall debt when they begin to use credit cards freed up by their loans.

Alternative channels are being developed in order to provide an alternative way to distribute financial services to the poor. Certain delivery channels offer the possibility of massive outreach to people in remote locations. Alternative channels also help in reducing cash in the financial system to provide more transparency, be less vulnerable to fraud risk, and be safer for the client. Alternative channels will also lead to dramatic cost reduction. The current model of microfinance is extremely human-resource intensive, with labour costs sometimes accounting for almost half of operating expenses. Microfinance institutions want to come up with alternative channels to reduce their dependence on branch staff and create a more personalized system involving a transactional service inspired from cell-phone banking. However, this is still in its early stages and has not been developed yet.11

Microfinance has a great social impact and helps to empower women thus reducing gender inequality. As of October 2011, the Grameen Bank had 8.349 million borrowers, 97% of whom were women. With 2,565 branches, it provides services in 81,379 villages, covering more than 97% of the total villages in Bangladesh.12 It gives high priority to women and works to raise the status of poor women in their families by giving them ownership of assets. It also makes sure that the ownership of the houses built with Grameen Bank loans remains with the borrowers, i.e., the women. Microfinance services lead to women’s empowerment by positively influencing women’s decision-making power and enhancing their overall socio-economic status. By the end of 2006, microfinance services had reached over 79 million of the poorest women in

11("Accelerating Financial Inclusion through Innovative Channels 10 Obstacles for MFIs Launching Alternative Channels— and What Can Be Done About Them")

12 ("About Grameen Bank") ● Research Report | Page 3 of 20

Dhirubhai Ambani International Model United Nations 2019 the world. As such, microfinance has the potential to make a significant contribution to gender equality and promote sustainable livelihoods and better working conditions for women. Moreover, microcredit has a great social impact helping to reduce gender inequality.

Considering the large number of people disconnected from financial services it is essential that steps be taken to improve microcredit systems in order to eradicate poverty.

Definition of Key Terms

Alternative Channels

According to the International Finance Corporation, “For much of its 30-year history, microfinance has been limited to the standard branch-and-loan-officer model of delivering credit.” Alternative channels refer to non-traditional, or alternative, ways of distributing credit and other financial services to the poor.13

Debt Trap

A debt trap is a situation in which a borrower is led into a cycle of re-borrowing, or rolling over, their loan payments because they are unable to afford the scheduled payments on the principal of a loan. These traps are usually caused by high-interest rates and short terms. Any time a person borrows money there are two basic elements to the loan: the principal and interest. A debt trap occurs when a borrower is unable to make payments on the loan principal; instead, he or she can only afford to make payments on the interest.14

Financial Inclusion

Financial inclusion is the pursuit of making financial services accessible at affordable costs to all individuals and businesses, regardless of its net worth. It means that individuals and businesses have access to affordable financial products and services that meet their needs (transactions, payments, savings, credit and ) and are delivered in a responsible and sustainable way. Financial inclusion strives to address the constraints that exclude people from participating in the financial sector.15

13("Accelerating Financial Inclusion through Innovative Channels 10 Obstacles for MFIs Launching Alternative Channels— and What Can Be Done About Them")

14("Debt Trap Definition - Financial Smarts")

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Microfinance

Microfinance also known as microcredit is a type of banking service that is provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services. Ultimately, the goal of microfinance is to give impoverished people an opportunity to become financially self-sufficient.16

Microfinance Institutions

Micro Finance Institutions access financial resources from the and other Financial Institutions and provide financial and support services to the poor. MFIs are pivotal organizations in a country that make individual microcredit loans directly to villagers, micro entrepreneurs, impoverished women and poor families.17

Poverty

Poverty is defined in either relative or absolute terms. Absolute poverty measures poverty in relation to the amount of money necessary to meet basic needs such as food, clothing, and shelter. The concept of absolute poverty is not concerned with the overall level of inequality in society. Relative poverty defines poverty in relation to the economic status of other members of the society: people are poor if they fall below prevailing standards of living in a given societal context.18

Self Help Groups

Self Help Groups have been defined as a group of about 15-20 people having a homogeneous socio-economic background who come together to address their common problems. They pool their resources and make small loans to members in need in the group. The groups decide the terms of the loan to the members.

16(Kagan "Microfinance Definition" 2019)

17("Micro Financial Institutions")

18("Poverty: United Nations Educational, Scientific and Cultural Organization")

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Background Information

Microcredit success around the world

The founder of the Grameen Bank, Muhammad Yunus, is one of the pioneers of the microcredit system and has helped run the bank effectively ever since its creation. In the 1970s, approximately three out of four Bangladeshis lived in poverty mainly due to rapid population growth, frequent natural disasters, and slow economic growth throughout the 1980s. However, due to the introduction of microfinance in this period, Bangladesh began to experience more sustained economic growth since the 1990s, which was accompanied by impressive poverty reduction. For example, in 1991 about 60% of the population was below the poverty line and around 50% was below the extreme poverty line. By 2005, those figures had gone down to 40% and 25% respectively. Poverty in Bangladesh has continued to decrease, which has been attributed to the onset of microfinance. Moreover, according to a study in the BE Journal of Macroeconomics, in the average developing nation, an increase in the gross loan portfolio per client by just 10% could reduce the extreme poverty rate by 0.0126 percentage points.19

Cost for Microfinance Institutions

As the loans are often of small amounts (averaging a few hundred dollars), the overhead costs are much higher in proportion to the loan, and it’s harder to make lending profitable.20 Reaching the unbanked populations of the world means servicing loans of small amounts and servicing remote and sparsely populated areas of the planet, which can be extremely unprofitable without mobile delivery. Due to the large number of branch staff in MFIs, they are extremely human-resource intensive, with labour costs sometimes accounting for almost half of operating expenses. The Diverse business models of MFIs include wide range of features and lending activities, which also cause an increase in cost.21

Multiple Lending and Debt trap

Both of the above problems can be attributed to competition among MFIs. In order to reduce each other’s market share, MFIs are giving multiple loans to the same borrowers leading to over-indebtedness (the borrower takes loans more than his or her repaying capacity) of the borrower. This results in a debt trap where the borrower is only financially capable of making payments on the interest does not lead to a reduction in the principal, the borrower never gets

19 (Zhang & Samuel "Yes, microlending reduces extreme poverty" 2019) 20(Wykstra "Microcredit was a hugely hyped solution to global poverty. What happened?" 2019)

21("Challenges faced by Microfinance Institutions" 2016)

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Dhirubhai Ambani International Model United Nations 2019 any closer to paying off the loan itself. The amount of interest charged on a loan will vary depending on several factors, including the creditworthiness of the borrower, the type of loan being issued, and the general health of the economy. The borrower’s creditworthiness is a very important factor, as people with a good credit profile can qualify for better loans at lower interest rates. People with a bad credit profile, on the other hand, will be often be saddled with higher rates and less favourable terms on the few loans they are able to get. This is why people with poor credit are generally at a very high risk for debt traps. MFIs are getting affected because borrowers are failing to make payments and hence their recovery rates are falling. It also makes MFIs vulnerable to credit risks and affects their portfolios. 22

Lack of regulatory framework

There is lack of regulatory legal framework to regulate the activities of MFIs and thus there is reduced transparency. This results in lack of accountability, which will ultimately hinder the sustainability of the operations. These organizations also struggle to strike a balance between their social and business goals. The presence of institutions with a variety of legal forms makes it difficult for the regulation of all such institutions by a single regulatory body.2324

Robust Risk Management

Risk Management is crucial if non-performing assets rise in MFIs. Robust risk management helps to prevent unsecured lending by MFIs. The microfinance industry is faced with financial, operational, compliance and strategic risks. Given the nature of the markets in which MFIs operate, the risk of over-indebtedness is very high. Furthermore, due to the increasing use of mobile technology, the industry is faced with data security issues and risks related to cyber crime. Investors and other stakeholders want to feel confident that the management of an MFI understands the risks it faces and can manage and monitor these risks efficiently. Therefore, they want proof that risks are being properly mitigated and assurance that the internal control structure is sound. Therefore, the MFIs need to strike the right balance between keeping risks within acceptable limits and pursuing new opportunities. A risk management program can be a tool of growth for the business, enabling MFIs to take better risks and achieve its objective of financial inclusion.25

22("AvantGarde")

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24("Challenges faced by the Indian microfinance industry" 2018)

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Financial Illiteracy

One of the major hindrances in the growth of the microfinance sector is the financial illiteracy of the people. This makes it difficult in creating awareness of microfinance and even more difficult to serve them as microfinance clients. Though most of the microfinance institutions claim to have educational trainings and programmes for the benefit of the people. In many countries the ability to sign one’s name is considered a sign of literacy. This can be dangerous to the customers of MFIs, as they may not entirely understand a document that they are signing. A new study by Sougata Ray and others, published in the Economic and Political Weekly concluded that financial literacy of the borrower is a crucial factor determining the risk of over- indebtedness.2627

Taxation of income of investors in MFIs and MIVs

Taxation of the income of investors’ disincentives investments in MFIs thus limiting the growth of the sector. Tax incentives to investors could possibly increase investment in the sector thus promoting its growth. For example, in India, investors do not have any tax incentives or rebates of any kind to invest in MFIs. As a result, investment in MFIs is limited.

Cluster formation

MFIs’ acquire established markets due to the reduced customer acquisition cost resulting in formation of clusters in some areas leaving the others out of the reach of MFIs. By using the established markets, MFIs reduce their initial cost in educating people and creating awareness about microfinance. This cluster formation is restricting MFIs from reaching rural areas where there is greater need for microfinance. People in urban and semi-urban areas are already having access to microfinance through SHG-bank linkage or individual lending, but in rural areas people don’t have access to microfinance due to cluster formation. Because of the initial cost involved in serving a new location, MFIs are not willing to go to such remote locations. This is the reason most of the MFIs have their branches in urban and semi-urban areas only resulting in a very low rural penetration of microfinance. Therefore, it is extremely

26("AvantGarde")

27(Livemint "How microfinance may lead to indebtedness" 2019)

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Dhirubhai Ambani International Model United Nations 2019 important that MFIs realise that increasing the outreach of the microfinance sector by serving new locations is what is needed today.28

Transparent Pricing

Another concern about MFIs is transparency with the borrowers, which is gaining significance with the growing size and the increasing competition in the sector. Non-transparent pricing by MFIs confines the ability of the borrowers to compare different loan products, because they don’t know the actual price. In absence of the proper understanding of the pricing, clients borrow more than their ability to repay the loan, which results in over-indebtedness of the borrower.

MFIs, in order to make their products look less expensive and more attractive, are disguising their actual interest rates by including other charges like service charge, processing fee etc. There have been cases where the interest rates are inversely linked with the loan amount, which means a higher interest rate for smaller loans (because of higher transaction cost). This is resulting in higher interest rates being charged to the poorest clients, which contradicts the social aspect of microfinance. Ambiguity in the pricing by MFIs is inviting regulatory bodies to implement strict measures like interest rate caps. But simply putting an interest rate cap may encourage MFIs to look for clients with larger loan requirements. This may deprive the clients with smaller loan requirements of loans who are supposed to be the actual beneficiary of microcredit.29

Suicide Epidemic

Microcredit has proven to be one of the larger contributors to the suicide rate in India for the past few years. Gradually building microcredit debt has become overwhelming for many borrowers and in extreme cases cause them to take their own lives. Thousands of people in India have committed suicide for reasons related to large microcredit debts. More than 80 people have taken their own lives in just the last few months after defaulting on micro-loans, according to the Indian government. This has triggered the worst ever crisis in India's booming microfinance industry. The families experience both personal and financial loss. This does not help the family’s position and makes it nearly impossible to repay their debts.30

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Smart Campaign

The Smart Campaign is a global campaign committed to embedding client protection practices in the microfinance industry. The client protection principles aim for responsible financial inclusion by increasing transparency and preventing a debt trap.31 Responsible financial inclusion involves working with clients so that they do not borrow more money than they can repay. It involves respectful collection practices and high ethical standards in the treatment of clients. It ensures client data remains private. The Client Protection Principles are the minimum standards that clients should expect to receive when doing business with a financial service provider. These standards include “transparency”, “preventing over- indebtedness”, “responsible pricing”, “privacy of client data”, and “fair and respectful treatment of clients”. More than 110 microfinance institutions have been certified by the smart campaign in 39 countries. These microfinance institutions follow the client protection principles enlisted by the smart campaign thus helping to protect about 45 million clients of microfinance institutions. The Smart campaign is based on The Principles for Investors in Inclusive Finance housed within the UN-supported Principles for Responsible Investment (PRI) Initiative, which guides responsible investment in the sector of inclusive finance.32

A push for Gender Equality

Many microcredit institutions specifically target women in their lending. For example, over 90% of the Grameen Bank clients are females. This can have several causes. Firstly, it has been observed that women are more likely to reinvest their loans for betterment of their entire families. Secondly, many microfinance institutions have seen that women are more reliable borrowers. They are more likely to use their loans productively and repay them promptly. The Grameen Bank has a repayment rate of 98% for its loans, higher than any other bank in Bangladesh. Moreover, microcredit gives women more independence, responsibility and respect, as they can become providers of the income for the family. It also helps raise their socio-economic status.33

31(Administrator "The Client Protection Principles")

32(2018-08-20T00:00:00+01:00 "Impact investing market map: Inclusive finance" 2018)

33(“Targeting women”)

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Major Countries and Organizations Involved

Bangladesh

MFIs in Bangladesh have had sustained benefits for over two decades in reducing rural poverty. MFIs have lifted about 2.5 million Bangladeshis from the ranks of the poor (10% reduction in rural poverty). Today, Bangladesh’s MFIs cover approximately 32 million members and give out more than $7.2 billion annually. When Bangladesh’s microfinance sector was first established in the 1970s, its main goal was reducing rural poverty by providing microcredit loans for non-crop activities such as trading, and raising livestock and poultry. Mainly the government of Bangladesh funded these loans. Microcredit has helped to diversify borrowers’ economic activities thus boosting their incomes. For households diversifying into non-farm activities, income growth was almost 29% higher than that of their counterparts who stuck exclusively to farming. The reduction in moderate and extreme poverty for this group was almost 8% higher. Better access to credit was found to be a key factor in promoting this shift. MFIs, despite their traditional focus on non-farm activities, have also aided farmers. Borrowing from an MFI has raised farm income and reduced reliance on wage income, producing significant positive effects for women and marginal farmers. A 10% increase in women’s credit use was found to increase crop income by 3.5%, non-crop income by 2.8%, and total farm income by 0.7%. In addition, borrowing by both men and women has had important impacts on income, labour supply, household assets and net worth, and children’s schooling. BRAC and Grameen Bank two of the most successful MFIs in the world are based in Bangladesh. Bangladesh has made great progress in the field of microcredit with many of the challenges of microfinance being addressed by the government and Bangladesh’s Microcredit Regulatory Authority.34

Bolivia

The contributions of the microfinance system to the growth of the Bolivian economy are fundamental for a solid development of the national economy. The 1980’s crisis in the country, particularly between 1982 and 1985, had a tremendous impact on the Bolivian economy. According to information from the Bolivian Central Bank, the deposits in the country fell 88%. The 32% inflation rate in December 1981 became 11750 % in 1985, the worst year of the crisis. This has been registered as the 7th highest hyperinflation worldwide. The National Treasury went bankrupt, and real interest rates were at negative levels of more than 90%. According to

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Dhirubhai Ambani International Model United Nations 2019 the Bolivian Central Bank, in 1991 the private and public banking portfolios were 51% and 49%, respectively. The private banking sector, which included banks such as, but not limited to Banco Mercantil Santa Cruz (BMSC), Banco Unión, and Banco BISA S.A. constantly decided to focus on the urban area, where clients had real guarantees. These entities did not show interest to work with clients from a vulnerable sector that did not count with guarantees to access to credit. These economic weaknesses basically created an opportunity for the microfinance industry to thrive.

Eastern Europe

The microcredit system in Eastern Europe, especially Poland, is one of the best in the world today. They employ many effective strategies to attain these high levels of success. One of these strategies is to have flexible banking regulations. This allows lenders to be less dependent on commercial banks and work directly with these microcredit organizations. Another strategy they employ is working very closely with development agencies and labour offices. This partnership is effective because these non-financial stakeholders have information like knowledge of potential customers. One of the most important qualities of an Eastern European microcredit organization is an effective screen process. Each organization carefully screens each loan applicant and look for information like economic responsibility and previous business experiences. With a combination of all of these strategies, Eastern European countries have developed one of the most successful microcredit systems. Many strategies used in these systems are applicable for microcredit institutions all around the world.

Grameen Bank

The model of the Grameen Bank is almost the reverse of the conventional banking model according to Dr. Muhammad Yunus. He also said that the Grameen methodology is not based on assessing the material possession of a person, it is based on the potential of a person. Furthermore, the Grameen Bank believes that all human beings, including the poorest, are endowed with endless potential. The Grameen Bank does not transfer liability to the family of the lender if the death of the borrower occurs. There is no legal instrument between the lender and borrower under the Grameen Bank model. If a borrower is unable to repay a loan the Grameen Bank allows the borrower to reschedule their loans. The interest instead of being compounded quarterly, as in the conventional banking model, is simple interest. Although the Grameen Bank has turned large profits (1.03 billion Bangladeshi Takas in the first half of

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2016)35, there are questions whether the model of the Grameen Bank is sustainable because of potential defaults by its customers.36

India The Self Help Group Bank linkage programme (SHGBLP), which started simply as a bank outreach programme, has become a holistic programme for financial, economic, social and technological capital building in rural areas. It has evolved into one of the largest microfinance programme in the world, and undoubtedly, it is the main microfinance programme in India. The National Bank for Agricultural and Rural Development (NABARD) has launched several programmes for financial inclusion of the poor through microcredit such as Micro Enterprise Development Programme (MEDPs), Livelihood and Enterprise Development Programmes (LEDPs) and financing of Joint Liability Groups (JLGs). However, the Indian microfinance industry faces regulatory problems.

Southeast Asian countries Microfinance in Asia has seen its fair share of ups and downs. The industry is increasingly gaining recognition as a provider of credit to populations who normally may not be able to access credit through formal systems of lending. Most Southeast Asian countries are well served by MFIs. In countries such as Philippines and Indonesia the industry is mature, whereas in other Asian countries such as China, Myanmar, Russia and Laos, the sector is still establishing itself. One of the measures of financial inclusion in a country is the state of the microfinance industry and its related policies. These have contributed significantly to the improvement of financial inclusion in most of the Asian countries such as Philippines, Vietnam, Sri Lanka and Nepal.

World Bank

The World Bank is a UN Multilateral Development Bank staffed with members from over 170 member nations. Their goal is to find sustainable solutions for combating poverty. The World Bank provides microfinance options such as savings, loans, micro and money transfers. The World Bank also drives innovation in microfinance and promotes developments in technology to help financial institutions reach more poor people, more cost effectively. The World Bank is committed to the creation of policy environments in countries that balance increased access, financial stability, and protection of poorer clients. It uses its position and

35("Grameen Bank's profit rises, interest declines")

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Dhirubhai Ambani International Model United Nations 2019 credibility with policy makers and regulators around the world to influence policy changes that will make a difference to the lives of the poor.37

Timeline of Events

Date Description of event 1976 First loan by Muhammad Yunus in Bangladesh

1983 The model of the Grameen Bank was formalised

1989 The model of the Grameen Bank began to spread to other countries

Consultative Group to Assist the Poor was created, which is an organisation 1995 dedicated to financial inclusion and develops innovative solutions for building inclusive financial systems.

1997 First Microcredit Summit was held

2005 International Year of Microfinance

2009 Launch of Smart Campaign for Client Protection

2010 Microfinance crisis in India

2011 The Principles for Investors in Inclusive Finance (PIIF) were declared

2012 Universal Standards for Social Performance Management (USSPM), Global Appeal for Responsible Microfinance

2013 First MFIs certified by the smart campaign (Bosnia, India)

2016 India became the global leader in microfinance

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2018 2nd Global Microfinance summit was held

2019 3rd Global Microfinance summit was held 38

Relevant Treaties and Events

● UN resolution 53/197, passed without vote by the General Assembly proclaimed 2005 as the “International Year of Microcredit.”

● During the International Year of Microcredit, the UN sponsored the Global Micro entrepreneurship Awards and encouraged governments to create national committees to discuss microfinance programs.

● A/53/223 Secretary General Report on the role of microcredit in the eradication of poverty

Previous Attempts to solve the Issue

One of the main solutions that have been implemented in recent years is increased investment in microcredit institutions. Microcredit institutions receive their money from large banks and investors and many of these investors believed that an increase in investments would increase the productivity of these institutions. In the early 2000s, around 100 microcredit organizations held over 7.5 billion dollars worth of assets provided to them by principal investors. However, many of the main problems including lack of regulatory framework, financial illiteracy, over-indebtedness of the borrower etc. remain untackled hindering the growth and success of the microfinance sector.

38 “The Evolution of Microfinance.” Preceden, www.preceden.com/timelines/65370-the-evolution-of-microfinance.

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Possible Solutions

When utilized properly, microcredit loans have proven to have a direct positive impact on impoverished lives and it can be used to combat gender inequality. However, at the moment, microcredit loans mainly operate on a one size fits all models. This means that these loans are provided in a certain way, which only benefit certain businesses and individuals. In order to further develop microcredit so it can reduce poverty and gender inequality, microcredit operations must become more flexible, holistic and technologically advanced. Along with improving the microcredit system, it would be extremely beneficial for microcredit institutions to provide women with education in topics such as accounting and business management. A lack of knowledge in these topics has caused problems for women requesting loans in the past. Flexibility is crucial for improving microcredit systems. Organizations should work towards being more flexible when providing loans. For example, many microcredit operations require that 100% of money loaned should be allocated and used for solely business purposes. Although it is important to invest in business, borrowers also need this money for food, clothes and other necessities. Creating a more flexible loaning process will improve the success of both borrowers and lenders. Another way to further develop microcredit is to have organizations focus on holistic financing. This means widening the range of resources that are being funded. For example, instead of simply allocating money for basic supplies and materials, organizations can fund things like solar powered lanterns, which allow students to study at night. By funding a wider variety of resources microcredit organizations can reach and impact a larger demographic. One of the most effective solutions to this issue is to integrate technology into microcredit operations. For example, it would be beneficial if borrowers could contact microcredit branches through a mobile system rather than travel long distances to these branches. This would save time and energy and make the process more streamlined and efficient. Measures should also be taken to create an international regulatory framework in order to regulate the activities of MFIs to ensure that they do not exploit the poor. Robust Risk Management also becomes important, as MFIs do not have the mechanisms to curb defaults.

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Bibliography

“Story of the Microcredit.” Micro World, www.microworld.org/en/about-microworld/about- microcredit.

“Accelerating Financial Inclusion through Innovative Channels 10 Obstacles for MFIs Launching Alternative Channels— and What Can Be Done About Them.” IFC, www.ifc.org/wps/wcm/connect/14d2568049585e8c9cd2bd19583b6d16/Tool 10.12. ACCION Report - Engaging MFIs in Mobile Money.pdf?MOD=AJPERES

Administrator. “The Client Protection Principles.” The Center for Financial Inclusion, www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles.

2018-08-20T00:00:00 01:00. “Impact Investing Market Map: Inclusive Finance.” PRI, 20 Aug. 2018, www.unpri.org/thematic-and-impact-investing/impact-investing-market-map- inclusive-finance/3548.article.

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Wykstra, Stephanie. “Microcredit Was a Hugely Hyped Solution to Global Poverty. What Happened?” Vox, Vox, 15 Jan. 2019, www.vox.com/future- perfect/2019/1/15/18182167/microcredit-microfinance-poverty-grameen-bank-yunus.\

“The Evolution of Microfinance.” Preceden, www.preceden.com/timelines/65370-the- evolution-of-microfinance.

Ifpri.org, www.ifpri.org/blog/how-microfinance-has-reduced-rural-poverty-bangladesh

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“About Grameen Bank.” Grameen Bank - Bank For The Poor, www.grameen- info.org/about-us/.

“AvantGarde.” MicroFinance – Current Status and Growing Concerns in India | AvantGarde, www.iitk.ac.in/ime/MBA_IITK/avantgarde/?p=475.

“Challenges Faced by Microfinance Institutions.” Nelito, 1 May 2016, www.nelito.com/blog/challenges-faced-microfinance-institutions.html.

“Challenges Faced by the Indian Microfinance Industry.” Knowledge Tank, 19 Nov. 2018, www.projectguru.in/publications/challenges-indian-microfinance-industry/.

“Debt Trap Definition - Financial Smarts.” OppLoans, www.opploans.com/glossary/debt- trap/.

Elmer. “Financial Inclusion and Microfinance.” Asian Development Bank, Asian Development Bank, 5 Oct. 2016, www.adb.org/sectors/finance/issues/financial-inclusion- microfinance.

“Empowering the Poor through Financial Services.” CGAP, www.cgap.org/.

“Financial Inclusion on the Rise, But Gaps Remain, Global Findex Database Shows.” World Bank, www.worldbank.org/en/news/press-release/2018/04/19/financial- inclusion-on-the-rise-but-gaps-remain-global-findex-database-shows.

“Grameen Bank's Profit Rises, Interest Declines.” Grameen Bank, www.grameen.com/grameen-banks-profit-rises-interest-declines/.

Kagan, Julia. “Microfinance Definition.” Investopedia, Investopedia, 25 June 2019, www.investopedia.com/terms/m/microfinance.asp.

“Micro Financial Institutions.” Microfinance & Microcredit Info, microfinanceinfo.com/micro-financial-institutions/

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Dhirubhai Ambani International Model United Nations 2019

“Microfinance Barometer 2017: Global Trends of the Sector...” BNP Paribas, group.bnpparibas/en/news/microfinance-barometer-2017-global-trends-sector

“Overview.” World Bank, www.worldbank.org/en/topic/financialinclusion/overview.

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“Previous Design Labs.” Is Grameen Bank Different From Conventional Banks?, muhammadyunus.org/index.php/design-lab/previous-design-labs/43-news-a- media/books-a-articles/232-is-grameen-bank-different-from-conventional-banks

Pti. “Microfinance Industry Clocks over 50% Growth in Q2.” The Economic Times, Economic Times, 3 Dec. 2018, economictimes.indiatimes.com/markets/stocks/news/microfinance-industry-clocks-over- 50-growth-in-q2/articleshow/66923949.cms?from=mdr

“The Challenges of Microfinancing in Southeast Asia.” FinDev Gateway - CGAP, 17 Dec. 2014, www.findevgateway.org/library/challenges-microfinancing-southeast-asia.

“WHAT WE DO.” NABARD, www.nabard.org/content1.aspx?id=518&catid=8&mid=489.

Biswas, Soutik. “India's Micro-Finance Suicide Epidemic.” BBC News, BBC, 16 Dec. 2010, www.bbc.com/news/world-south-asia-11997571.

Zhang, Quanda, and Samuel. “Yes, Microlending Reduces Extreme Poverty.” The Conversation, 18 May 2019, theconversation.com/yes-microlending-reduces-extreme- poverty-78088

Targeting Women, www.mtholyoke.edu/~reidd20c/classweb/microcredit/target.html.

“The World Bank Group and Microfinance.” Ifc.org, www.ifc.org/wps/wcm/connect/industry_ext_content/ifc_external_corporate_site/financial institutions/resources/the world bank group and microfinance

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