Microloans can be a useful tool for alleviating poverty in developing countries where the poor -- who usually don't have access to credit -- use them to start small but profitable businesses. It has typically focused on social goals such as the empowerment of rural women.
Micro lending, or making tiny loans that help entrepreneurs lift themselves up from the lowest rungs of poverty, isn't entirely altruistic.
Default rates on microloans tend to be very low -- under 3%, in many cases. By comparison, U.S. credit-card issuers typically charge off around 5% of outstanding balances.
Even so, micro lending overhead often gobbles up most of the profit. That's because it can take hundreds or even thousands of loan officers to manage millions of small loans to often-illiterate farmers in remote villages. Transaction costs and paperwork can be overwhelming.
Most microlenders live hand-to-mouth, relying on wealthy patrons or development agencies to keep the money flowing.
[Excerpt of an article by Eric Bellman, The Wall Street Journal]
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