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Loans

Microcredit: Why It's Such a Powerful Idea

Editor's Note: In this column that appeared in the May 2005 issue of <i>Kiplinger's Personal Finance</i> magazine, editor-in-chief Knight A. Kiplinger extolled the benefits of microloans, a subject in the news now as microloan pioneer Muh

Nearly 30 years have passed since a Bangladeshi economist began making tiny cash loans, at moderate rates of interest, to impoverished local artisans so that they could buy materials to make crafts to sell. Muhammad Yunus demonstrated to skeptical financiers that small loans made to people with no collateral except their integrity and a will to succeed would be repaid -- and could also lift both the borrowers and their communities out of abject poverty.

Today, with loans of just a few hundred dollars or less, microborrowers create vibrant businesses that their communities need. These aspiring entrepreneurs -- the vast majority of them women -- might use the money to buy a used sewing machine for tailoring, a cell phone to rent to neighbors for a few cents per call, or a potter's wheel and kiln.

A taxi ... or a cow

Borrowers can invest in a motorbike jitney to launch a taxi service. They may buy kitchen utensils and a wheeled cart to start a snack-food business, or a seed-oil press to make cooking oil. They can use their loans to start a beauty salon or maybe a dairy, with the purchase of a cow and a refrigerator.

Microcredit is now a growth business for big commercial banks. They've discovered that the world's poor will gladly accept interest rates that might seem high to you and me -- sometimes as much as 20% a year -- rather than fall prey to local loan sharks who gouge them for ten times those rates. And the poor are excellent credit risks. The default rate on microloans averages less than 2%. Perhaps that's because he very survival of the entrepreneurs' families is dependent on the success of their tiny enterprises.

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Since the founding of Yunus's Grameen Bank in 1976, microlending has exploded. The United Nations has declared 2005 the International Year of Microcredit. Millions of poor people, on every continent in some 60 nations, now have access to microcredit programs sponsored by nonprofit philanthropies, the World Bank and commercial giants, such as Citigroup, ING, Credit Suisse, Deutsche Bank and India's ICICI Bank. And plans are afoot to package microloans into marketable securities to sell to institutional investors, such as mutual funds, insurance companies, pension funds and college endowments.

As a weapon against poverty in the Third World, microcredit ranks up there with education, free trade, public health services, and the spread of political and property rights for women. (Microcredit also works in the U.S., with somewhat larger loans.)

Make your money count

You can join this powerful global movement by providing your own capital to microcredit charities, as either tax-deductible donations or low-interest loans. Here are some possibilities: Opportunity International (www.opportunity.org); Accion International (www.accion.org), which lends money overseas and in nine U.S. states (mostly to immigrants); Women for Women International (www.womenforwomen.org); FINCA International (www.villagebanking.org); Unitus (www.unitus.com); Grameen Foundation USA (www.gfusa.org); Oikocredit USA (www.oikocredit.org/sa/us); and Calvert Social Investment Foundation (www.calvertfoundation.org), which accepts donations for microcredit programs in the U.S. and abroad. You can also lend the foundation your money -- with little or no interest income to you, as you wish -- by buying Calvert Community Investment Notes.

Milton Friedman, the free-market economist and Nobel laureate, once observed, "The poor stay poor not because they are lazy, but because they have no access to capital." Your support of the microcredit revolution can help ensure that access.

See today's AP story about Yunus.

Columnist Knight Kiplinger is editor in chief of this magazine and of The Kiplinger Letter and Kiplinger.com.