Academic journal article American Journal of Entrepreneurship

Micro-Finance from Bangladesh to the United States: Beneficial or Detrimental to Nascent Entrepreneurs?

Academic journal article American Journal of Entrepreneurship

Micro-Finance from Bangladesh to the United States: Beneficial or Detrimental to Nascent Entrepreneurs?

Article excerpt


In recent years, the idea of providing micro-loans to potential small-scale entrepreneurs, in the third world and in other areas of poverty, has gained wide-spread notoriety and praise. Muhammad Yunus, considered the pioneer of this concept, started the movement by lending small amounts of funds to basket weavers in Bangladesh, and was awarded the Nobel Peace Prize in 2006 for his efforts.

The Nobel Peace Prize Committee, in presenting the award jointly to Mr. Yunus and to his Grameen Bank, stated:

"Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights. "(Norwegian Nobel Committee, 2006)

Yet today, in many countries, micro-finance has become a for-profit industry, with a large number of banks and financial institutions entering the field and often charging seemingly very high interest rates and earning large profits in the process. Even not-for-profit micro-finance organizations typically charge interest rates considerably higher than banks charge their large business clients and are often subject to criticism. The current controversy centers on the issues of appropriate interest rates and/or resulting profits. Do the small loan amounts and significant risks of non-repayment to the microlender justify such interest rates and profits? Has the micro -loan phenomenon become exploitative in some countries? Also, do micro-loans always lift people out of poverty?

While micro-finance in general, and this issue of appropriate interest rate levels in particular, have been subjected to a modest amount of scholarly investigation, most of these studies have focused on a few countries including Bangladesh, India, Mexico, Nicaragua, Nigeria and Peru, where possible exploitation has been identified. Although micro-finance programs exist in the United States as well, a search of the literature has identified very few prior academic investigations with a domestic focus on either the general topic or on the specific interest rate issue (Khavul, 2010). The objective of this article is to examine the status and nature of micro-finance throughout the world, including a specific focus upon the United States, to probe the costs of micro-finance to loan recipients, to better understand the strengths and weaknesses of third-world and American micro-loan programs, and to offer policy implications and guidance to governments, to small business owners, and to those who consult to and assist nascent entrepreneurs and other small businesspeople who might avail themselves of such financing.

While most micro-financing will continue to take place in developing nations, where poverty is most wide-spread, it is also important to understand the American micro-finance model. With a sub-set of the American population and economy subsiding at an economic level where micro- financing might be of value, and with the majority of this journal's readership being American, an understanding and analysis of American micro-finance should be of importance and value to those who study small business and entrepreneurship, to those who assist such small business owners, and to the owner/entrepreneurs themselves.

The remainder of this article will provide the following discussion: a) a brief history of micro-finance from its beginnings in Bangladesh to its growth into other countries and the resulting controversy; b) a review of prior research, especially scholarly research with a focus on the value and appropriateness of micro-finance; c) a discussion of micro-finance programs in the United States; d) an expanded discussion of the worldwide controversy regarding appropriate micro-finance interest rates and lender profits; e) a "policy and practice" discussion with regard to governments, for nascent entrepreneurs, and for those who advise them; f) a suggested agenda for further scholarly research; and g) conclusions. …

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