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Do Microcredit Lending Programs Help The Poor

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Do Microcredit Lending Programs Help The Poor? A Comparative Analysis
of Programs in Bangladesh and the U.S.A.
Like the right to
food, clothing, shelter, education and health,
credit should also be recognized as a
fundamental human right.
- Muhammad Yunus
Fahima Aziz
Department of Economics
Hamline University
Paper presented at 2011 Second European Conference on Microfinance, Groginnen.
June 16-18, 2011

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INTRODUCTION
Micro-credit programs were first introduced in developing countries and have grown
rapidly in the United States and in rest of the world. Initially, developing countries began
implementing microenterprise programs to bootstrap the poor out of poverty through
entrepreneurship, or self-employment, and instilling skills for employment, which would then
stimulate economic development in the surrounding communities. The main focus of many
microcredit programs is to break the vicious cycle of poverty. Some argue that welfare programs
sometime tend to contribute to the dependency and despair of the poor, whereas microfinance
programs help the poor rise out of poverty by giving them a sense of dignity and self-respect.
Consequently, microenterprise programs also have a social impact on its borrowers by increasing
self-confidence and self-worth, which further lead to empowering the poor.
The poor are generally unable to obtain credit for working capital. There are
approximately over 1 billion people worldwide who have to live on less than $1 a day and over 2
billion people are malnourished (UNDP report 2010). Therefore, in developing countries, where
credit is virtually nonexistent for the poor, microenterprise programs were created to collateral-free
credit to low-income people who historically have been considered credit risks by conventional
banks (Aziz, 2002). Traditional banks will not consider lending to the poor for a variety of
reasons. First of all, traditional banks usually do not make loans to home businesses, which is
typically the type of business operated by microentrepreneurs. Second, the poor are considered to
be very high credit risks because they lack collateral, credit history and/or previous experience
operating a business. Furthermore, microenterprise loans are unattractive to traditional banks
because the transactions costs of a small loan are high relative to the interest and fees the loan
generates. In other words, it is not profitable for traditional financial institutions to lend such small

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 Do Microcredit Lending Programs Help The Poor? A Comparative Analysis of Programs in Bangladesh and the U.S.A. Like the right to food, clothing, shelter, education and health, credit should also be recognized as a fundamental human right. - Muhammad Yunus Fahima Aziz Department of Economics Hamline University Paper presented at 2011 Second European Conference on Microfinance, Groginnen. June 16-18, 2011 INTRODUCTION Micro-credit programs were first introduced in developing countries and have grown rapidly in the United States and in rest of the world. Initially, developing countries began implementing microenterprise programs to bootstrap the poor out of poverty through entrepreneurship, or self-employment, and instilling skills for employment, which would then stimulate economic development in the surrounding communities. The main focus of many microcredit programs is to break the vicious cycle of poverty. Some argue that welfare programs sometime tend to contribute to the dependency and despair of the poor, whereas microfinance programs help the poor rise out of poverty by giving them a sense of dignity and self-respect. Consequently, microenterprise programs also have a social impact on its borrowers by increasing self-confidence and self-worth, which further lead to empowering the poor. The poor are generally unable to obtain credit for working capital. There are approximately o ...
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