Microcredit lending: Small loans; big payback
Last Updated November 10, 2006
(Note: The 2006 Global Microcredit Summit takes place in Halifax Nov. 12 to 15, 2006. The gathering brings together 2,000 delegates from more than 100 countries, including the winner of the 2006 Nobel Peace Prize, Muhammad Yunus.)
Some people may have been surprised when the Nobel Committee awarded the 2006 Peace Prize to Bangladeshi banker Muhammad Yunus. But if ending poverty promotes peace — and there is little disagreement on that point — then Yunus surely merits the honour.
Muhammad Yunus celebrates in Dhaka, Bangladesh, after winning the Nobel Peace Prize. (Pavel Rahman/Associated Press)
The Grameen Bank he founded is generally credited with being the most successful "microcredit" lender in the world — building an organization that's spawned similar projects in many other countries. While some microcredit operations were around before Grameen Bank's, it is the Bangladesh effort that is now acknowledged to be the most influential.
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.
Nancy Wilson interviews Muhammad Yunus who is in Halifax this week, taking part in the Global MicroCredit Summit. (Runs 7:19)
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."
It is a refreshingly optimistic vision of humanity.
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."
How effective has microlending been?
In 1997, delegates from 137 countries gathered at the Microcredit Summit in Washington to launch an ambitious campaign goal — to provide microloans to 100 million of the world's poorest families by the end of 2005.
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).
Microlending programs report very high repayment rates — usually in excess of 95 per cent. Many of the programs are entirely self-financing. A 2002 Wall Street Journal story said the Grameen Bank was in financial difficulty, but Yunus denied that, saying the bank was in its "strongest position ever." In 2005, Grameen Bank reportedly made a profit of more than $15 million US.
Microloan projects are also offered in several big American inner cities. Bill and Hillary Clinton said the Grameen Bank project served as a model for microlending activities in some of Arkansas' poorest communities.
Microcredit has its critics — those who say the programs often fail to reach the poorest of the poor, or lead to gender conflict, or charge interest rates that are too high. And its supporters acknowledge that microcredit is no panacea.
In the Nobel Committee's citation, it noted that Grameen Bank and its founder want to eventually eliminate world poverty. "That vision cannot be realized by means of microcredit alone," the citation read.
"But Muhammad Yunus and Grameen Bank have shown that, in the continuing efforts to achieve it [the end of poverty], microcredit must play a major part."
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