History of microfinance


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History of microfinance

  1. 1. History of micro financehttp://www.guardian.co.uk/katine/2008/jun/03/livelihoods.projectgoals1In 1974, an economics lecturer at the University of Chittagong, Bangladesh, lent $27 to agroup of impoverished villagers. Thirty years later, the lecturer, Muhammad Yunus, won theNobel peace prize and microfinance become the worlds favorite development idea, the silverbullet that will cure world poverty and spread the wealth-creating force of capitalism acrossthe globe. Only last month, Gordon Brown to help support microfinance institutions (MFIs)in Africa.Microfinance has a beguiling simplicity and a record of success not just in promotingfinancial resilience but in achieving other social objectives – reaching the excluded,empowering women and developing the capacity of small groups of people to take control oftheir own lives.Muhammud Yunus founded his Grameen Bank in 1983 to make very small loans – perhaps£15 a time – to the poor and uncreditworthy. Since then it has loaned about £3 billion to morethan six million of the very poorest in Bangladesh and across the Asian sub-continent, yet itremains entirely self-financing. Borrowers deposits cover the costs.Although Grameen Bank is now instituting programmes for the destitute, its historicalassociation has been with the slightly less poor, helping them to set up micro-enterprises thatprovide sustainable family incomes. It is a very slow process. The banks impact researchsuggests that each year, only 5% of their clients are lifted out of poverty. Ill health, pooreducation and natural disasters are the three critical predictors of failure.It is now experimenting with a holistic approach (where basic medical care is available atthe same place the customer would go to repay an instalment of the loan), and offering adulteducation. It funds 20,000 student loans a year and provides 50,000 scholarships forschooling. It is also trying to find ways of helping creditors survive disaster, whether it is apersonal accident or a major flood.
  2. 2. Professor Muhammad Yunus. Photograph: David LeveneMicrofinance is now widely used in Africa, where among its pioneers is Care InternationalUK, Barclays partner in developing financial services for the Katine project. While GrameenBank is an institution that makes rigorous demands on its borrowers – new borrowers sign upin peer groups to, "the 16 Grameen decisions" (a range of pledges on everything fromvegetable growing to no dowries) – Care International builds on the traditional villagesavings and loans associations (VSLAs) where a group saves a small amount each month andlends it out for immediate needs at high rates of interest.At the end of each year, the VSLAs account is reckoned and profits paid out to investorsbefore the group re-forms. It is small-scale, finite and an important tool in helping very poorpeople meet daily challenges such as the unforeseen medical bill, or an item of schooluniform. In Katine, and other areas scarred by recent conflict, these groups can play animportant role in rebuilding trust within a community.At its lowest level, microfinance sees people through the worst of times. It is a form ofinsurance, of pooled risk among a group of villagers or neighbors’ where repayment is highbecause the borrowing is from friends and acquaintances.At the next level, which many participants never aspire to, it might involve borrowing to startup a small enterprise, or to expand an existing one. Village savings and loan associations areless good for business because of the high interest rates charged and the short term of theloans. Care Internationals objective is to reach the most excluded and also to enable thosewho want to graduate into the more formal microfinance sector.However, the success of microfinance has come under increasing scrutiny as evidence isdemanded by donors and governments for the claims made for it as an economic and a socialtool. Microfinance is a grown-up global brand now, and some of the shine has worn off.As long ago as 1997, the Asian-based development analyst Vijay Mahajan was warning thatalthough improving poor peoples ability to withstand financial shocks is important, it did notmake them less poor in itself. If it is to work as a tool of poverty alleviation, microfinanceneeds to support business. Yet a majority of people would rather have a safe job than take onthe risks of running a business.
  3. 3. Katine shopkeeper Simon Eebu. Photograph: Dan ChungBorrowing can be a cause rather than a cure for problems. People borrow to repay earlierloans and get overwhelmed by debt. Drop-out rates in East Africa have been as high as 60%,although they are much lower in Bangladesh where the Grameen programme operates in amore intensively structured manner. For the poorest, a safe place to save is the first essential.Meanwhile, evidence on the ground suggests that extending credit to the poorest delivers lessthan when it is targeted at those just above the poverty line. Finally Mahajan argues over-emphasis on microfinance can deter structural investment without which business will notwork.In 2005, the year that the UN dedicated to microfinance, others also stressed the need tobegin by helping poor people to save and cast some doubts on the effectiveness of groupfinancing.Meanwhile the move to regulate and standardize microfinance institutions (MFIs) in order tocreate the climate where they can play a more formal role in the economy risks jeopardizingsome of the things they do best – reaching the poorest and the disempowered. One studysuggested a marked decline in the take-up of loans by women from regulated MFIs.Care International acknowledges that many people who join village savings and loan groupswant nothing more than a safe place to save and access to their money or to small borrowingsfor emergencies. But a few will want to go further: perhaps first to some form of simpleinsurance, and then to borrowing for investment.So as well as setting up VSLAs, the organization provides expertise and advice to the nextlevel of microfinance institutions, which will be a source of capital for VSLAs ready toexpand and wanting to lend at more competitive rates of interest. And to fund that level, ithas set up a global organization, MicroVest. Microfinance has limitations, but it remains oneof the most promising ways of tackling poverty.
  4. 4. Microfinance - Backgroundhttp://www.iilj.org/courses/FDMicrofinanceBackground.aspMicrofinance consists of the provision of financial services in small increments, typically tovery poor people.HistoryThe beginnings of the microfinance movement are most closely associated with theeconomist Muhammed Yunus, who in the early 1970s was a professor in Bangladesh. In themidst of a country-wide famine, he began making small loans to poor families in neighboringvillages in an effort to break their cycle of poverty. The experiment was a surprising success,with Yunus receiving timely repayment and observing significant changes in the quality oflife for his loan recipients. Unable to self-finance an expansion of his project, he soughtgovernmental assistance, and the Grameen Bank was born. In order to focus on the verypoor, the Bank only lent to households owning less than a half-acre of land. Repayment ratesremained high, and the Bank began to spread its operations to other regions of the country. Inless than a decade, the Bank was operating independently from its governmental founders andwas advertising consistent repayment rates of about 98%. In 2006 Yunus was awarded theNobel Peace Prize.The success of the Grameen Bank did not go unnoticed. Institutions replicating its modelsprang up in virtually every region of the globe. Between 1997 and 2002, the total number ofMFIs grew from 618 to 2,572. Altogether, these institutions claimed about 65 million clients,up from 13.5 million in 1997 and still growing at 35% a year. The amount of money flowingto clients also continues to climb rapidly and the Grameen Bank has extended over $750million worth of credit in the past two years alone.Alongside the explosion of the microfinance industry in absolute terms, there has been asteady growth in private financing for MFIs. The bulk of microfinance funding is stillprovided by development-oriented international financial institutions and NGOs. Yetestimates place demand for unmet financial services at roughly 1.8 billion individuals. Evenat its current growth rates, it is clear that microfinance will only be extended to meet thisenormous demand by leveraging private capital, flows of which dwarf all other potentialsources. Commercial financing has grown most rapidly in Latin America, where regulatedfinancial institutions now serve 54% of the continents microfinance clients and, importantly,are now responsible for 74% of the regions loans. Overall, 2005 saw private lending to MFIsjump from $513 million to $981 million.This jump in investment is a reflection of an increasing number of sustainable MFIsworldwide. In addition to earning a profit, sustainable microfinance providers are in a betterposition than their subsidized peers to expand their operations and share of the market. Thusin a study by the Consultative Group to Assist the Poor (CGAP) in which operationally-sustainable MFIs represented only 46% of the sample, they accounted for 77% of borrowers
  5. 5. served. The push towards sustainable institutions and the resulting growth of commercialfinancing raise some important questions about the true mission of MFIs and how best toexpand their reach. These issues are further developed in the materials below.Benefits of microfinanceThe very poor are unusually susceptible to income shocks. Death, illness, natural disaster, orother catastrophes can have devastating effects on households existing at or just above asubsistence level. With no asset base on which to draw in the crisis, they may be forced toseverely reduce their level of consumption, which can be dangerous if it means forgoingbasic healthcare and nutrition. Additionally, they may sell off important, income producingassets, exacerbating their economic difficulties well into the future.Financial services that allow poor people to save in times of prosperity and borrow or collectinsurance when necessary allow them to maintain a consistent level of consumption withoutselling off income-producing assets. Microfinance can also provide an opportunity forexpanding or pursuing new business opportunities that allow poor people to increase ordiversify the sources of their income.It has also been argued by advocates that microfinance can also promote the development ofa traditional financial sector. Most obviously, by alleviating poverty, microfinance candeepen the market for more traditional financial services. In addition, MFIs and their clientscan lobby for the creation of clearinghouses for information on borrowers credit histories,easing of interest rate controls, greater foreign ownership of financial institutions, andopening local capital markets beyond a countrys political elite, among other reforms. Suchimprovements could strengthen the financial sector as a whole, creating a feedback loop thatcould serve to lift even more families out of poverty.Microfinance can also generate important non-economic benefits. For instance, manymicrofinance programs are aimed specifically at women. It has been suggested that access tofinancial services enhances womens power and influence in the household. Their ability tomake decisions over certain purchases and their new status as important household earnershas been linked not only to increased bargaining power, but also to a decreased incidence ofdomestic violence. (Lower incidences of abuse could also be the result of third party scrutinyfrom loan officers and, in the case of group lending, fellow borrowers.) Furthermore, theopportunity to pursue business opportunities may make women more likely to usecontraceptives and lower fertility rates.In addition, many MFIs couple their loan programs with educational efforts. For example,loan officers may provide information on contraceptive use or disease prevention or domesticeconomics as well as methods of controlling saving and spending habits and various aspectsof small business management.
  6. 6. Challenges associated with lending to the poorUltimately, microfinance is designed as a tool to reach impoverishes households that are nototherwise served by more traditional financial institutions. There are several reasons why it isdifficult to lend money to the poor.Hidden informationThe primary problem with lending to the poor, and the main obstacle that microfinance isdesigned to overcome, is banks lack of information about the inherent riskiness of potentialclients. The transaction costs of evaluating individual borrowers are very high relative to thesize of the loans likely to be made to poor borrowers. This means that to cover the expenseof screening individual borrowers banks would be forced to charge correspondingly highinterest rates to their clients. Moreover, it is doubtful whether screening will provideaccurate information given that potential borrowers have incentives to misrepresent theircredit history and the risks of their respective projects. Without accurate information, bankswill still charge high rates to cover the frequent incidence of default among the riskyborrowers that will inevitably join their client base. Either way, interest rates will be highenough to drive borrowers with safe but relatively low returns out of the market. Thisproblem is referred to as adverse selection.Governments sometimes respond to this problem by imposing restrictions on interest ratescharged by financial institutions in the form of usury laws or interest rate caps. With ratesconstrained, it would become impossible to provide banking services to the poor withoutsignificant and costly subsidies.Moral hazardEven borrowers whose projects are not inherently risky may refuse either to use their loansproductively or, if they do use the loans productively, to repay their loans if their lenders haveno means of enforcing their obligations. This problem of moral hazard may arise because,for instance, local judges are biased in favor of debtors or police forces are stretched too thinto provide assistance. This problem can be exacerbated by competition among lenders, as inthe absence of competition a lender can encourage repayment by refusing to provide futurecredit.Absence of credit historyIn societies with developed credit markets, problems stemming from inadequate informationand moral hazard are mitigated by the fact that lenders routinely investigate borrowers credithistories. . A record of a borrowers repayment history provides lenders with valuableinformation about the likelihood of future repayment. In addition, the ability to tarnish aborrowers credit history and thereby limit the borrowers access to future credit provideslenders with leverage that they can use to induce repayment.Lack of collateralAnother response to problems of hidden information is to require that borrowers providecollateral, meaning an asset that the lender can easily seize and, perhaps, sell in the event of
  7. 7. default. This allows banks to charge low interest rates even in the face of poor informationabout the borrowers prospects. But many of the impoverished borrowers that microfinanceseeks to reach lack assets that can effectively serve as collateral. When they do have assets,they have are often illiquid. Livestock, for example, is not only subject to destruction, but canbe very difficult to convert on the market for a traditional bank inexperienced in selling it.Furthermore, among these sorts of clients the only assets they have may be critical to theirmeans of subsistence and legal or ethical restrictions may prevent banks from foreclosingupon them.Micro finance in chainaChina’s economy may lead the region in many ways, but in one surprising area it is laggingbehind: microfinance. The concept of distributing small loans to the poor has flourishedacross Asia since its introduction in Bangladesh three decades ago. Yet it has a notablyminimal footprint in China.A casual observer might say China doesn’t need microfinance. After all, it is now the world’sthird-largest economy. But beyond the prosperous cities, millions of people still languish inpoverty. China has the second-largest number of poor after India. About 254 million peoplein China lived on less than $1.25 a day in 2005 (as measured in purchasing power paritydollars), according to the World Bank. The income gap is widening between rural and urbanareas and has today reached a historical high.Microfinance is one tool that can reduce this entrenched poverty by providing entrepreneurswith credit, just as it has in other developing countries. Loan sizes would be larger than inIndia because GDP at purchasing power parity per capita in China is higher at $5,962 versus$2,972 in India, according to 2008 World Bank figures. But loans would still be used forincome-generating activities such as raising livestock, buying materials for micro-businessesand farming, and setting up small trade and services. This is especially pertinent as thegovernment seeks to create a “harmonious society” in part through poverty reduction andhuman development.At the moment it is very difficult for China’s poorest citizens to get loans. The absence ofcivil society in China until recently means there are few established poverty-reductionprograms and the role that they can play is relatively new. There is no coherent governmentpolicy to foster and oversee microfinance and there are no clear laws governing the industry.In addition, Chinese microfinance institutions are allowed to operate only in the county wherethey are registered, and obtaining licenses is a highly bureaucratic process.Despite China’s extensive banking system, which includes government rural credit co-operatives that are meant to serve poor people in the countryside, the neediest are left out.Co-op loans tend to be too big, cumbersome and bureaucratic for the poorest citizens toaccess, and bank branches are not conveniently located.Some Chinese microfinance institutions are starting to address this by partnering with foreigngroups to learn their methods and put operations into place. That is a crucial first step, but
  8. 8. their efforts will be limited unless Beijing creates a regulatory environment favorable formicrofinance institutions. The government could start by boosting microfinance throughprivate village banks. This would require dropping investment restrictions on foreigners andloosening local license requirements.China is understandably cautious after the failure of rural cooperative funds, which weredepository institutions established in the 1980s to funnel lending to rural areas. Lack ofeffective supervision and meddling from local governments led to their closure in 1991.Many peasants never received their deposits back. Microfinance institutions, however, couldbe restricted from taking deposits, so wouldn’t present the same risk.It will take hard work and reform to grow microfinance in China. But millions of poor peoplein China could benefit from the opportunities provided by a small but powerful loan.Mr. Akula is founder and chairperson of SKS Microfinance. Mr. Khanna, the author of“Billions of Entrepreneurs” (Harvard Business School, 2008), is Jorge Paulo LemannProfessor at Harvard Business School and serves on SKS Microfinance’s board of directors.Featured in Wall Street Journal Online, October 7, 2009There are three main categories of microfinance investors: public investors, also known asinternational or development finance institutions (DFIs); individual investors, whether retailor high net worth; and institutional investors. See Figure 1. (p.2)
  9. 9. Failures of MicrofinanceDespite the hoopla surrounding microcredit, few have studied its impact.10One of the mostcomprehensive studies reaches a surprising conclusion: Microloans are more beneficial toborrowers living above the poverty line than to borrowers living below the poverty line.11This is because clients with more income are willing to take the risks, such as investing innew technologies, that will most likely increase income flows. Poor borrowers, on the otherhand, tend to take out conservative loans that protect their subsistence, and rarely invest innew technology, fixed capital, or the hiring of labor.Microloans sometimes even reduce cash flow to the poorest of the poor, observes VijayMahajan, the chief executive of Basix, an Indian rural finance institution. He concludes thatmicrocredit “seems to do more harm than good to the poorest.”12One reason could be thehigh interest rates charged by microcredit organizations. Acleda, a Cambodian commercialbank specializing in microcredit, charges interest rates of about 2 percent to 4.5 percent eachmonth. Some other microlenders charge more, pushing most annual rates to between 30percent and 60 percent.13Microcredit proponents argue that these rates, although high, arestill well below those charged by informal moneylenders. But if poor clients cannot earn agreater return on their investment than the interest they must pay, they will become poorer asa result of microcredit, not wealthier.Another problem with microcredit is the businesses it is intended to fund. A microcreditclient is an entrepreneur in the literal sense: She raises the capital, manages the business, andtakes home the earnings. But the “entrepreneurs” who have become heroes in the developedworld are usually visionaries who convert new ideas into successful business models.Although some microcredit clients have created visionary businesses, the vast majority arecaught in subsistence activities. They usually have no specialized skills, and so must competewith all the other self-employed poor people in entry-level trades.14Most have no paid staff,own few assets, and operate at too small a scale to achieve efficiencies, and so make verymeager earnings. In other words, most microenterprises are small and many fail – contrary tothe United Nations’ hype that microentrepreneurs will grow thriving businesses that lead toflourishing economies.This should not be too surprising. Most people do not have the skills, vision, creativity, andpersistence to be entrepreneurial. Even in developed countries with high levels of educationand access to financial services, about 90 percent of the labor force is employees, notentrepreneurs.15The reality of microcredit is less attractive than the promise.16Even a stalwart proponent ofneoliberal policies like The Economist is beginning to conclude that “the few studies thathave been done suggest that small loans are beneficial, but not dramatically so.”
  10. 10. Definition of MicrofinanceA type of banking service that is provided to unemployed or low-income individuals or groups whowould otherwise have no other means of gaining financial services. Ultimately, the goal ofmicrofinance is to give low income people an opportunity to become self-sufficient by providing ameans of saving money, borrowing money and insurance.What is Microfinance?Microfinance refers to a variety of financial services that target low-income clients, particularlywomen. Since the clients of microfinance institutions (MFIs) have lower incomes and often havelimited access to other financial services, microfinance products tend to be for smaller monetaryamounts than traditional financial services. These services include loans, savings, insurance, andremittances. Microloans are given for a variety of purposes, frequently for microenterprisedevelopment. The diversity of products and services offered reflects the fact that the financial needsof individuals, households, and enterprises can change significantly over time, especially for thosewho live in poverty. Because of these varied needs, and because of the industrys focus on the poor,microfinance institutions often use non-traditional methodologies, such as group lending or otherforms of collateral not employed by the formal financial sector.MIX recognizes many general definitions of microfinance, but for analysis purposes, employs afunctional definition:Microfinance services – as opposed to financial services in general – are retail financial servicesthat are relatively small in relation to the income of a typical individual. Specifically, theaverage outstanding balance of microfinance products is no greater than 250% of the averageincome per person (GNI per capita).http://www.themix.org/about/microfinance#ixzz2RYLrghqpDefinition of PovertyA state or condition in which a person or community lacks the financial resources and essentials toenjoy a minimum standard of life and well-being thats considered acceptable in society. Povertystatus in the United States is assigned to people that do not meet a certain threshold level set by theDepartment of Health and Human Services.Where peoples basic needs for food, clothing, and shelter are not being met. Poverty is generally oftwo types:(1) Absolute poverty is synonymous with destitution and occurs when people cannot obtain adequateresources (measured in terms of calories or nutrition) to support a minimum level of physical health.Absolute poverty means about the same everywhere, and can be eradicated as demonstrated by somecountries.2) Relative poverty occurs when people do not enjoy a certain minimum level of living standards asdetermined by a government (and enjoyed by the bulk of the population) that vary from country tocountry, sometimes within the same country. Relative poverty occurs everywhere, is said to beincreasing, and may never be eradicated.: http://www.businessdictionary.com/definition/poverty.html#ixzz2RYNwlLbY
  11. 11. Indian definitionIn India, norms set by the country’s main planning body to calculate poverty have been slammed bycritics who fear they will exclude vast numbers of the needy from social welfare programs. Aboutone third of India’s 1.2 billion populations is poor, according to official estimate"Poverty" defined as an economic condition of lacking both money and basic necessities needed tosuccessfully live, such as food, water, education, healthcare, and shelter. There are many workingdefinitions of "poverty," with considerable debate on how to best define the term. Lack of incomesecurity, economic stability and the predictability of ones continued means to meet basic needs allserve as absolute indicators of poverty. Poverty may therefore also be defined as the economiccondition of lacking predictable and stable means of meeting basic life needs.20 Poorest Countries In The WorldBy Sammy S. on May 27, 2012What are the poorest countries in the world? The rankings below were published inWikipedia from International Monetary Fund’s 2011 gross domestic product per capita (GDPper capita) report and reflecting the countries with the lowest purchasing power parity (PPP).Since 1970, there has been encouraging news emerging from developing countries.According to the UN’s 2010 Human Development Report, life expectancy in developingcountries has increased from 59 years in 1970 to 70 years in 2010. School enrollment climbedfrom 55% to 70% of all primary and secondary school-age children. Also, in the last fortyyears, per capita GDP doubled to more than ten thousand U.S. dollars. Poor countries arecatching up with the wealthier countries, but not all countries are making fast progress. Forexample, some countries in Sub-Sahara Africa have little or no progress, largely due to theHIV epidemic and civil wars.
  12. 12. The 20 Poorest Countries:#1. Congo, Democratic Republic of theGDP Per Capita: $348 (As of 2011)Not to be mixed with the neighboring Republic of Congo, the Democratic Republic of theCongo has become the poorest country in the world as of 2010. Democratic Republic of theCongo was known as Zaire until 1997. Congo is the largest country in the world that hasFrench as an official language – the population of D.R Congo is about six million larger thanthe population of France (71 million people in D.R Congo vs 65 million in France). TheSecond Congo War beginning in 1998 has devastated the country. The war that involves atleast 7 foreign armies is the deadliest conflict in the world since World War II – by 2008 theSecond Congo War and its aftermath had killed 5.4 million people.#2. LiberiaGDP Per Capita: $456 (As of 2011)Liberia is one of the few countries in Africa that have not been colonized by Europe. Instead,Liberia was founded and colonized by freed slaves from America. These slaves made up theelite of the country and they established a government that closely resembled that of theUnited States of America. In 1980 the president of Liberia was overthrown and a period ofinstability and civil war followed. After the killings of hundreds of thousands, a 2003 peacedeal was led to democratic elections in 2005. Today, Liberia is recovering from the lingeringeffects of the civil war and related economic dislocation, with about 85% of the populationlives below $1 a day.#3. ZimbabweGDP Per Capita: $487 (As of 2011)The government of Zimbabwe released its largest bank note 100 trillion dollar bill issued onJanuary 2009. In addition to the economic problems the life expectancy of Zimbabwe is thelowest in the world – 37 years for men and just 34 for women. One of the problems for theearly deaths are the 20.1% of the population with HIV and AIDS. The health issues aren’tseeing any improvement.#4. BurundiGDP Per Capita: $615 (As of 2011)Burundi is known for its tribal and civil wars. Burundi have never really had any peacefultime between the everlasting civil wars as a result its the fourth poorest country. Owing inpart to its landlocked geography, poor legal system, lack of economic freedom, lack of accessto education, and the proliferation of HIV and AIDS. Approximately 80% of Burundians livein poverty and according to the World Food Programme 57% of children under 5 years sufferfrom chronic malnutrition; 93% of Burundi’s exports revenues come from selling coffee.
  13. 13. #5. EritreaGDP Per Capita: $735 (As of 2011)Affected by the Italian colonizers of the 19th century. Eritrea’s advantage of controlling thesea route through the Suez Canal made the Italians to colonized it just a year after theopening of the canal in 1869 and same reason the British conquered it in 1941. The presentEritrea’s economic conditions have not improved and real gross domestic product growthaveraged 1.2 percent between 2005 and 2008; in 2009 GDP growth was estimated at 2.0percent.#6. Central African RepublicGDP Per Capita: $768 (As of 2011)Despite its significant mineral resources; uranium reserves in Bakouma, crude oil, gold,diamonds, lumber, hydropower and its arable land, it remains one of the poorest countries inthe world. Diamonds constitute the most important export of the Central Africans Republic,accounting for 40–55% of export revenues. The 2010 UNDP Human Development Reportranks CAR near the bottom of its Human Development Index (159th out of 162 countries)and unlikely to meet its MDG goals. The proportion of Central Africans living on $1 a dayhas decreased slightly to 62% but it needs to be half of that in order to reach the 2015 goal.#7. NigerGDP Per Capita: $771 (As of 2011)With over 80% of its land is covered by the giant desert of Sahara, Niger has a GrossDomestic Product (GDP) per capita in Parity Purchasing Power (PPP) terms of US$771 as of2011, one of the lowest in Africa. Niger’s poverty is exacerbated by political instability,extreme vulnerability to exogenous shocks and inequality which affects girls, women andchildren disproportionately. In January 2000, Niger’s newly elected government inheritedserious financial and economic problems including a virtually empty treasury and wasqualified for enhanced debt relief under the International Monetary Fund program for HighlyIndebted Poor Countries.#8. Sierra LeoneGDP Per Capita: $849 (As of 2011)A West African country with English as its official language, Sierra Leone has relied onmining, especially diamonds, for its economic base and home to the third largest naturalharbour in the world where shipping from all over the globe berth at Freetown’s famousQueen Elizabeth II Quay. It is among the top diamond producing nations in the world, andmineral exports remain the main foreign currency earner and also among the largestproducers of titanium and bauxite, and a major producer of gold. Despite this natural wealth,70% of its people live in poverty. If you have seen the movie Blood Diamond you shouldknow that it is based on Sierra Leone.
  14. 14. #9. MalawiGDP Per Capita: $860 (As of 2011)Malawi has one of the lowest per capita incomes in the world, with 53% (2004) living underthe poverty line. In December 2000, the IMF stopped aid disbursements due to corruptionconcerns, and many individual donors followed suit, resulting in an almost 80% drop inMalawi’s development budget. In 2006, Malawi was approved for relief under the HeavilyIndebted Poor Countries (HIPC) program. In December 2007, the US granted Malawieligibility status to receive financial support within the Millennium Challenge Corporation(MCC) initiative. Agriculture accounts for 35% of GDP, industry for 19% and services forthe remaining 46%. In addition, some setbacks have been experienced, and Malawi has lostsome of its ability to pay for imports due to a general shortage of foreign exchange, asinvestment fell 23% in 2009.#10. TogoGDP Per Capita: $899 (As of 2011)This small, sub-Saharan economy suffers from anemic economic growth and depends heavilyon both commercial and subsistence agriculture, which provides employment for a significantshare of the labor force. Cocoa, coffee, and cotton generate about 40% of export earningswith cotton being the most important cash crop. Togo is among the world’s largest producersof phosphate. Approximately one half of the population lives below the international povertyline of US$1.25 a day.#11. MadagascarGDP Per Capita: $934 (As of 2011)Madagascar’s mainstay of growth are tourism, agriculture and the extractive industries.Approximately 69% of the population lives below the national poverty line threshold of onedollar per day. The agriculture sector constituted 29% of Malagasy GDP in 2011, whilemanufacturing formed 15% of GDP. Tourism dropped more than 50% in 2009 comparedwith the previous year, and many investors are wary of entering the uncertain investmentenvironment.#12. AfghanistanGDP Per Capita: $956 (As of 2011)Afghanistan is probably the only poorest country in the world that doesn’t need anyintroduction. Due to the decades of war and nearly complete lack of foreign investment, thenation’sGDP per capita stands at $956. Its unemployment rate is 35% and 42 % of thepopulation live on less than $1 a day. As tribal warfare and internecine feuding has been oneof their chief occupations since time immemorial. History has never seen Afghanistan lose awar. They might be one of the poorest but they know how to fight. Instead of a traditionalarmy they simply resist with small counter attacks that eventually tire out the enemy.
  15. 15. #13. GuineaGDP Per Capita: $1,083 (As of 2011)Guinea also has diamonds, gold, and other metals. The country has great potential forhydroelectric power. Bauxite and alumina are currently the only major exports. Guinea’spoorly developed infrastructure and rampant corruption continue to present obstacles tolarge-scale investment projects. Agriculture employs 80% of the nation’s labor force. UnderFrench rule, and at the beginning of independence, Guinea was a major exporter of bananas,pineapples, coffee, peanuts, and palm oil. From independence until the presidential electionof 2010, Guinea was governed by a number of autocratic rulers, which has contributed tomaking Guinea one of the poorest countries in the world.#14. MozambiqueGDP Per Capita: $1,085 (As of 2011)One of the poorest and most underdeveloped country in the world, 75% of the populationengages in small-scale agriculture, which still suffers from inadequate infrastructure,commercial networks, and investment. The minimum legal salary is around US$60 permonth.#15. EthiopiaGDP Per Capita: $ 1,093 (As of 2011)Ethiopia suffers from poverty, and poor sanitation. In the capital city of Addis Ababa, 55%of the population lives in slums. Despite its fast growth in recent years, GDP per capita is oneof the lowest in the world, and the economy faces a number of serious structural problems.Ethiopia’s economy is based on agriculture, which accounts for 41% of GDP and 85% oftotal employment. Agricultural productivity remains low, the sector suffers from poorcultivation practices and frequent drought.#16. MaliGDP Per Capita: $1,128 (As of 2011)With 50% of the population living below the international poverty line of US$1.25 a day,Mali is one of the poorest countries in the world. Some of its natural resources are gold,uranium, livestock, and salt. Mali remains dependent on foreign aid. Economic activity islargely confined to the riverine area irrigated by the Niger River and about 65% of its landarea is desert or semidesert. Mali experienced economic growth of about 5% per yearbetween 1996-2010. The government in 2011 completed an IMF extended credit facilityprogram that has helped the economy grow, diversify, and attract foreign investment.#17. Guinea-Bissau
  16. 16. GDP Per Capita: $1,144 (As of 2011)Guinea-Bissau’s legal economy depends mainly on farming and fishing, but trafficking innarcotics is probably the most lucrative trade. With 60% of the population living below thepoverty line, drug traffickers based in Latin America use Guinea-Bissau, along with severalneighboring West African nations, as a transshipment point to Europe for cocaine. Thegovernment and the military did almost nothing to stop this business.#18. ComorosGDP Per Capita: $ 1,232 (As of 2011)Made up of three islands with rapidly increasing population, and few natural resources. As of2008 about 50% of the population lives below the international poverty line of US$1.25 aday, due to numerous coups d’etat since independence in 1975.#19. HaitiGDP Per Capita: $1,235 (As of 2011)Haiti is a free market economy that enjoys the advantages of low labor costs and tariff-freeaccess to the US for many of its exports. Poverty, corruption, and poor access to educationfor much of the population are among Haiti’s most serious disadvantages. Haiti’s economysuffered a severe setback in January 2010 when a 7.0 magnitude earthquake destroyed muchof its capital city, Port-au-Prince, and neighboring areas. Already the poorest country in theWestern Hemisphere with 80% of the population living under the poverty line and 54% inabject poverty, the earthquake inflicted $7.8 billion in damages. Seven out of ten Haitianslive on less than US$2 a day, according to the International Red Cross.#20. UgandaGDP Per Capita: $1,317 (As of 2011)Uganda is one of the poorest nations in the world, with 37.7 percent of the population livingon less than $1.25 a day. Uganda has substantial natural resources, including fertile soils,regular rainfall, small deposits of copper, gold, and other minerals, and recently discoveredoil. Despite making enormous progress in reducing the countrywide poverty incidence from56 percent of the population in 1992 to 31 per cent in 2005, poverty remains deep-rooted inthe country’s rural areas, which are home to more than 85 per cent of Ugandans.[Source: Wikipedia/International Monetary Fund]
  17. 17. Microfinance: A Tool for Poverty ReductionMicro Mess