What is Microlending?

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Communities around the world have looked for new ways to jump-start their economies and support local businesses. One of the more recent and popular methods for keeping up the money flow is called microlending.

Microlending is a process of providing very small loans to poor borrowers--usually to people who lack real assets or have poor credit history. It was started in the 1970s through the Grameen Bank in Bangladesh and the ideas of Professor Muhammad Yunus, who wanted to help local women and impoverished communities lift themselves up to prosperity. While most people turn to banks for loans, high interest rates and a need to hold assets as collateral often mean that banks will turn away the poorest borrowers.

Rather than provide a charitable handout, a microlender provides a small affordable loan to a local entrepreneur or to a group of people in the community who can start a small business. With loans as small as ten or fifty dollars, the money goes toward buying capital (like seeds or farming equipment). After a set time has passed, the loan is then paid back from the profits that the local entrepreneur has made. In theory, this allows impoverished families and communities to lift themselves out of poverty and create new trade and services in the larger economy.

Most of the original microlending came out from small financial institutions like the Grameen Bank and other nonprofits. New microlending platforms have also emerged on the Web, creating peer-to-peer networks to provide microloans and microfinance to thousands of entrepreneurs in the developing world, as well as in Western countries.

While microlending has been in practice for decades, the impact it's had on poor families and communities is still in question. While its supporters say that borrowers are better at earning profits and raising revenue to pay back their loans, critics claim that the microloans do not actually allow most individuals to change their fortune and escape their poverty. And in some cases, microfinance groups have been found to charge high interest rates  in spite of the small loan amount they deliver. However, there have been more positive effects like a rise in local employment and better wages.

If you want to get involved as a microlender, it's possible to get set up online with a credit card and a PayPal account. There are organizations that also specialize in microlending, such as the Grameen Foundation and Accion East and Online.

Image by WOVOC on Flickr

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