Microlending/Microfinancing: designed for the Third World, now also for USA-citizens.

[Maastricht]

Microcredits is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs and to others living in poverty who are not considered bankable. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor.
Microcredit is a financial innovation which originated in Bangladesh where it has successfully enabled extremely impoverished people to engage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty.
Due to the success of microcredit, many in the traditional banking industry have begun to realize that these microcredit borrowers should more correctly be categorized as pre-bankable; thus, microcredit is increasingly gaining credibility in the mainstream finance industry and many traditional large finance organizations are contemplating microcredit projects as a source of future growth. … the United Nations declared 2005 the International Year of Microcredit.

This year, microlending has taken a foothold not just in the worlds poorest countries, but also in one of the worlds richest; the U.S.:

Strikingly, Grameen Bank not only provides microloans in poor countries, but also in the world’s richest country, the USA, where 37 million people (12.6%) live below the poverty line.
Grameen Bank started this operation in New York in april 2008, because the economic crisis created a need for this sort of aid. Grameen Bank founder Muhammad Yunus: “About a quarter of the US population cannot get a microloan from the traditional banks because they do not fit the profile of the perfect customer.” And this has only gotten worse with the mortgage crisis. This results in a huge market for a bank like Grameen. The plan is to give out 175 million US$ worth of loans over 5 years. If successful, Grameen will also start giving out mortgages for the poor (nicknamed sub sub sub subprime). An earlier attempt at microloans in the US, at the request of Bill Clinton when he was governor of Arkansas, failed because there weren’t enough lenders, but the situation has changed now. According to economist Jonathan Murdoch of New York University, microloans have less appeal in the US because people think it too difficult to escape poverty through private enterprise.

I think this is a great developement. There have been experiments with microlending to entrepreneurs in the USA’s biggest cities for a couple years now, and so far they have been succesfull. Microlending keeps loan sharks out of business. Weird fact: although sex discrimination is illegal, about 95% of the loans are extended to women, as they have a better pay-back record.

I didn’t see a thread on microlending in the USA on SD, and I thought it was enough of an interesting development to merit a thread.