Loans are generally made to make a profit. But what if the benefit were mainly for the person who takes the loan, rather than the person who gives it? Microloans have become more popular since the growth of the internet made loan-giving easier and less expensive.
A microloan is a loan for a small amount, generally given to households or businesses in third world countries to lift them out of poverty or enable them to establish themselves more securely. Many microloan groups are non-profit, so the principle will be returned to the lender sans profit. A more complete definition explains the development of microfinance as follows:
Historical context can help explain how specialized MFIs developed over the last few decades. Between the 1950s and 1970s, governments and donors focused on providing subsidized agricultural credit to small and marginal farmers, in hopes of raising productivity and incomes. During the 1980s, microenterprise credit concentrated on providing loans to poor women to invest in tiny businesses, enabling them to accumulate assets and raise household income and welfare. These experiments resulted in the emergence of nongovernmental organizations (NGOs) that provided financial services for the poor. In the 1990s, many of these institutions transformed themselves into formal financial institutions in order to access and on-lend client savings, thus enhancing their outreach.
An MFI can be broadly defined as any organization—credit union, down-scaled commercial bank, financial NGO, or credit cooperative—that provides financial services for the poor.” (see: www.kiva.org/about/microfinance/ for more information)
The difference the money makes to the borrowers is amazing. Many are women or groups of entrepreneurs who with a thousand dollars could make an extreme difference to their standard of living. Websites like www.kiva.org (with the catch-phrase “Loans that Change Lives”) provide a venue for lenders to view profiles and contribute to the borrowers. Poor people have a harder time gaining access to financing due to the difficulty and lower returns on micro-lending. However, the difference this makes in these people’s lives is astronomical.
