Online Microlending for Entrepreneurs in Developing Countries

51Give China Micro-Philanthroly [Photo by Gauravonomics] (CC BY-SA 3.0)

Online Microlending Pros and Cons

The concept of online microlending in the developing world has received a lot of media attention in recent years, both positive and negative. The original idea, started by Muhammad Yunus at the Grameen Bank in Bangladesh, was for poor people in developing countries who did not have access to commercial banks to take out a small loan to expand their agricultural production or small business.

Muhammad Yunus - World Economic Forum Annual Meeting Davos 2010 [Photo by World Economic Forum] (CC BY-SA 3.0)

The program was designed to function with a support group around the borrower to monitor the activity, and to restrict any future borrowing until the original loan had been repaid. However, this type of oversight quickly disappeared as commercial lenders were attracted to the business. They raised interest rates and encouraged people to borrow more, which has resulted in many borrowers defaulting on their microloans.

Online Microlending in Cambodia

However, there are many places where microlending is still being conducted through non-profit organizations such as Britain’s Lendwithcare.org. This charity allows people to lend as little as 15 pounds to entrepreneurs in poor communities around the world so that they can start or expand their small businesses.

Monk (woman), Angkor Wat / Cambodia, Siem Reap [Photo by flydime] (CC BY-SA 3.0)

For example, in Cambodia many entrepreneurs are using loans from this organization to diversify their crops and rent essential farming tools, which can increase their annual incomes. Others are using the financing to buy sewing machines and provide training to village girls. Many of these entrepreneurs have a different concept of business then what is common in the developed world. They are as much concerned about helping their communities as they are about making profit, and will often choose to earn less money for themselves in order to involve more people in the village in the enterprise.

Online Microlending in India

On the other hand, when greed takes over the microlending business the concept can quickly become corrupted. This has been the case in India, where there were high hopes that microlending would help lift millions of people out of poverty. Local government officials have recently urged thousands of borrowers to simply stop paying lenders, even if they have the money, and the government has begun ratcheting up restrictions after countless reports of predatory microlending.

Beautiful old lady from Darap(Sikkim) village [Photo by Sukanto Debnath] (CC BY-SA 3.0)

Cases of suicides by people who were unable to pay back their loans has raised alarm throughout the country, and created a backlash primarily in the southern Indian state of Andhra Pradesh. Hyderabad, the state capital, is home to some of the world’s biggest microlenders, including SKS Microfinance, Spandana Sphoorty Financial, and Basix & Share Microfin Ltd.