Microloans

Many people in the third world are good solid citizens with ideas for projects that could serve as profitable businesses, but they don't have any prospects because they need start-up funds.

There are often traditional lenders in third world countries, but, like bankers anywhere, they tend to require collateral before making any loans. Muhammad Yunus, a Bangladeshi economist, had a better idea: believing that these poor, hard-working, honest folk were worthy of loans without credit, he initiated a program of small loans -- banking instead on trust and solidarity. He gambled and won. In fact, he just won the Nobel Prize for his initiative in the creation of the microloan idea, and you can read about him in his autobiography, Banker to the Poor.

As Prof. Yunus says, "It was initiated as a challenge to the conventional banking which rejected the poor by classifying them to be "not creditworthy". As a result it rejected the basic methodology of the conventional banking and created its own methodology."

At the urging of several funders, I undertook to create a microloan program for Ranquitte: The Story.

Our program takes a somewhat non-traditional approach among microloan programs (as exemplified by Yunus's Grameen Bank):

  1. Our loans are interest free;
  2. we don't require our customers to have savings accounts with us;
  3. we don't require our customers to join a group.
Grameen's policy is "to keep the interest rate at a level which is close to a level commensurate with sustainability of the programme rather than bringing attractive return for the investors." Ironically, microloans have become something of a "cash-cow" for investors: they find that the poor will tolerate interest rates that make loan sharks look like goldfish.

Our "funders" decided that they would prefer to go in the direction of no-interest, to provide the greatest possible benefit to the clients. Unfortunately, the cost of doing so means that the program is ultimately un-sustainable: administrative costs will ultimately suck the fund dry. Only infusions of cash from outside sources will result in continuation of the program. Alternatively, one could look at the program as one that will die a natural death, at roughly ten years down the road.

Grameen and Yunus seek to do "real" development: "Reaching the poor is its non-negotiable mission. Reaching sustainability is a directional goal. It must reach sustainability as soon as possible, so that it can expand its outreach without fund constraints." They realize that they should ultimately be able to take their hands off,


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