Microcredit and Pre-Bankability

by James & Miel on November 4, 2009 · 0 comments

In 2006 Muhammad Younus and the organization he founded, the Grameen Bank in Bangladesh was awarded the Nobel Peace Prize for their work in providing loans to the poor in an effort to provide a means of self-employment and a hopeful path out of poverty. As he tells in his book, “Banker To The Poor: Micro-Lending and the Battle Against World Poverty”, the idea first came about when he loaned $27 of his own money to a group of stool makers in a tiny village. He famously talks in his book about how those individuals just needed a little bit of money to buy the basic materials necessary to start their business and eventually work their way out of poverty.

The essential idea of microloans is the extension of credit to those impoverished individuals with limited employment and credit history who lack the necessary collateral or other means to obtain a loan (sometimes referred to as “pre-bankable”). The loans provided to those people would be used to start a business, hopefully kick-starting an entrepreneurial enterprise that would not only benefit the individual acquiring the loan, but also other impoverished individuals as the business gets off the ground. Microcredit is considered more of a sociological initiative than a financial one, as it is viewed that helping small businesses in poor areas benefits everyone in the community. Most of the loans made are relatively small, or like in the case of organizations like Kiva, made up of a series of very small loans.

Despite the publicity and goodwill directed towards microcredit, it is not without its detractors. Some argue that external governments who provide microloan assistance become more likely to cut back on more direct-funding aid. Also, the argument has been made that issuing credit in these types of situations is no different than credit cards and consumer spending: the borrowing can be sucked into a cycle of lending that fails to improve their financial standing while making them more and more dependent on those loans. And of course there are instances of corruption. Kiva has been the target of a fair amount of criticism, mostly centering on the interest rates that are set for the loans, which can be relatively high. Kiva defends their rates by making the argument that those loans are extremely high risk, and are expensive to provide to those in under-developed nations. Additionally, Kiva has opened up microlending to the United States, a decision that was met with a sharp outcry. Kiva’s critics argued that while the poor in the United States are certainly in need of assistance, they still have access to education, limited health care and government assistance, services not available to those in the developing world.

Microcredit is certainly not a perfect model for eradicating poverty world-wide. The Grameen Bank has provided great services to the poor in Bangladesh, but has also sparred with the World Bank, an organization with wide-spread influence in the fight against poverty. From a ideological standpoint, Younus has faced opposition from heads of government and skepticism from fellow economists (he once referred to credit as a “human right”) but there’s no question that despite the criticisms, microlending has made a significant impact in the fight against poverty. This type of aid (and although it is a loan, I would still consider it aid, due to the high risk involved and the individuals targeted) goes directly to the person most affected. Whether it is successful or not, it provides an individual the opportunity to improve their standing in life, and sometimes all that is needed is the opportunity.

If you want to learn more about the development of microlending, I suggest you read Younus’ book – “Banker to the Poor” and check out websites like Kiva.

-Twitter: @michael_dink

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