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Chapter 9: Problem 10

What is microlending? How does it work?

Short Answer

Expert verified
Microlending or microcredit is the provision of small loans to individuals or businesses who lack access to traditional credit. The purpose is to promote entrepreneurship and self-sustainability among impoverished communities. Operated through microfinance institutions, these loans are usually small, not more than a few hundred dollars, and are paid back over a set period, often with interest. The funds are typically used for income-generating activities, and the repayment rates are high, improving the living standards of the recipients.

Step by step solution

01

Definition of Microlending

Microlending is the act of giving small loans (microloans) to individuals or businesses who usually lack access to other forms of credit. The individuals are often poor and have no collateral to offer.
02

Purpose of Microlending

The idea of these loans is to provide recipients with a means to improve their conditions and work towards becoming self-sufficient. This strategy aims to promote entrepreneurship and empowerment among impoverished communities, thus helping in reducing global poverty.
03

Process of Microlending

Microlending functions through specific microfinance institutions. These institutions lend small sums of money, typically not more than a few hundred dollars, to individuals. The borrowers repay the loan over a set period, often with interest, allowing the institution to lend money to more individuals.
04

Repayment and Impact

Repayment rates are surprisingly high as recipients often use these funds to start a small business or other income-generating activities such as farming, handcraft, or trading. As a result, their capacity to pay back the loans from their earnings increases, making a significant improvement to their living standards.

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