Microcredit as an Alternative Financing Service

Microfinancing has improved the economic stability of households and communities across the globe by giving businesses and individuals in impoverished conditions access to financial services. One of the most discussed facets of microfinance is microcredit, the practice of giving small loans typically valued at less than $50 to individuals who lack collateral or a credit history. While this kind of alternative financing appears to be a bad deal for the microfinancier, these loans have a surprisingly high repayment rate. Microloans in the United States have a repayment rate of 95 to 98 percent, which is much higher than the repayment rates for student loans or credit card debt.

The practice of microcredit began in late 18th century Ireland. Wealthy Irish and English financiers and philanthropists began to believe that making small loans with little interest to struggling businesses and individuals helped reduce poverty and increase business. It was fairly successful. Today, a legion of institutions around the world provide microfinancing services to communities that would otherwise have no access to banking services. A recent study by sociologists at New York University showed that access to microfinancing truly does reduce poverty and at the same time produces profits for the institutions due the the sheer number of small value, low interest rate loans.

Investing in microfinancing institutions would be a wise move in the current economy. For the philanthropic, donating money to microfinancing nonprofit organizations has a proven, entirely positive effect on poor communities, allowing businesses to flourish and families to afford food easily.