Microloans - A Win-Win for Everyone

Microlending is the process of giving very small loans ranging from $50 to a few hundred dollars to entrepreneurs in developing countries. These relatively small loans, known as microloans, are used to promote grass-roots economic development, and have so far proven to be a very effective means of boosting the standard of living for participating borrowers, as well as the overall economies of participating countries. Although at first the idea of lending money to the poorest people in the world does not seem to make financial sense, in fact, it does.

Microloans are made typically at the prevailing commercial loan rate, and have a repayment rate between 90 to 100%, depending on the particular country (Bell et al., 346-7, 2006). Not only is this good news for entrepreneurs seeking such loans, but for lending institutions as well. With such an attractively high repayment rate, many lending institutions have come to consider microlending as very profitable venture. So far this seems to be one of those rare win-win situations for everyone.

But why do microloans have such high repayment rates, often times higher than repayment rates found in developed countries? Essentially the answer boils down to human psychology, pride, and the importance of feeling productive. In developed countries, repaying a loan is often regarded as a necessary evil, or as part of a larger financial plan. For borrowers in developing countries, however, being given the opportunity to receive a loan is in itself a matter of pride (someone has enough faith and trust in you to lend you money) so repaying the loan is of utmost importance to the borrower’s sense of self-worth.

One well known organization that uses microloans as a way to help women rebuild after war is Women for Women International. In countries like Afghanistan and Bosnia, Women for Women International organizes women into “entrepreneurial groups” that are responsible for repaying microloans after being giving the necessary entrepreneurial education and skills. In this way group members hold each other accountable for repayment and as well as provide support to each other during the process of establishing their small businesses (WomenForWomen.org). This is just one example of what used to be a traditional charity that has now embraced the idea of grass-roots economics by providing such loans.

Another important point that should be noted is many of these microloans are going to women around the world, rather than to men. According to the Microcredit Summit Campaign women are better candidates for microloans in developing countries for a variety of reasons including; being a good credit risk, investing more in their children and families which leads to the better care, education, and social development of the next generation, and raising women’s social status by allowing them to generate household income (MicrocreditSummit.org). By granting loans to women, cultural and societal development is encouraged along with economic development.

Although microlending is not a new concept, in recent years it has grown in popularity due to the ever increasing data that supports its effectiveness. Microlending helps developing nations by giving impoverished people the chance to start businesses, increase their sense of self-worth, boost their economies, and provide secure returns to investors. The idea of “charity,” or simply handing out goods and money, is not as beneficial to developing economies or to individuals as are microloans. For everyone involved, microlending is a beneficial practice that is both economically sound and socially ethical.

Sources:

Bell, Donald A. et al. (2006). International Business: The Challenge of Global Competition. Mc-Graw-Hill Irwin. New York, New York. P. 346-7.

Microcredit Summit Campaign. “About the Microcredit Summit Campaign - Why Target Women?” Reference URL: http://www.microcreditsummit.org/aboutmicrocreditsummit.htm

Women for Women International. “Microcredit Lending Programs.” Reference URL: http://www.womenforwomen.org/mlp.htm

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