Module 4: Get Stronger

What Is Microlending?

Muhammad Yunus, a professor in the Asian country of Bangladesh, is credited with formalizing microlending as a way to support small businesses. When Prof. Yunus visited the village of Jobra in 1974, he learned that to buy their supplies, basket weavers relied on predatory money lenders who charged exploitive interest rates. The professor decided to loan $27 to a group of 47 families which enabled them to produce goods and sell them for profit.[1] This led to the creation of the Grameen Bank in Bangladesh. Grameen provided collateral-free loans to mainly women, who invested the money they borrowed into productive activities that improved the quality of life for their families.[2]

Eliminating the requirement of the borrower having collateral was very significant. Collateral is some kind of valuable asset such as money or property that the borrower promises to back up their agreement to repay the loan. If the borrower is unable to repay the loan, the lender can take the collateral to compensate for the failed loan. Requiring the borrower to have collateral protects the lender but it makes getting a loan difficult for a new or struggling business that does not have anything valuable to use as collateral.

Currently in the U.S., one of the most well known microlending programs is run by the Small Business Administration. This program provides loans of up to $50,000 for starting or expanding a small business.[3] Although some collateral is often required, the eligibility requirements and terms of these microloans are more flexible than traditional bank loans. For example, the microlender might decide to provide the loan based on a business plan and anticipated sales for business just starting out while a traditional lender would want to see proof of past income from actual sales that would only be possible for an established business to provide.[4] Some of these microloans are made by nonprofit organizations that also provide business services to increase the chances that the borrowers will be successful. These services might include mentoring, networking opportunities, and assistance with sales and marketing.[5]

Does microlending alleviate poverty?

To what extent does microlending address the root causes of poverty, and are there other strategies that might be more effective in tackling systemic issues?

To learn more about microlending, check out these microlenders:

  • Kiva lends all over the world. Individuals who wish to lend or borrow may use their platform.
  • Accion Opportunity Fund offers loans ranging of up to $100,000 for entrepreneurs who have been in business at least 12 months, own at least 20% of the business, and generate $50,000 or more in annual sales. They also provide business education, coaching, and support networks.
  • Grameen America is an offshoot of Prof. Yunus’ Grameen Bank that provides microloans of up to $15,000 to women living below the federal poverty line. Applicants open bank accounts and receive financial education before getting their loans. They have six months to repay the loans, during which time they receive ongoing support. Once the loan is repaid, the borrowers become eligible for larger loans.

  1. Wright, Graham, Samveeet Sahoo, and Anik Chowdhury. “Bangladesh – The Basket Case That Taught Microfinance to The World.” Microsave.net, August 5, 2021. https://www.microsave.net/2021/08/05/bangladesh-the-basket-case-that-taught-microfinance-to-the-world/. ↵
  2. Wright 2021 ↵
  3. Small Business Administration. “Microloans.” Accessed November 28, 2022. https://www.sba.gov/funding-programs/loans/microloans. ↵
  4. Wells Fargo. “Microlending and Your Small Business.” Accessed November 28, 2022. https://www.wellsfargo.com/biz/wells-fargo-works/women-owned-business-resources/managing-your-money/what-you-should-know-about-microloans/. ↵
  5. Axelton, Karen. “What Is Microlending?” Experian.com, May 18, 2021. https://www.experian.com/blogs/ask-experian/what-is-microlending/. ↵