Taking Tiny Loans To The Next Level

An idea, not a person, was the most powerful force in philanthropy in 2006. The choice of the 2006 Nobel Peace Prize winner was a tribute to it. It was truly the year of microfinance.

The energy, money, and brainpower being devoted to the practice of lending to the world's poor is unprecedented. "Previously, if we screamed, people didn't listen. Now, if we whisper, the whole world will hear," says Muhammad Yunus, who shares the Nobel Peace Prize with his Bangladesh-based Grameen Bank.

Yunus pioneered microfinance in the 1970s and continues to expand its boundaries. But some of the most exciting innovations reshaping the field spring from a new breed of philanthropists who hail, in large part, from the tech world. As befits captains of the tech industry, their efforts center on bringing scale, efficiency, and transparency to a fragmented, often inefficient area.

At the heart of microfinance is microcredit, the practice of offering small, unsecured loans to poor people not served by banks. The loans, often just $50 to $150, are used to buy everything from buffaloes that produce milk to sell in markets to mobile phones that villagers can pay to use. Borrowers are usually women, in part because studies show that women are more likely to use their earnings to pay for family needs than men. Repayment rates are said to run from 95% to 98%, though some suspect that figure is overstated.

[Excerpt of an article by Jay Greene and Jeffrey Gangemi, BusinessWeek]