Finance and Insurance
Microfinance; Microloans; Microcredit; Poverty
Nearly half of today’s population is living in poverty, meaning that they are living on less than $2.50 a day. The lack of capital creates a vicious cycle for those in poverty. The less fortunate do not have sufficient access to education, healthcare, proper nutrition and loans. This forces those living in poverty to focus on getting by one day at a time instead of looking to the future. Those with a lack of sufficient income can’t get access to loans because of the risk associated with lending to subprime borrowers.
However, microfinance loans change this. They are unique because they give subprime borrowers the opportunity to borrow money that they wouldn’t have otherwise been able to obtain. Microloans are more beneficial to the borrower than a charitable gift. The loan creates an incentive to keep up a sustainable and profitable business because there is a need to pay off the loan. In addition, the loan allows the borrower the psychological benefit of feeling that they are not the object of charity but a true contributor to the economy. In 2006, Muhammad Yunus and the Grameen Bank won the Noble Peace Prize for their efforts in micro lending to create economic and social development. Yet, for subprime borrowers, the cost of borrowing is substantial. Borrowing costs include service fees, administrative expenses, interest and a premium to protect the lender from losses. Are microloans a tool to help alleviate poverty by creating successful entrepreneurs with sustainable businesses and lifestyles or do they exploit borrowers with extremely high interest rates?