Microcredit

Microcredit is a relatively new form of international aid that helps people from poor countries by giving out small loans to individuals to fund small business. This system started in the 1970s with Muhammed Yunus, an American trained professor of economics, who began giving the first micro-loans in his native Bangladesh. Initial reactions to this enterprise were very negative, with arguments such as the poor would not be able to save or would default on the loans. Today microcredit institutions have overcome those arguments and are now loaning money to five million people. Recently the film Small Fortunes: Microcredit and the Future of Poverty made by BYU’s Center for Economic Self-Reliance aired on PBS and discussed the pros and cons of microcredit.

Businesses funded by microcredit aren’t elaborate by any means, but they allow the receivers of the loans to perhaps double their income. In many cases this takes the receiver from a step away from starvation to a respected and prosperous member of the community. Every month the receiver pays back a portion of the loan with the money they are receiving from their new business.

The loans themselves are small and interest free, so no one is going to make a profit from the business of micro lending, but it has potential to help every poor person who can come up with a business plan. The businesses are things like making market bags out of old cement bags or raising chickens. They are things that don’t require a lot of capital to start, but the people who receive the loans don’t have that little amount of capital to start the business on their own.

This kind of aid is useful because it is not just a handout. The people are required to work hard, give back the money they borrowed, and become self reliant. Surprisingly, almost all the loans do eventually get paid back, even though there is little that the lenders could take away from the receivers if they defaulted on the loan. This system also re-supplies itself so it helps many people, not just a few. The money goes out, comes back in, and can go out again.

Although initially microcredit began by giving loans to both women and men, now about 96% of all the loans at the Grameen Bank and the majority of loans at other institutions are given to women. Lenders found out that women are more likely to actually repay the loans, while the loans to women also have a more direct affect on the family. Women are the primary caregivers to children, so when their situation improves the situation of the children improves as well.