What is Microcredit?

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September 17th, 2006

Microcredit involves making small loans to persons who are not ‘bankable’ (meaning they could not get a loan from a traditional bank). This audience often consists of the very poor, unsuccessful entrpreneurs, or unemployed people.

Although the business models differ, there exist many non-profits that supply microcredit, as well as several businesses, and individuals.

Individuals seeking to begin lending in a microcredit situation need to be very careful about who they choose to work with, as it can very risky to invest in this market.

Some businesses exist to assist investors in making micro-credit loans. Often, these businesses provide aggregation and risk-sharing models. This means that if a person requests $10,000 in micro-credit, the business can split it up between 10 investors who each invest $1,000. This helps to spread the risk of deault around, meaning you can invest your money more widely. One such service is Prosper.com.

Non-profits have also shown much success in the micro-credit market. The common idea of success in this arena is that a poor person takes a loan to do something, and then ends up growing their business to employ other poor persons in their neighborhood.

One such example is a woman in India who took a small micro-credit loan to buy some fish from a fisherman at a local wharf. She cooked the fish and then sold it to others in the same area. She then repaid the loan and took the extra money to the wharf to buy more fish. Once again she cooked and sold the fish. After repeating this process quite a few times, she was able to buy her own fishing boats, which she now rents to local fisherman, for the price of bringing her enough fish to cook and sell.

Of course, not all stories can end like this, so do the proper due diligence when investigating this type of investing. Also, keep in mind that a non-profit such as this could make an excellent tax shelter should you find your income too high for your liking.

Entry Filed under: Finance Concepts, Finance Principles, Financial Investments, Investing Concepts
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