Microcredit lending: Small loans; big payback
CBS News (Nov. 10, 2006)
While not a strict requirement, the reality is that most of the loan programs are targeted to women. The Microcredit Summit Campaign says it's found that women are more likely to repay their loans in full and are more likely to use the money to improve their families' lives. They are, in the words of the Grameen Bank, "the best poverty fighters."
...A 2005 progress report noted that more than 66 million poor families had been helped as of the end of 2004, representing more than 330 million people. The summit campaign believes the 100-million goal will be reached by the end of 2006 or 2007.
Microcredit lending is now carried out by more than 3,200 organizations in dozens of countries in Africa, Asia, and Latin America. The longest-running microlending enterprise — that of Grameen Bank — has loaned $6 billion US to 6.6 million borrowers in more than 71,000 Bangladeshi villages since 1976 (96 per cent of the clients are women).
... What is microcredit?
The Microcredit Summit of 1997 defined microcredit as any program that extends small loans to very poor people for self-employment projects that generate income. Definitions of what constitutes a "small loan" may vary from one country to the next, but many of the loans are as small as the equivalent of $30. Most loans are under $200.
A typical loan might see a woman borrow $50 to buy chickens. The chickens would produce eggs and, eventually, more chickens — all of which she could sell in the marketplace. Every week, she and other local loan recipients will gather to make loan payments — tiny weekly installments that makes repayment much easier for the borrower. The clients also share success stories. Peer support is an integral part of the microfinance system. The loan will be fully repaid in six to 12 months and the money will then be re-lent to someone else in the community.
The loans are usually fronted by non-profit groups that are typically owned by the borrowers themselves. One becomes an owner simply by borrowing. The loans granted by microfinance institutions (MFIs) usually carry an annual interest rate of 15 to 35 per cent (although some loans are interest-free). That may seem high to Western borrowers, but it reflects the high costs they face in running their programs and meeting every week with their clients in the clients' home villages. For most of the borrowers, the only alternative to a microloan is the local moneylender and interest rates that can quadruple the cost of a loan in just one year.
MFIs also don't just loan money. They also offer entrepreneurship and life-skills training, such as literacy and nutrition counselling.
...What are the lending criteria?
The typical recipient of a microloan is very poor. They struggle to survive every day, often living on less than the equivalent of $1 US a day.
Unlike other types of loans, microcredit loans never require collateral. Being desperately poor is all it takes to qualify. Formal contracts are usually not drawn up. The loans are based on the premise that credit is a human right and that everyone has skills that can be harnessed. Even beggars can get loans.
"Conventional banks look at what has already been acquired by a person," Yunus wrote. "Grameen looks at the potential that is waiting to be unleashed."