Business
22.10.17

Microcredit Loans: The 40-Year-Old Dilemma

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Microcredit loans are loans that are given to impoverished individuals and entrepreneurs hoping to start up a business. They are usually granted to people in less economically developed countries, such as Bangladesh or Zambia. However, while the motive for giving out money to the poor can be seen to have the genuine objective of lifting them out of poverty, the main argument is that the lending is about profit. When lenders are promised to receive interest, the players with the shorter straw in the game of capitalism can reach a spending deficit, which is when there is more spending than what is earned. In order for borrowers to pay back the old sum of money (if they had not achieved this within the specified time frame), they would seek to sign up for a new loan; this is where the principal issue lies.

Some of the large corporations that manage microcredit loans can be controversial and receive mixed views. It can be argued that these loans lead people into a cycle of deficit, with borrowers having the burden of paying back numerous organisations. From a socialist, pessimistic perspective, the banking organisations that give out these microcredit loans exist for the sole purpose of capitalism, exploiting vulnerable people seeking an alternative solution who would not be eligible for a loan at their local bank.

Doctor Mohammad Yunus is thought to have pioneered the modern microcredit loan. He first funded a group of Bangladeshi women so that they could buy raw materials to construct bamboo furniture, and, as a result of his idea, the Grameen Bank in Bangladesh was built in 1983. It was this humanitarian project that led to him winning a Nobel Peace  Prize in 2006. Organisations like Kiva, for example, offer different resolutions than a traditional bank. Kiva (founded in 2005) is among the many philanthropic institutions that connect people around the world and is reported to have operated in over 80 Countries.

There are detractors who state that loans prompt inescapable debt cycles and believe that the poverty caused by deprivation is only replaced by poverty caused by debt. An advantage, however, is that microfinance generally enables young people – who do not have an extensive credit history – to borrow, though it does generate financial dependence. A way to improve this would be for borrowers to receive advice on their finances so that they have a better chance to succeed with their careers and improve their lives.

By Sophia Andersson-Gylden

Global Seven News

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