web statistics "Dash": 2005: International Year of Microcredit.

Monday, September 05, 2005

2005: International Year of Microcredit.

Give a man a fish and you feed him for a day. Teach a man to fish and you feed
him for a lifetime

- Chinese Proverb

Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime. Teach a man to create an artificial shortage of fish and he will eat steak
- Jay Leno

The United Nations have declared 2005 the International Year of Microcredit.

Microcredit is a small collateral-free loan extended to entrepreneurs who are too poor to get a loan from traditional banks (Wikipedia). Loans are lent to people to start their own business (usually for self employment) to purchase tools and equipment to generate income.

Microcredit is primarily targeted towards developing countries around the world as a way to help people help themselves. Although interest rates charged on these loans are high (from 20 to 100 percent per annum), microcredit supporters say that studies conducted in India, Kenya and the Philippines found that the average annual return on investments by micro-businesses ranged from 117 to 847 per cent. That’s enough to get any business man and woman excited. Women entrepreneurs, indeed, have been the big beneficiaries of microcredit, where they have been traditionally shut out of obtaining finance to run businesses on their own.

Detractors of the microcredit scheme claim that finance institutions are making big profit at the expense of the poor. However, microcredit financial institutions cannot be expected to deliver long-term services to the poorest areas of the world without making a profit. In fact, having a healthy profit margin will encourage other finance companies to move in and offer more microcredit loans which means that a) more money will flow into the poor countries and will have a stimulatory effect on the economy and b) competition will drive interest rates lower.

So this got me thinking… can the concept of microcredit be applied to first-world countries such in situations like Hurricane Katrina? Although the finance industry is much more mature in the US, can a microcredit style loan help small businesses in New Orleans and the affected areas? It can act a stimulatory boost to the local economy and can act as a raise the hopes of the thousands that have been affected.

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