While perusing online the other day in my daily ritual to find out what’s happening in the world, I came across this article in Foreign Policy about a topic we recently wrote extensively about in the online incorporation knowledge center at MaxFilings.com regarding microloans.
President Barack Obama recently awarded the Presidential Medal of Freedom, the nation’s highest civilian honor, to the pioneer of microloans Muhammad Yunus. In the ceremony at the White House, the president commended Yunus for “[unleashing] new avenues of creativity and [inspiring] millions worldwide to imagine their own potential.”
Establishing a micro-bank in Bangladesh, Yunus demonstrated how very small loans to the poor can not only be repaid, but generate new entrepreneurial ventures and create jobs, etc.
But critically looking at Yunus indicates some shortcomings with his ideas…not that they are bad, but they do not deliver the results, as is often claimed, to lift the world’s poorest out of poverty.
First, implementing something this massive would be tremendous. Approximately 4 billion people in the world live in poverty – $17 billion was loaned through microfinance in 2004, which is peanuts when considering how to end poverty.
Another problem is that microfinance is generally heavily subsidized – private micro-banks and finance organizations generally charge very high rates of interest. A micro-bank in Mexico charges 100% for example, which makes it not feasible for the poor.
The article goes on to suggest other ways to alleviate poverty and provide the financing for someone with limited means to form a corporation. The author’s uses the best of both Yunus’ and economist Hernando deSoto, who proposed in his book “Mystery of Capital” that poor people across the world have close to $9 trillion in frozen assets.
Read a $9 Trillion Question at Foreign Policy for more.