Microcredit (also known as microfinance) is the business of making very small loans, sometimes as low as $50 or less, to poor people who can invest the money to help them make a living. Recipients of loans may buy sewing machines or other simple tools that allow them to earn money, pay off the loan, and help to break the cycle of poverty. Muhammad Yunus acted as the grandfather of the industry by founding Grameen Bank in Bangladesh. One of its operations, Grameen Phone, exemplifies the spirit of microcredit by providing loans for villagers to buy mobile phones. If a single person in a village has the means to buy a phone, and then pay it off by renting the phone out to others, in one simple transaction an entire village can become connected. Long gone are the days when less than half the people on the planet had made a phone call. Today there are one third as many mobile phones as there are people alive, and many of the phones in the developing world service entire communities. Microcredit may be done as a not-for-profit venture, but is also frequently undertaken for financial return. One of the great strengths of microcredit is repayment rates that banks in developed countries would often drool over. Because loans are made within communities, there is a very strong understanding of the customer, and peer pressure to keep the funds in good standing.
Last week Pierre Omidyar, the founder of eBay, made a donation of $100 million to Tufts University, on the condition that it is used for microfinance in the developing world. The funds will be used to help develop economies and alleviate poverty, while the profits will go to Tufts, in a true win-win. This will play an important role in helping the industry grow and develop. The gift spurred a good article in BusinessWeek on the phenomenon, and an interview in Fortune, while coincidentally The Economist had almost simultaneously published an excellent story on microfinance. Other interesting blogs and references in the space include the blog of Unitus, one of the largest players in the field, and Nextbillion.net. The continuing rise of microcredit reflects the broader trend of greater granularity and flow in the economy. Business can easily be executed in smaller pieces, and has to be to access the next massive tier of the global middle class. The whole domain of “social entrepreneurship” also provides fine examples of knowledge-based relationships. Almost every microcredit institution is as focused on helping its clients invest funds effectively (and repay them!) as in providing those funds. I have long had a strong interest in microfinance, and hope to be more active in the domain at some stage.
Thanks to my friend Chris Turillo, who has recently arrived in India to work for the microfinance institute SKS after a few years working at my alliance partner Business Development Institute in New York, for pointing out some of these references to me, and keeping me posted on what’s happening in the exciting world of microfinance.