The Growing Popularity of Microcredit for the Poor

Microcredit Is Becoming Profitable

"Microcredit Is Becoming Profitable, Which Means New Players and New Problems
By Wharton School of Business, April, 2005

Microcredit, the innovative financial tool that provides very small business loans to poor people, is moving into adolescence and must wean itself off non-profit donors to become an established part of the global capital structure, according to Wharton faculty and experts in microfinance.

The movement began nearly 30 years ago with Muhammad Yunus, founder and managing director of Grameen Bank in Bangladesh, which so far has provided $5 billion in loans to four million people. Since then, similar networks of microfinance institutions (MFIs) have sprung up around the world. Indeed, the United Nations has declared 2005 the International Year of Microcredit and will sponsor research projects and meetings to encourage the use of microcredit to alleviate poverty. 'It's a growing market,' says Wharton management professor Keith Weigelt. 'I view it as the good side of capitalism, using loans to give money to poor people so they can improve their lot in life.'

Large commercial financial institutions, including Citigroup and Deutsche Bank, are now showing interest in microfinance, which could increase access to credit for the poor. At the same time, challenges remain in attracting private capital, lowering costs and interest rates, and developing regulation.

More than 500 microfinance institutions around the world have loaned $7 billion to about 30 million small-business people, says Weigelt, but 300 million could benefit from microcredit to start viable businesses. So far, most of the loans made by MFIs have originated as grants from government or gifts from individuals and foundations. 'The big jump now is for microfinance institutions to wean off the donors and subsidies and operate like a commercial bank would,' Weigelt adds."

Read the entire article