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Nate Mook

CEO & Founder, Localist

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Is microcredit a flawed idea that does more harm than good, with high interest rates and lack of proper regulation?

A few years ago, microcredit and microfinance were seen as world-changing endeavors that could drastically alleviate poverty by enabling those without the ability to get a traditional bank loan to receiving funding for their business or household. Muhammad Yunus won a Nobel Prize in 2006 for his work founding Grameen Bank, and services such as Kiva have brought the concept to the masses. Oprah even featured Kiva on her show, and the service couldn't find enough loans for interested lenders.

It makes sense: enable millions to make small loans, which can reach remote communities all while creating a sense of helping people without asking individuals to give their money away to charity - simply lend it. And once the money is paid back, those lenders will be more likely to continue to lend. Major countries such have Norway have even become big supporters of organizations like Grameen, because microcredit is seen as far more effective at reaching those in need than traditional foreign aid.

But perceptions are starting to change. Muhammad Yunus was asked to step down from Grameen by the Prime Minister of Bangladesh who claims the poor are being taken advantage of. There are also allegations of Grameen Bank funds being diverted illegally, but that's another issue. The biggest criticism seems to stem from the extremely high interest rates microcredit loans have. While it may seem like you give $25 via Kiva and $25 is repaid, the actual repayment number could be 40% higher, or more. That money is pocketed by the microfinance institution (MFI) that is handling the transaction and repayments. Clearly there are costs involved, and higher risks when dealing with loans to low-income individuals (which is why they couldn't get bank loans in the first place). But poor families are now being burdened by high-interest debt many can't pay off.

Is microcredit simply going through "teething problems" as Yunus says, or is the very idea flawed despite its noble intentions?

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    Feb 17 2011: Full disclosure: I've been in a big supporter of Kiva and have made well over 100 loans, along with gifting accounts to friends, etc. Only a couple of those loans have defaulted, one because of a sketchy MFI that ran off with money. All the reports from the field about those loans have been very positive.

    I'm genuinely interested in the above debate, and despite trying to read about and understand the microfinance industry, don't have an opinion either way right now.

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