What is Micro Lending?

By Barbara Serating

Imagine if you lived in an undeveloped country and you wanted to improve the quality of your life. Perhaps you wanted to purchase several cows to start a small dairy business in an impoverished company.   How do you get the financing to start this business venture? You have no money saved to purchase even one cow and what is even worse is the fact that you don’t have a credit history and a weekly paycheck coming in.

There is a way to get the money that is required to either purchase cattle or start a small business.  This money is available particularly in countries with low employment and a great deal of poverty. That is what mircolending, or micro financing, is all about. By definition, micro lending is the lending of small monetary loans to people who cannot turn to conventional banking institutions to raise the capital that is needed.   Micro lending loans can be for as little as $20 which is paid back over a period of time.  The money is loaned to people without collateral, credit history and employment.   These loans are usually outside of the banking system and have higher interest rates.

The loans are known as microfinance since they involve small amounts of money. Micro lending has been known to end poverty for some people living in a country such as Bangladesh.  The capital needed may be raised by private investors who may purchase a gift certificate of $25 and chose who they want to lend the money to.  If a poorer country receives a microloan of $1000, that money can buy a great deal of inventory as compared to going to a micro lender in the United States, which has a higher cost of living.

Women are offered loans from micro lending facilities. Grameen Bank is a micro lender to 95% women. They have had 97% of their loans paid in full. They can offer microloans in $25 amounts.  Kiva.org also loans money in $25 increments with a very high repayment rate. Here one can give a grandchild a gift certificate of $25 while choosing who they want to lend the money to.  The success rate of getting the money back is excellent.

Micro lending is all about low income, minorities, disadvantaged people that can never receive the money from a conventional lender.  These loans have more flexible terms and in most cases, the borrower could not qualify for any other type of funding.  This money can empower poor people to find a way out of poverty.

People who manage these types of loans have been referred to as “bankers on bicycles.” These people speak the native tongue and get on bicycles and ride out to the villages and meet the borrowers weekly in the village. A two year loan might have an interest rate of 31%.  They are small loan amounts and are usually successfully paid back.  They are a great resource for entrepreneurs.  They are dependent on donors for funding. There are greater than 400+ Latin American micro lenders.