Micro Lending August 25
Micro lending – which involves loans of small amounts – got its start as a research project meant to study the possibility of designing a credit delivery system targeted to the rural poor. In 1983 the project – created by Professor Muhammad Yunus of Bangladesh, India – was transformed into the Grameen Bank.
Grameen became the first micro-lending institution in the world, and it has loaned about $7 billion dollars’ worth of tiny loans. Many of the loans, for example, are in amounts equaling only $20 or $30 dollars. The bank boasts a repayment rate of more than 98 percent, even as conventional banks face mounting losses and defaults in the current global credit crisis. Yunus was awarded a Nobel Peace Prize in 2006 for his revolutionary ideas and work to help the poor and disadvantaged.
Now the idea of micro loans – which often amount to $100 or less – has caught on in the USA via the Internet. By combining online banking systems with the popularity of cyber-based social networks like Facebook and MySpace, a new breed of unconventional lenders is cropping up on Web sites such as Prosper.com or Zopa.com. The fast-growing sites are populated by registered members who borrow money or make loans to each other, through a type of bidding process not unlike the bid systems used to trade items on eBay.
The way it works is that a member will post a description of their loan needs, along with the interest rate they are willing to pay. Those who want to loan that amount at the desired rate can then agree to the transaction, send the money, and await repayment – which includes interest charged.
Before offering a loan users can check out a borrower’s credit, income, and other financial data – which is collected by the company that runs the site. Because of the potential risk involved in this untested type of loan market, rates charged are usually higher than those available at large banks. But it is much harder to qualify for a loan from a bank; so many consumers are now turning to these new micro loan sites for an easy solution to their borrowing problems.