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Microfinance to "return the economy to health"

Mohammed Yunus, Nobel Prize winner and founder of Grameen Bank, the first microfinance institution, has a suggestion to help lift the world out of the current crisis: microfinance loans. He made his name lending small sums of money, less than $2,000 to poor women in Bangladesh, but he sees hope in extending the concept through the developed world.

As covered by Forbes Magazine, during recent remarks at the Foreign Correspondents Club of Japan in Tokyo, Yunus "cites a program his bank started last January in New York City's Jackson Heights section, a low-income neighborhood in the borough of Queens that is home to many immigrants. Grameen America disburses loans averaging a paltry $2,200 to women there. Although New York has been hit hard by unemployment tied to the financial turmoil, Grameen's repayment rate there is still 99%, Yunus says: "In the same city where big banks collapsed, we're untouched by the crisis."

Yunus believes that microcredit could  spread across the United States as big banks contract. Grameen has attracted the interest of Susan Buffet from Berkshire Hathaway and is considering opening up branches in several U.S. cities. He hopes that microcredit can eventually replace payday loans and check-cashing shops: "Although we live in a world where we deal with billions of dollars down the block, people are looking for much smaller sums."

If you're interested in being a lender to international microfinance institutions, try out two peer-to-peer sites, Kiva.org and microplace.com.

If you're interested in being a peer-to-peer lender domestically, see our review of all the major players. Soon-to-come is a site directly focused on the payday loan market, YadYap.

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Reader Comments (2)

What is the basis for the remarkable 99% rate?

March 22, 2009 | Unregistered CommenterGene Germanovich

Gene, there are several factors that contribute to Grameen's remarkable repayment rate. The most important is probably their lending methodology which employs group lending. The idea is that a loan is given to a small group of women who divide it amongst themselves to invest in their own particular enerprises. When it is time for repayment, if one of the women isn't able to pay her share of the due, the others are responsible for repaying her amount. This has come to be known as social collateral and in the rural areas of Bangladesh and India where mobility is relatively low and the social bonds strong, this method has been found effective. Grameen uses this same method in its operations in New York City and it has been interesting to see if it will have the same effects here as abroad. (Apperently so far it has worked well.) As you can see however, the repayment rate reflects the group's ability to pay back their loan and not necessarily an individual's. Bad borrowers may not appear as defaults if their group repays for them. Afterwards, these borrowers may not be allowed to be part of a group and thus the group-lending methodology serves some of the functions that a credit bureau does.

April 7, 2009 | Registered CommenterAnita
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