Microcredit is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs and to others living in poverty who are not bankable. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimum qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of financial services to the very poor; apart from loans, it includes savings, microinsurance and other financial innovations.
Microcredit is a financial innovation which originated in
developing countries where it has successfully enabled extremely impoverished people (mostly women) to engage in
self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit
poverty. Due to the success of microcredit, many in the traditional
banking industry have begun to realize that these microcredit borrowers should more correctly be categorized as
pre-bankable; thus, microcredit is increasingly gaining credibility in the mainstream
finance industry and many traditional large finance organizations are contemplating microcredit projects as a source of future growth. Although almost everyone in larger development organizations discounted the likelihood of success of microcredit when it was begun in its modern incarnation as pilot projects with
ACCION and
Muhammad Yunus in the mid-1970s, the
United Nations declared
2005 the
International Year of Microcredit.
Women have become the center focus of many microcredit institutions and agencies worldwide. The reasoning behind this is the observation that loans to women tend to more often benefit the whole family than loans to men do. It has also been observed that giving women the control and the responsibility of small loans raises their socio-economic status, which is seen as a positive change to many of the current relationships of gender and class. However, there is an ongoing debate about whether microcredit loans have the power to truly change established political and economic relationships.[1]
According to the Microcredit Summit Campaign:
"1.2 billion people are living on less than a dollar a day. Women are often responsible for the upbringing of the world’s children and the poverty of the women generally results in the physical and social underdevelopment of their children. Experience shows that women are a good credit risk, and that women invest their income toward the well being of their families. At the same time, women themselves benefit from the higher social status they achieve within the home when they are able to provide income."[2]
Many microcredit organizations focus completely on women borrowers. Pro Mujer and NamasteDirect are two organizations that directly work with women, but the Grameen Foundation, UN Secretary General Kofi Annan, and Hillary Rodham Clinton all emphasize women when they speak about microcredit.
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Fundamental Principles
An increasingly large body of published literature and conference proceedings has begun to seriously study the implications and debate the relative significance of different aspects of this important financial innovation. For those who are interested in a reading more detailed, theoretical studies of this field of economics and finance, a separate ESR Review has existed since the fall of 1999. From published literature and conference proceedings, it is possible to surmise several fundamental lessons from the microcredit success and failures over the last three decades.
A savings|investment as preferable aid: Independent borrowers earn the dignity and lasting self-confidence associated with responsible loan repayment. Institutional managers are more careful to ensure borrower success and generally perform better when there are risks involved.
Entrepreneurial talent and energy are scarce invaluable resources for economic growth: Our economies cannot afford not to find and develop independently responsible entrepreneurs and public bankers who are financial critical thinkers. These individuals can be attracted to the microcredit industry, but they are individuals with options – they will not risk their future on short-term or unpredictable bureaucratic support.
Traditional private banks should not be expected to offer microcredit: Existing banks with a traditional operating philosophy typically have significant investments in facilities and costly operating structures. Because of the significant overhead of such banking operations, these bank operations naturally gravitate to large, profitable transactions with affluent borrowers.
A new generation of banking institutions [and the banking professionals to run them] is arising: Banking institutions motivated by a less myopic vision of profitably serving the common good can be capitalized for the primary purpose of entry-level economic development. By lowering the transaction costs through institutional specialization and innovation in delivery systems, they will be able to operate profitably in markets characterized by very small transaction sizes and less affluent clients.
Poor entrepreneurs possess the same survival skills as the toughest, most affluent business operators: Poor entrepreneurs save money, carefully apply their entrepreneurial energy and repay debts as scheduled to maintain access to future loans. In other words, poor entrepreneurs are not only prebankable, they represent the population of those individuals who will be aggressively pursued as successful, very affluent captains of enterprise in 10, 25 or 50 years from now.
A radically efficient, large-scale, NEW banking operating infrastructure required: Simply modifying old methods will not successfully expand poor people's participation in their country's economy. Investment in self sustaining institutions that finance poor residents is a comparatively cost-effective use of scarce subsidies for economic development. The costs of doing research in the microcredit and microenterprise areas are extremely low compared to other strategies to stimulate economic development such as tax abatement or continued support for welfare programs.
Beyond enterprise lending and savings: Increasingly, microfinance is expanding beyond its roots in savings and business lending and now offers other forms of financial services, including most notably insurance and housing microfinance. In many ways, microfinance offers the promise that it could eventually evolve into a specialized form of banking catering to economically active poor people who currently happen to be unbanked. Some new microfinance focused-organizations, see for instance the Development Innovations Group (DIG),have embraced this more expanded vision of microfinance and speak of financial services for the poor or of development finance, rather than of microfinance.
[edit] Strengths
In the past few years, savings-led microfinance has gained recognition as an effective way to bring very poor families low-cost financial services. For example, in India the National Bank for Agriculture and Rural Development (NABARD) finances more than 500 banks that on-lend funds to self-help groups (SHGs). SHGs comprise twenty or fewer members, of whom the majority are women from the poorest castes and tribes. Members save small amounts of money, as little as a few rupees a month in a group fund. Members may borrow from the group fund for a variety of purposes ranging from household emergencies to school fees. As SHGs prove capable of managing their funds well, they may borrow from a local bank to invest in small business or farm activities. Banks typically lend up to four rupees for every rupee in the group fund. Groups pay a reasonable 11-12% annual rate of interest. Nearly 1.4 million SHGs comprising approximately 20 million women now borrow from banks, which makes the Indian SHG-Bank Linkage model the largest microfinance program in the world. Similar programs are evolving in Africa and Southeast Asia with the assistance of organizations like Opportunity International, Catholic Relief Services, CARE, APMAS and Oxfam. Also helps in the development of an economy by giving everyday people the chance to establish a sustainable means of income. Eventual increases in disposable income will lead to economic development and growth.
[edit] Criticism
Gina Neff of the Left Business Observer has described the microcredit movement as a privatization of public safety-net programs.[6] Enthusiasm for microcredit among government officials as an anti-poverty program can motivate cuts in public health, welfare, and education spending. Neff maintains that the success of the microcredit model has been judged disproportionately from a lender's perspective (repayment rates, financial viability) and not from that of the borrowers. For example, the Grameen Bank's high repayment rate does not reflect the number of women who are repeat borrowers, and have become dependent on loans for household expenditures rather than capital investments. Studies of microcredit programs have found that women often act merely as collection agents for their husbands and sons, such that the men spend the money themselves while women are saddled with the credit risk.[7] As a result, borrowers are kept out of waged work and pushed into the informal economy.
Bangladesh's Finance and Planning Minister M. Saifur Rahman charges that some microfinance institutions use excessive interest rates.[8]
Posted 05/03/07 by
Jennifer McArdle
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