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For the past few months, I have become fascinated with the idea of microfinance, sometimes referred to as micro-loans, or micro-credit. The idea is simple, and painfully obvious (to me anyway):

Loan money to aspiring entrepreneurs in developing nations, thus helping them to grow their business, and move towards escaping poverty. The idea stemmed from Muhamed Yunus while he was teaching in Bangledesh. The reason this works in developing countries (as opposed to in America) is because the cost of capital is so low in third world nations. A farmer can apply for a loan from as low as $50 to around $1,000 and what seems like such a drop in the bucket becomes the seed money for starting or expanding a business, and becoming self-sustainable.

Repayment rates are incredibly high (close to 100%), despite the extreme poverty the lendees are living in. Quite often, field partners work with the entrepreneurs to develop business knowledge, and general life habits, to further improve the quality of life. The result of this, is that the lendees learn to take business deals seriously, and almost unanimously pay back their loans on time. While huge aid packages, such as food or medical supplies, are incredibly important, they often fail to trickle down to the extremely impoverished who need them, due to poor distribution lines, or corruption in leadership. Microloan organizations, such as Kiva, work with partners in developing nations to ensure that loans go directly to the people who applied for them. I recently started lending money through Kiva. I know this organization has its critics, but for me, it offers a way to get involved in something I believe is extremely beneficial. There are other organizations that offer similar services - Kiva just happens to be the one that I chose, because it was the one that enlightened me to this idea.

One thing I particularly like is that over the course of several months, the money is paid back to me, and I can re-lend it to a new entrepreneur. A lot of my interest in this came from the SIFE (Students in Free Enterprise) team at Roberts, who have worked with a village in Guatemala for several years. In addition to providing medical training and care, education for children, and gifts, they have focused on developing adults in the village into business leaders. I think developing the ability to provide for ones-self is brilliant. Rather than waiting for handouts, villagers are taught how to provide for their own well-being, even once the group of aid-workers leaves.

Microfinance is not the solution to poverty in developing nations. That issue is much too large to reduce down to a single solution. But poverty is the cause of many other global issues, and if loaning to some businesses in other parts of the world can make a small impact there, then I support it greatly.

Learn more about this author, Dan Mason.
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