Good to Know: What is microlending?

Microlending–or microcredit–has gotten more and more press recently, both good and bad.

In the simplest terms, microlending is the practice of making small and unconventionally secured loans to those generally outside the banking system. That is: for people without collateral, a credit history, or demonstrable employment, it’s a way that they can get additional money to finance their small business. As you could probably expect, this is done primarily in “third world” countries, where there are a number of people without access to conventional banks.

Built upon the old adage that, “you’ve got to spend money to make money,” it’s argued that microcredit, by allowing the previously unable to start businesses, is a innovative way to fight poverty. Last year, Bangladeshi Muhammad Yunus won the Nobel Peace Prize for his work creating and running the microcredit Grameen Bank.
Muhammad Yunus
The Grameen Bank, like many micolenders, loans mostly to women. This is based on the idea that women are more responsible when supplied with credit and are thus less risky borrowers. And though we could condemn such lenders for sexism, I don’t think we should. After all, with few other ways to secure such loans, the banks have to use simplistic ways to assess risk. Another rating factor they use, with much success, is to have other community members assess the borrowers creditworthiness.

Recently, Mr. Yunus has himself come out against microcredit–of a certain stripe. As microlending has gained prominence and recognition as a potentially profitable lending scheme, more and more for-profit banks are getting into the game. This is bound to create waves in a field previously dominated by not-for-profit lenders or those that share their profits with their customers, as Mr. Yunus’s Grameen Bank does.

Though Mr. Yunus doesn’t deny that for-profit lenders can also bring people out of poverty by their lending, he argues–as on recent episode of PBS’s NOW–that the goal of microcredit institutions should only be to bring people out of poverty. That for-profit banks often charge higher fees than not-for-profit microlenders is Mr. Yunus’s main concern. Though the lenders argue that they simply need the fees for their administration expenses, many doubt this to be true.

Some have also made the point that Mr. Yunus and other microlenders don’t have much evidence that their programs are any better at bringing people out of poverty than conventional welfare-style programs. Though these critics don’t actually argue that microcredit is less efficient than such programs, they are rightly skeptical that it is the miracle cure that some have tried to make it–after all, countries still need basic infrastructure to allow businesses to succeed. Such skepticism is probably merited, but it hardly a reason to ignore microcredit’s strengths.

One of the most interesting things about microlending is that you can do it. You won’t make any money, but Kiva, an American non-profit, allows people like us to make microloans in $25 chunks–you can loan no less, but you can also loan much more. You earn no interest on the money you lend, but you can relend your $25 dollars when it’s paid back.

Strictly speaking, Kiva loans have no guarantee of repayment. The organization boasts that 99.7% of their loans are repaid in-full and on-time. And though microlending isn’t actually charity, a 99.7% chance of your money doing exactly what you want it to–and then being returned–is better than any conventional charity can offer.

Though most doubt that microlending can end poverty by itself, it’s certainly a step in right direction. And even if I don’t think giving to conventional charities should be replaced by microlending, that doesn’t mean that microloans cannot be a portion of one’s giving.

2 responses to “Good to Know: What is microlending?”

  1. I’d heard about microlending a few years ago and it sounded promising. Thanks for posting about it, reminding me, and also for posting about Kiva. I’d never heard of that before, and I might just add it into my rotation. Have you heard much about them, in terms of reputation?

  2. Kiva’s been working perfectly for me for about a year. You put in the money, after the term ends, you get the money back. I’ve never really heard a bad thing about it.