| Description |
Microfinance is defined as a "type of banking service that is provided to unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services" (Investopedia.com). Muhammad Yunus, founder of the concept of microfinance, believes it is the key to ending poverty. Even though microfinance has grown into a framework that can improve the lives of impoverished citizens, it has failed to reach its ultimate goal of eradicating poverty. Microfinance has developed into different models. Some of the models require a group of individuals, institutions, or online platforms for the microfinancing process to take place. Throughout this paper, I will describe the impact of microfinance on individuals, but more specifically, I will look at different models, both traditional such as the Grameen Bank, and non-traditional models emerging online. My research focused on Peru and Bangladesh. These two countries are common to all microfinance institutions researched in this paper. The research shows high interest rates are common to most microfinance institutions, and this observation raises the question of the effectiveness of the microfinance system to lift people out of poverty. This observation led me to the second part of my research, which consists of determining why interest rates are high for most microfinance institutions. I used data on interest rates to correlate different factors to the return on equity, return on assets, and risk of loans based on a sample of microfinance institutions in each country. I also conducted regression analysis to try to explain causes for high interest rates in those regions. |
