Microfinance has a long history but has recently been more formalized and accepted globally. Image: Savijana/flickr

The history of microfinancing small loans to community members can be traced back several hundred years, arguably thousands. Savings and credit groups that have operated for centuries include the “susus” of Ghana, “chit funds” in India, “tandas” in Mexico, “arisan” in Indonesia, “cheetu” in Sri Lanka, “tontines” in West Africa, and “pasanaku” in Bolivia, as well as numerous savings clubs and burial societies found all over the world.

Formal microcredit and savings groups also have a long history.  One of the more prominent and longlived microcredit organizations that provided small loans to the poor with no collateral was the Irish Loan Fund system which was founded in the early 1700s by Jonathan Swift.  Swift’s idea began slowly but by the 1840s had become widespread throughout Ireland; at their peak they were making loans to 20% of all Irish households annually.

By the 1800s, more formal savings and credit organizations began to emerge in Europe.  Organized primarily among the rural and urban poor, these institutions went by a variety of names but are more commonly known as Credit Unions today.  The concept of credit unions spread and by the early 1900s they were in Latin America and North America.  However, in most cases these new credit unions in the Americas were not owned by the poor themselves, as they had been in Europe, but by government agencies or private banks. Over the years, these institutions became inefficient and often corrupt.

It was not until the 1970s and 1980s when the modern industry of microfinance began to formulate.  Pioneering individuals such as Muhammad Yunus originally started lending small loans to the poor, specifically poor women who wished to operate businesses that did not have any collateral, generally because no one else would.  The first loan Yunus conducted was in 1976 when he lent $27 to a group of impoverished villagers.  Several years later, in 1983, he founded the Grameen Bank of Bangladesh and began making small loans to the poor and uncreditworrthy.  In 2006, Yunus received the Nobel Peace Prize for his work with microfinance.

Since the 1970s many new microfinance providers and institutions have established around the world.  Today the World Bank estimates approximately 7,000 microfinance institutions are in operation all over the globe. In an effort to continue the entrepreneurial spirit of poor people around the world, the year 2005 was proclaimed as the International year of Microcredit by The Economic and Social Council of the United Nations.