What are Micro Loans
Micro loans are “very small” loans that are given either to existing small businesses or to start-ups that need a small “take-off” or consolidation loan.
There is a difference between regular small loans and micro loans – micro loans are typically given to very poor unemployed people who may not have a proper credit history.
These loans are mostly given to very poor entrepreneurs who have the ideas, but no money or collateral to pledge. In fact, the idea behind giving micro loans is to motivate entrepreneurs. TheseMicro loans are part of a larger micro financing concept, which also includes micro savings and insurance plans.
What is a micro loan used for?
A micro loan can be used to start a new business, for working capital, to buy raw material or office equipment or machinery. The purpose behind a micro loan must be to spur business.
What are the economic principles of a micro loan?
Micro loans came into being for two reasons – one, to encourage entrepreneurship at the bottom of the economic ladder and help people rise up, and two, to stop loan sharks from exploiting poor people. Aside from these noble economic principles, micro loans also help build trust between the lender and the borrower.
These loans also help generate employment by encouraging new business formation. Most of all, these loans help people help themselves through some very difficult times and situations.
Micro loans on the web and in developed countries
Many online organizations like Kiva.org help poor and unemployed people around the globe get microfinance loans. These online organizations facilitate peer-to-peer lending model.
For example, Kiva.org allows lenders to contribute as little as $25 towards a loan. The website is already connected with several micro loan companies (termed as field partners) around the world, and has several loan requirements at any one point of time.
The lenders, who are close to a million as on September 2011, can pick and choose loan projects that they would like to lend to, and each lender can start by lending as little as $25. The lender is given online status updates on how his financed project is progressing, and once the project achieves closure, he is repaid back.
The interest that is levied is negligible and Kiva.org does not get a cut. Kiva’s current repayment rate is 98.87% and once the loan is repaid, the lender can then withdraw the amount or use it to give another loan.
Kiva aggregates the small loans from different lenders and disburses the whole loan after the required loan amount is received. It is at sites like Kiva is that people in the developed world get a chance to help people in poverty-stricken nations lead a better and fuller life, and in turn, generate employment within their community.
It is interesting to note that though many Americans believe in investing in micro loans, and such loans are also available for Americans, their demand in America is severely limited. According to a report by the U.S. Census bureau, 15% of Americans live below the poverty line.
This makes a strong case for Americans taking micro loans, but strangely, poor Americans do not take micro loans because they think it is not possible to remove poverty by taking loans from private enterprise (as per a study conducted by John Murdoch of New York University).
What are a micro loan’s characteristics?
- There is a cap on the maximum loan amount that be availed by a borrower. For example, Kiva’s average loan value is $385. There is a maximum term for which the loan is given.
- It is very easy to get micro loans. Borrowers don’t have to go through the conventional banking formalities. However, borrowers’ credit histories are checked by partnering micro-financing institutions and the loan usage is adequately monitored by volunteers.
- The donor organization pays the amount to its partner institution, which in turn forwards it to the borrower.
- These loans are community-driven. For example, a partnering micro finance institution may specialize in disbursing seed loans to farmers in a certain global location.
- The partnering micro finance institution does its best to secure the loan with collateral.
- The borrower has to convince the lender and the partnering micro finance institution that he is skilled enough to conduct the business and that he has made adequate plans of infusing the loan into his business and of repaying it back.
- Micro loans are given to entrepreneurs who want to start their own business and generate employment within the community.
This was the answer to the question, “what is a micro loan?” If you are interested to alleviate poverty and make the world a better place to live in, then you must seriously consider investing in micro loans.
Try a Micro Loan with Kiva.org Today!