03 Sep 2018

How Microcredit Could Help Pull Poor Americans Out of Poverty

In the late 1970s, Muhammad Yunus began lending miniscule amounts of money out of his own pocket to the rural poor of Bangladesh. He soon received bank backing for his small loans and the microcredit movement grew. By 2007, the bank he established, Grameen Bank, meaning “Village Bank,” had lent over $6 billion to over seven million low-income entrepreneurs. For his efforts, Yunus and Grameen Bank received the Nobel Peace Prize in 2006. In recognition of his struggle against global poverty, Yunus also received a U.S. Congressional Gold Medal, which was awarded in 2010 and presented in 2013. The poor face obstacles all over the world, even in the United States. Recently, microcredit institutions such as Grameen Bank have begun to offer low-interest loans to entrepreneurs below the poverty line in the United States, to give them a boost to help their businesses succeed and lift themselves out of poverty.


The Need for Microcredit

In some developing countries, loans of as little as $100 can help struggling families lift themselves out of abject poverty. In these countries, traditional lenders often charge exorbitant rates on loans that vendors need to buy goods to resell. The interest rates on the loans preclude the possibility of ever getting ahead. Small low-interest loans, like those available through Grameen Bank, enable sellers to realize more profit for their efforts and even begin to save money. The situation in the U.S. for low-income households is not so different. People with poor or no credit have difficulty getting good housing, obtaining utilities without large deposits, finding jobs and, of course, securing loans to grow budding businesses. Microlending, the thinking goes, could help these financially disadvantaged individuals improve their credit through small loans.

How Microcredit Works

In the United States, the term microcredit refers to any loans less than $50,000. However, some microcredit organizations offer loans of much smaller amounts than that. Grameen America, for example, generally lends from $1,500 to $8,000 at 15 percent annual interest. Borrowers, who must have incomes below the federal poverty line when they join, are organized into groups of five and approve each other’s loans. It is not necessary that they be legal residents in the United States. If everyone in the group pays back their loans, they are all eligible for larger loans later. Borrowers also receive savings accounts and are encouraged to deposit at least a small amount every week. Most of the borrowers are women, and almost all of them— about 99 percent —pay back their debts in full.

Benefits of Microcredit

The most obvious benefit of microcredit is the opportunity it affords those of low income to establish a foothold in entrepreneurship. Most microcredit borrowers remain in business, and many are able to create jobs for others. The businesses increase income for struggling households, and even more importantly, improve their credit scores, which opens up more financial opportunities for them in the future.

Microcredit offers the possibility of financial inclusion to those who have previously been ostracized from the American financial mainstream. Higher income and improved credit scores tangibly benefit low-income households and struggling small businesses. The escape from poverty may be an incremental, slow one, but it escapes nonetheless.