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more than 30 years microfinance has been portrayed as a key policy and programme intervention for poverty reduction and ‘bottom-up’ local economic and social development. Microfinance (more accurately microcredit, but in practice the terms are interchangeable) is the provision of tiny loans to the poor to help them establish or expand an income-generating activity, and thereby escape from poverty.
The microfinance movement began with the work of Dr Muhammad Yunus in Bangladesh in the late 1970s, spreading rapidly to other developing countries. Most early microfinance institutions (MFIs), including Yunus’s own iconic Grameen Bank, relied on funding from government and international donors, justified by MFI claims that they were reducing poverty, unemployment and deprivation.
In the 1980s, however, the expanding microfinance model operated in a transformed political and ideological environment. Market principles were in the ascendant, with growing emphasis on financial sustainability and the need to wean microfinance programmes off long-term donor support. It was felt that the poor should pay the full cost of any support received, rather than impose an additional tax burden on others.
This led to a push for MFIs to
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