Giving loans to poor people has proven to be a success story. Most of the schemes make a profit, and they all help people to help themselves.

Now the UK is being urged to develop small-scale lending initiatives as well.

The Economic Secretary to the Treasury Patricia Hewitt MP, has announced new measures to encourage credit unions formed by poor people to expand. The aim is to develop alternative community finance institutions to help economic development in areas not usually served by the big banks.

The new proposals suggest that credit unions' maximum lending limits should be increased, loan repayment periods extended, and the membership rules liberalised.

Credit unions may also be put under the supervision of the Financial Services Agency.

Ms Hewitt said the government "is determined to encourage the sector and these proposals build on the vital work that credit unions do, particularly in poorer communities."

But the Association of British Credit Unions Limited said the plans, although welcome, did not go far enough.

They said that the proposals would exclude most credit unions which did not have the substantial capital assets that the government was setting as a threshold for the change.

There are an estimated 3.5m people in the UK who do not have a bank account or access to credit.

Different models

According to researchers at the New Economics Foundation, non-traditional lending currently amounts to £400m.

They have identified five different models.

• Credit unions, which is the largest section, have 200,000 members; they are co-operative institutions which issue shares to members and then lend on.

• Community loan funds, which have assets of more than £74m, provide start-up funds for community regeneration.

• Micro-finance funds provide small loans for locally based traders. The Prince's Youth Trust is the largest example.

• Mutual guarantee societies are groups of small businesses that pool their savings in banks in order to borrow at better rates of interest.

• Social banks are for-profit institutions that are dedicated to social or environmental objectives.

Ed Mayo of the New Economics Foundation has called for the government to give tax credits to banks to encourage such schemes.

"Their track record both here and abroad is one of serving individuals and groups that are not conventionally 'bankable' and improving their access to capital without insisting on premium interest rates," he said.

The New Economics Foundation points out that such lending can be highly profitable. The written-off bad debts of UK credit unions, for example, amount to only 2.9% of assets.

Micro-credit spreading worldwide

The attempt of the UK and other Western countries to improve access to credit for poor people was actually pioneered in the Third World.

The system of micro-credits was first developed by Professor Mohammed Yunis who noted the prohibitively high interest rates paid by the poor.

His Grameen (village) bank now lends $1.3bn to 2.3m poor people in Bangladesh, the vast majority women.

And the system of collective responsibility ensures a very high repayment rate.

Many other countries have begun copying this model.

In Brazil, the Banco do Nordeste has lent to 46,000 small businesses in the impoverished North-east, and plans to expand to its portfolio to $8.2bn.

In Indonesia, the Dagang Bali Bank, founded by apprentice tailor Gusti Made Oka, now lends $115m to the poor.

Banking on the poor

Now the UN is trying to encourage Western banks to lend more to micro credit organisations in developing countries.

It believes the up to 500 million small entrepreneurs worldwide could be helped out of poverty if they had more access to lending.

At its Partners in Development conference in Lyon, France, this past week, the United Nations Conference on Trade and Development has been trying to encourage more countries to create micro-credit institutions - and find more money from the rich countries to fund them.

It wants to encourage Western banks to lend to micro-credit projects, and has encouraged a Luxembourg-based bank to channel money from financial markets. The International Bank of Luxembourg is creating a Fonds Dexia Micro Credit, managed by Axa Investment Managers, to channel $500m a year to small scale entrepreneurs.

Jacques Attali, former president of the European Bank for Reconstruction and Development, told delegates that such lending could help overcome the increasing inequality in the world economy.

"If this trend is happening nowadays, even though the world economy is growing stronger than ever, it is mainly due to the growing conflict between democracies and the financial markets," he said.

Ironically, the Grameen Bank that started the micro-credit movement is now facing difficulties of its own.

The cyclone that devastated Bangladesh has meant it needs to lend more than ever, while the income prospects of many of its poor clients have been damaged.

The bank has been forced to ask the Bangladesh Central Bank for a loan to meet its debts.