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Tiny Loans Spur Credit Bubble in a Slum

“Microfinance” is a relatively new concept developed within the last decade or so. Muhammad Yunus was the brain behind the concept of microcredit and he explains it eloquently in his book, Banker to the Poor. The general idea is that small loans (usually less than $100) can be made to support individual entrepreneurs in developing countries. Once a queue for these loans form, it becomes the responsibility of the next person waiting for a loan to ensure that the person in front pays back what is owed. Once the initial loan is repaid in full, the next person can receive his loan and it becomes the responsibility of the next person waiting in line to ensure that the cycle completes itself once more. A brilliant idea in theory.
According to this article, however, there are problems with this system that need to be addressed most carefully to avoid potential disaster in these developing nations. A similar microfinance problem occurred a few years back when the popular microfinance site Kiva took off after being featured on the Oprah Winfrey show. People here couldn’t loan money fast enough and growth for these micro loans spurred. Yet the figures were not sustainable and once the hype died down, so did the micro loans and money.