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What is Microlending?

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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 16 September 2016
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Microlending is an interesting approach to trying to encourage self-sufficiency and end poverty especially in developing countries. The idea may have been first begun in Bangladesh, and it is now a popular one. Essentially, very small amounts of money are lent to usually very poor people, who have at present, little way to pay the loans back. These people are often called fledgling entrepreneurs because with a small loan they may be able to start a successful business, repay their loan eventually, and raise their income status dramatically.

There are for profit companies that practice microlending, but many companies are not for profit. A certain amount of interest is charged to keep the company working, but beyond that, non-profit types don’t hope to make huge amounts of money on loan transactions. Instead, most merely hope to help people who would otherwise be unable to get a loan, and this help though small and minute, can make a huge a differences.

Though the majority of microlending companies operate in developing countries, there are microloans and microlenders in places like the US too. The trouble is that loan amounts may need to be higher in countries with a higher cost of living. Those lenders who work in poorer countries can make a smaller amount stretch much farther.

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Some microlending companies depend on loans from private individuals. One such company is Kiva. Individuals can loan money in $25 US Dollars (USD) increments and choose entrepreneurs from Kiva’s database to fund. Kiva boasts a high repayment rate on their loans, but individuals do have a little risk when they lend. However, when loan amounts are small, people may view their lending as a charitable enterprise and don't worry too much if the money isn’t repaid.

There does seem to be preference in microlending to loaning money to women. Women may be able to start small businesses that help them raise their incomes and they are often viewed as more reliable when it comes to paying back loans. Not everyone is able to repay a microloan, and some people do end up borrowing from more than one agency, and then using loans from one agency to repay the loans or payments from another. There can also be some unsavory aspects to this lending especially when banks that operate for profit in less developed areas control it. People can be threatened if they don’t repay loans in a timely fashion, though many organizations operate in a completely reputable manner.

Some critics of microlending say that there is an inherent problem with privatizing these tiny loans to others. If microloans become greatly successful it might discourage governments from either developing or keeping programs designed to help the very poor. Concern does exist too about the way some microlending agencies operate, as they may have fewer regulations than would any government-lending program, and tendency to abuse the system or those seeking loans can exist.

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