Microcredit Finance

Microcredit is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs and to others living in poverty. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor.

Microcredit is a financial innovation that is generally considered to have originated with the Grameen Bank in Bangladesh. In that country, it has successfully enabled extremely impoverished people 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, even though almost everyone in larger development organizations discounted the likelihood of success of microcredit when it was begun. The United Nations declared 2005 the International Year of Microcredit.

 

History

Microcredit has been practiced at various times in modern history; Jonathan Swift inspired the Irish Loan Funds of the 18th and 19th centuries [1], in the mid-1800s, abolitionist/legal theorist Lysander Spooner wrote about the benefits of numerous small loans for entrepreneurial activities to the poor as a way to alleviate poverty [2], and microcredit was included in portions of the Marshall Plan at the end of World War II. However, in its most recent incarnation, with attention paid by economists and politicians worldwide, it can be linked to several organizations starting in Bangladesh in the 1970s and onward.

Principles

Microcredit is based on a separate set of principles, which are distinguished from general financing or credit.  Microcredit emphasizes building capacity of a micro-entrepreneur, employment generation, trust building  and help to the micro-entrepreneur on initiation and during difficult times. Microcredit is a tool for socioeconomic development

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 generally pay interest rates that range from 12% to 24% a year, based on the flat calculation method. 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. Microfinancing 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.

Jason Cons and Kasia Paprocki of the Goldin Institute, while quite critical of some unintended side-effects of microcredit, nonetheless acknowledge its "enormous potential as a tool for poverty alleviation."^[1]

Microcredit and the Web

The principles of microcredit have also been applied in attempting to address several non-poverty-related issues. Among these, multiple Internet-based organizations have developed platforms that facilitate a modified form of peer-to-peer lending where a loan is not made in the form of a single, direct loan, but as the aggregation of a number of smaller loans—often at a negligible interest rate. There are several ways by which the general public can participate in alleviating poverty using Web platforms.

Lend to micro-entrepreneurs:

Kiva.org is the first micro-lending website that enables an individual to lend money to a micro-entrepreneur in the developing world through a microfinance institution. As of November 2008, over 100 field partners have collaborated with Kiva, dramatically extending its scope and reach.

New platforms that connect lenders to micro-entrepreneurs are emerging on the Web, such as Rang De (India) [6], dhanaX (India) and http://www.babyloan.org or http://www.veecus.com (France).

Invest in microcredit securities:

MicroPlace.com, a wholly-owned subsidiary of eBay, was launched in October 2007. With Microplace, retail investors in the US can buy securities issued by security issuers. Therefore, MicroPlace is tapping into the socially responsible investment world and can attract larger capital to microcredit. Deutsche Bank estimates that $250 billion is needed to raise enough capital to get it into the hands of the one billion working poor who could benefit from microcredit. While the US gave $303 billion [8] in charity to all causes, they invested $2.4 trillion in socially responsible investments.

Guarantee loans to micro-entrepreneurs:

United Prosperity will enable an individual to guarantee a loan to the micro-entrepreneur they choose to connect and support. The guarantee allows the microfinance institution to raise funds in local currency from local banks and make a loan to micro-entrepreneurs. Since the guarantee is only for a part of the loan amount, the guarantee allows the guarantors to multiply the impact of their money.

Contribute to micro-entrepreneurs:

Wokai(lending to China) allows contributors to contribute towards micro-entrepreneurs they choose to connect and support. Since the contribution is a donation, contributors in the United States may also get a tax deduction.

Ensure microcredit reaches the poorest families:

The Microcredit Summit Campaign brings together microcredit practitioners, advocates, educational institutions, donor agencies, international financial institutions, non-governmental organizations and others involved with microcredit to promote best practices in the field, to stimulate the interchanging of knowledge, and to work towards reaching the following goals:^[4]

• Working to ensure that 175 million of the world's poorest families, especially the women of those families, are receiving credit for self-employment and other financial and business services by the end of 2015.

• Working to ensure that 100 million families rise above the US$1-a-day threshold adjusted for purchasing power parity (PPP) between 1990 and 2015.