MICRO LOAN BACKGROUND

Micro loan was introduced over 35 years ago. The idea is quite simple, by ensuring that poor people in the third world get access to money, through so- called. micro loans, in this way they could help themselves out of poverty while the lending institutions would make a profit. soon followed thousands of lending institutions, which in turn lent money to hundreds of millions of poor people in the Third World. The entire concept was supported from the beginning by, for example, USAID, World Bank and the UN. What are the problems then? The biggest problem is that it was assumed that as long as the poor were given the opportunity to produce something, there would be a demand for what was produced. This reasoning, that supply creates its own demand, is a known misconception and in classic economics is called Say’s law.

In fact, the problem is not on the supply side, there is generally no shortage of necessary goods in poor countries, but the problem lies in the fact that people cannot afford to buy them. When poor people take out loans to afford to produce goods, they soon discover that few people can afford to buy them. This lack of demand leads to two things: firstly, they take customers from pre-existing operations (Displacement) and partly lead to the over-supply of goods causing prices to fall, which means that both old and new businesses are forced to close (Exit). Those who fail, however, remain with their loans, which they have often taken at an interest rate of over 20% annually or more, often much more. Studies in, for example, South Africa show that over 90% of the loans go to pure consumption. These things easily lead to them getting into a debt trap (Debt trap) as they have to borrow more money to pay interest on their old loans etc.