Saturday, January 29, 2011

Micro loans; help or scam?

I  heard a segment on micro loans on NPR this morning. An 18 year old committed suicide, apparently because her parents, with whom she was living, had 8 micro loans out.  They had spent the money on essentials and other items rather than on the vegetable farm they told the loan company they were starting, and now had no way to repay the loans.

Micro loans are loans of small amounts, such as $100, to poor entrepreneurs.  For instance, a woman might take out a loan to buy a sewing machine so she could make clothing to sell.  Generally, there are social aspects to the loan as well,  where the applicant has to go to monthly meetings to get education and support from loan officers as well as fellow loan takers. The goal is to make poor people self-sustaining by helping them start their own business.

A recent study claims that 10 million people in Bangladesh have been helped by micro loans [] .  But there are also companies that are misusing the micro loan procedure to make money on the backs of the poor.  So, it seems to depend on whether the loaning agency is reputable or not how well this works.

Grameen Bank [] was one of the first promoters of these loans.   Muhammed Yunus won a Nobel prize for his work in micro loans. is another reputable organization.  There are even micro loan programs in the U.S., such as ACCION USA.

So it seems that the process is sound, so long as the loaning agent does due diligence to make sure the loan is being used for its actual purpose, and the person taking the loan stays in the program to stay on track.

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