Microcredit: Creative Capitalism

Small loans enable economic independence in developing nations

| November 11, 2004

The traditional banking system isn't set up for the destitute. Though the poor in developing countries often need only $100 to become self-employed and self-sufficient, a large financial institution would, on the rare occasion when such a loan was granted, consider it a high-risk investment and charge an exorbitant interest rate. Banks involved in the microfinance movement, however, recognize that such small loans help eliminate poverty. These microcredit organizations -- of which there are now more than 7,000, serving 16 million people -- often target women living well below their country's poverty line, reasoning that a woman's economic status more directly affects children. Firms that extend microcredit have also modified the traditional banking by providing more client-centered services, supplementing loans with job training, facilities, and peer networking. They also encourage communities to pool their loans to ensure group repayment. In return, recipients have shown a higher propensity to repay the money than wealthier nations.

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