MICROCREDIT

In North America, banks provide different lending services such as loan, mortgages, and numerous other services. Consumers who want to borrow from a bank needs to provide some collateral. However, in developing countries much of the population doesn’t have sufficient assets to guarantee repayment and, as a result, banks unwilling to extend credit to these people. One way to solve this problem is to create a microcredit platform in developing countries. The goal of microcredit is to provide small loans to those without any collateral, in order to enrich people and allow them to escape from poverty.
This new way of lending money was introduced in the 1800s by Mr. Lysander Spooner who believed in the advantages of giving smalls loans to poor people who wished to become entrepreneurs. But it wasn’t until the 1980s that the practice was implemented on a large scale by Dr. Muhammad Yunus, a Bangladeshi banker and economist who won the Nobel Peace Prize for his ideas in 2006. His philosophy of microcredit consists of three aspects:
§ First, collateral is not required in order to lend money.
§ Second, the money is lent to a group of people and not just to one person. This system, called ‘‘solidarity groups,’’ make the group responsible to pay back the money and the pressure is on each person to respect the conditions of the loan. Once they have proven themselves to be a responsible borrower, they are eligible to take out extra loans.
§ Third, the cash usually is lent to women since women seem to be more reliable than men.

Microcredit is a critical concept for the 21st century because it has the potential to increase the standard living for poorest people of the world. For instance, in countries with microcredit systems, we see reduced unemployment rates, stimulation of the economy, increased consumption and increased production. Despite the increased risk of default on these loans, in practice we actually see that these loans are relatively secure and profitable for all parties involved. Small loans, while of inconsequential amounts to the lender, allow impoverished regions to develop entrepreneurial skills, thereby reducing the need to send aid in the future.

In the future, this idea may even find a home here in North America. Though intended for poor and developing countries, it can equally be applied to poor communities right in North America.