Posts Tagged ‘microloans’

Microfinance Hits A Wall In India

Wednesday, November 24th, 2010

The great microcredit experiment in India was a wild success… but now it’s on the verge of collapsing entirely.

  • Politicians in India are accusing microfinance institutions of taking advantage of poor borrowers, and encouraging borrowers not to pay back their loans.
  • Microcredit is one of the only ways that poor people around the world can get loans to start small businesses. And in India, microfinance has become a booming industry in recent years.
  • Unfortunately, many people who receive microloans won’t be able to pay them back. So the loans tend to be really small, and their interest rates are really high. That means that entrepreneurs who do pay back their loans cover the cost of those who don’t pay.

Facts & Figures

  • Indian banks have about $4 billion tied up in the microfinance industry
  • In the past few weeks, less than 10% of borrowers made loan payments
  • SKS Microfinance charges a 24% interest rate on its microloans

Best Quote

“The money lender lives in the community. At least you can burn down his house. With these companies, it is loot and scoot.” – Reddy Subrahmanyam, Senior Official of the Indian Government

When is a pig better than cash?

Wednesday, October 21st, 2009

For many of the poorest people around the world, holding onto cash is just as difficult as getting their hands on it in the first place. For one thing, lacking food or basic necessities, there are immediate needs that cash will go to right away. Nothing is invested, which makes it harder for a person to make more money and eventually, escape from poverty. Too many hungry children or parents in desperate need of medicine siphon off cash as soon as it appears, trapped in an endless cycle of poverty.

For this reason, many microfinance and poverty-alleviation institutions are making loans of durable goods like pigs, bicycles, or refrigerators rather than cash. These are called in-kind loans. It’s much harder to give away pieces of a pig (until it’s eventually butchered of course), so it tends to last longer – hopefully long enough to grow from a small, inexpensive piglet to a fat hog that will fetch a good price at the market and allow its owner to repay the loan and, hopefully, reinvest the profit.

This isn’t to say that cash loans don’t help – they can save lives – but it’s also important that the people receiving the loan know how and are able to turn that cash into a durable asset that will reap greater returns and profit in the long term.

Microfinance is…

Thursday, October 8th, 2009

Microfinance is a range of financial services targeted at people “at the bottom of the pyramid” who don’t have access to regular financial products like credit, savings and insurance. When people talk about microfinance, they are often referring to inreasingly popular “microloans.”

What is microfinance?

Tuesday, September 15th, 2009

Microfinance is a way of providing financial services like savings accounts, loans, and insurance to poor people around the world. It is aimed at people who may not qualify for typical financial services because they have limited resources or there are no financial institutions where they live.

By not being able to access financial services that are available to most everyone in more developed countries, these people have little means of improving themselves and their society. The goal of microfinance is to break this cycle of poverty by empowering people who have great ideas, no matter how poor, with the tools and resources to achieve them.

A Microloan is…

Monday, June 29th, 2009

A microloan is a relatively small amount of money (usually from $100-$25,000) lent to an individual or entrepreneur to help him or her get a business up and running. Microloans are generally targeted at people who are unattractive to large financial institutions because they don’t have good enough credit or collateral and are therefore considered risky customers.

What is the difference between a microloan and a regular loan?

Monday, March 23rd, 2009

Normally, banks make loans to customers who need a large sum of money immediately to purchase a house or a car or to start a business. These customers are attractive to the banks because they promise to repay their loans with a significant amount of interest.

A microloan is a very small loan for individuals or entrepreneurs – often those living in poverty – who aren’t as attractive to traditional large financial institutions. Banks decide whether they want to lend money based on how likely they are to make a profit by doing so. Things they consider to make their decision are the size of the loan, interest rate charged, and the borrower’s credit quality (or the risk involved in lending to a specific person).

Microloans are available in the U.S., but they’re even more popular in developing nations with a high poverty rate. The average size of a microloan secured through the U.S. Small Business Administration is $13,000. The size of an average microloan worldwide is $1,026. To make up for the higher risk involved in lending to people who may not be able to pay back their loan, microloans often have a much higher interest rate than traditional loans. Interest rates on commercial loans in the U.S. are typically around 7-8%, but they can be more than 20% on micro-loans!

Still, microloans are important to the development of a struggling economy. They are sometimes the only opportunity a poor entrepreneur has to raise enough money to start up a potentially successful business.