Microcredit
Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment, or a verifiable credit history. It is designed to support entrepreneurship and alleviate poverty. Many recipients are illiterate, and therefore unable to complete paperwork required to get conventional loans. As of 2009 an estimated 74 million people held microloans that totaled US$38 billion. Grameen Bank reports that repayment success rates are between 95 and 98 percent.[1]
Microcredit is part of microfinance, which provides a wider range of financial services, especially savings accounts, to the poor. Modern microcredit is generally considered to have originated with the Grameen Bank founded in Bangladesh in 1983.[2] Many traditional banks subsequently introduced microcredit despite initial misgivings. The United Nations declared 2005 the International Year of Microcredit. As of 2012, microcredit is widely used in developing countries and is presented as having "enormous potential as a tool for poverty alleviation."[3] Microcredit is a tool that can be helpful to possibly reduce feminization of poverty in developing countries.
Some argue that microcredit has not had a positive impact on gender relationships, does not alleviate poverty, has led many borrowers into a debt trap and constitutes a "privatization of welfare".[4][5] The first randomized evaluation of microcredit, conducted by Abhijit Banerjee and others, showed mixed results: there was no effect on household expenditure, gender equity, education or health, but the number of new businesses increased by one third compared to a control group.[6] Some of this increase in the number of businesses can be due to the phenomenon of 'informal intermediation' documented by Frithjof Arp and collaborators: Philanthropic, low-interest-rate microcredit fosters unintended entrepreneurship where some borrowers split loans they receive and on-lend to less-entrepreneurial borrowers.[7]
History
Ideas relating to microcredit can be found at various times in modern history. Jonathan Swift inspired the Irish Loan Funds of the 18th and 19th centuries.[8] John Wesley began a microcredit scheme in 1746. His journal on 17/1/1748 records:
I made a public collection toward a lending stock for the poor. Our rule is, to lend only twenty shillings at once, which is repaid weekly within three months. I began this about a year and a half ago: thirty pounds sixteen shillings were then collected; and out of this, no less than two hundred and fifty-five persons have been relieved in eighteen months.
In the mid-19th century, Individualist anarchist Lysander Spooner wrote about the benefits of numerous small loans for entrepreneurial activities to the poor as a way to alleviate poverty.[9] At about the same time, but independently to Spooner, Friedrich Wilhelm Raiffeisen founded the first cooperative lending banks to support farmers in rural Germany.[10]
Comilla model
In the 1950s, Akhtar Hameed Khan began distributing group-oriented credit in East Pakistan. Khan used the Comilla Model, in which credit is distributed through community-based initiatives.[2] The project failed due to the over-involvement of the Pakistani government, and the hierarchies created within communities as certain members began to exert more control over loans than others.[2]
Modern microcredit
The origins of microcredit in its current practical incarnation can be linked to several organizations founded in
Principles
Economic principles
Microcredit organizations were initially created as alternatives to the "loan sharks" known to take advantage of clients.[2] Indeed, many microlenders began as non-profit organizations and operated with government funds or private subsidies. By the 1980s, however, the "financial systems approach", influenced by neoliberalism and propagated by the Harvard Institute for International Development, became the dominant ideology among microcredit organizations. The neoliberal model of microcredit can also be referred to as the institutionist model, which promotes applying market solutions as a viable way to address social problems.[15] The commercialization of microcredit officially began in 1984 with the formation of Unit Desa (BRI-UD) within the Bank Rakyat Indonesia. Unit Desa offered 'kupedes' microloans based on market interest rates.
Yunus has sharply criticized the shift in microcredit organizations from the Grameen Bank model as a non-profit bank to for-profit institutions:
Even so, the numbers indicate that ethical microlending and investor profit can go hand-in-hand. In the 1990s a rural finance minister in Indonesia showed how Unit Desa could lower its rates by about 8% while still bringing attractive returns to investors.[17]
Group lending
Though lending to groups has long been a key part of microcredit,[citation needed] microcredit initially began with the principle of lending to individuals.[11] Despite the use of solidarity circles in 1970s Jobra, Grameen Bank and other early microcredit institutions initially focused on individual lending.[12] (A solidarity circle is a group of borrowers that provide mutual encouragement, information, and assistance in times of need, though loans remain the responsibility of individuals.[18][19]) Indeed,
Lending to women
Lending to women has become an important principle in microcredit, with banks and NGOs such as BancoSol, WWB, and Pro Mujer catering to women exclusively.[12] Pro Mujer also implemented a new strategy to combine microcredits with health-care services, since the health of their clients is crucial to the success of microcredits.[20] Though Grameen Bank initially tried to lend to both men and women at equal rates, women presently make up ninety-five percent of the bank's clients. Women continue to make up seventy-five percent of all microcredit recipients worldwide.[12] Exclusive lending to women began in the 1980s when Grameen Bank found that women have higher repayment rates, and tend to accept smaller loans than men.[2]
Examples
Bangladesh
Grameen Bank in Bangladesh is the oldest and probably best-known microfinance institution in the world.
India
In
United States
In the United States, microcredit has generally been defined as loans of less than $50,000 to people—mostly entrepreneurs—who cannot, for various reasons, borrow from a bank. Most nonprofit microlenders include services like financial literacy training and business plan consultations, which contribute to the expense of providing such loans but also, those groups say, to the success of their borrowers.[29] One such organization in the United States, the Accion U.S. Network is a nonprofit microfinance organization headquartered in New York, New York. It is the largest and only nationwide nonprofit microfinance network in the US. The Accion U.S. Network is part of Accion International, a US-based nonprofit organization operating globally, with the mission of giving people the financial tools they need to create or grow healthy businesses. The domestic Accion programs started in Brooklyn, New York, and grew from there to become the first nationwide network microlender.[30][circular reference] US microcredit programs have helped many poor but ambitious borrowers to improve their lot. The Aspen Institute's study of 405 microentrepreneurs indicates that more than half of the loan recipients escaped poverty within five years. On average, their household assets grew by nearly $16,000 during that period; the group's reliance on public assistance dropped by more than 60%.[31] Several corporate sponsors including Citi Foundation and Capital One launched Grameen America in New York. Since then the financial outfit—not bank—has been serving the poor, mainly women, throughout four of the city's five boroughs (Bronx, Brooklyn, Manhattan, and Queens) as well as Omaha, Nebraska and Indianapolis, Indiana. In four years, Grameen America has facilitated loans to over 9,000 borrowers valued over $35 million. It has had, as Grameen CEO Stephen Vogel notes, "a 99 percent repayment rate".[32]
Peer-to-peer lending over 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.
Examples of platforms that connect lenders to micro-entrepreneurs via Internet are Kiva, Zidisha, and the Microloan Foundation. Another internet-based microlender, United Prosperity (now defunct), uses a variation on the usual microlending model; with United Prosperity the micro-lender provides a guarantee to a local bank which then lends back double that amount to the micro-entrepreneur. United Prosperity claims this provides both greater leverage and allows the micro-entrepreneur to develop a credit history with their local bank for future loans.[33][34] In 2009, the US-based nonprofit Zidisha became the first peer-to-peer microlending platform to link lenders and borrowers directly across international borders without local intermediaries.[35] From 2008 through 2014, Vittana allowed peer-to-peer lending for student loans in developing countries.[36]
Impact of microcredit
The impact of microcredit is a subject of some controversy. Proponents state that it reduces poverty through higher employment and higher incomes. This is expected to lead to improved nutrition and improved education of the borrowers' children. Some argue that microcredit empowers women. In the US, UK and Canada, it is argued that microcredit helps recipients to graduate from welfare programs.[37]
Critics say that microcredit, if not carefully directed, may not increase incomes, and may drive poor households into a
The available evidence indicates that in many cases microcredit has facilitated the creation and the growth of businesses. It has often generated self-employment, but it has not necessarily increased incomes after interest payments. In some cases it has driven borrowers into debt traps. Some studies suggest that microcredit has not generally empowered women. Microcredit has achieved much less than what its proponents said it would achieve, but its negative impacts have not been as drastic as some critics have argued. Microcredit is just one factor influencing the success of a small businesses, whose success is influenced to a much larger extent by how much an economy or a particular market grows.[39]
Improvement
Many scholars and practitioners suggest an integrated package of services ("a credit-plus" approach) rather than just providing credits. When access to credit is combined with savings facilities, non-productive loan facilities, insurance,
One of the principal challenges of microcredit is providing small loans at an affordable cost. The global average interest and fee rate is estimated at 37%, with rates reaching as high as 70% in some markets.[43] The reason for the high interest rates is not primarily cost of capital. Indeed, the local microfinance organizations that receive zero-interest loan capital from the online microlending platform Kiva charge average interest and fee rates of 35.21%.[44] Rather, the principal reason for the high cost of microcredit loans is the high transaction cost of traditional microfinance operations relative to loan size.[45] Microcredit practitioners have long argued that such high interest rates are simply unavoidable. The result is that the traditional approach to microcredit has made only limited progress in resolving the problem it purports to address: that the world's poorest people pay the world's highest cost for small business growth capital. The high costs of traditional microcredit loans limit their effectiveness as a poverty-fighting tool. Borrowers who do not manage to earn a rate of return at least equal to the interest rate may actually end up poorer as a result of accepting the loans. According to a recent survey of microfinance borrowers in Ghana published by the Center for Financial Inclusion, more than one-third of borrowers surveyed reported struggling to repay their loans.[46] In recent years, microcredit providers have shifted their focus from the objective of increasing the volume of lending capital available, to address the challenge of providing microfinance loans more affordably. Analyst David Roodman contends that in mature markets, the average interest and fee rates charged by microfinance institutions tend to fall over time.[47]
Professor Dean Karlan from Yale University advocates also giving the poor access to savings accounts.[48]
See also
- Cooperative banking
- Count Me In (charity)
- Crowdfunding
- Crowd sourcing
- Flat rate (finance)
- Microcredit for water supply and sanitation
- Microgrant
- M-Pesa
- Project Enterprise
- Solidarity lending
- The Women's Development Bank
- Oikocredit
References
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- ^ Jason Cons and Kasia Paprocki of the Goldin Institute, "The Limits of Microcredit—A Bangladeshi Case" Archived 2012-01-16 at the Wayback Machine, Food First Backgrounder (Institute for Food and Development Policy), Winter 2008, volume 14, number 4.
- ^ Gina Neff:Microcredit, microresults Archived October 21, 2006, at the Wayback Machine The Left Business Observer #74, October 1996
- ^ Arp, Frithjof (January 12, 2018). "The 34 billion dollar question: Is microfinance the answer to poverty?". Global Agenda. World Economic Forum. Archived from the original on January 18, 2018. Retrieved January 18, 2018.
- ^ Banerjee, Abhijit; Esther Duflo; Rachel Glennester; Cynthia Kinnan. "The miracle of microfinance? Evidence from a randomized evaluation". Archived from the original on April 6, 2012. Retrieved April 17, 2012.
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- ^ Aidan Hollis; Arthur Sweetman (March 1997). "Complementarity, Competition and Institutional Development: The Irish Loan Funds through Three Centuries" (PDF). Archived from the original (PDF) on March 4, 2016. Retrieved January 30, 2012.
- ^ Spooner, Lysander (1846). "Poverty: Its illegal causes and legal cure". Boston. Archived from the original on October 25, 2012. Retrieved January 30, 2012.
- ^ Deutscher Raiffeisenverband:The Raiffeisen organization: Beginnings, tasks, current developments Archived 2007-08-10 at the Wayback Machine, March 2011
- ^ a b c d Drake, Deborah (2002). The Commercialization of Microfinance. Kumarian.
- ^ a b c d e f Armendariz, Beatriz (2005). The Economics of Microfinance. Cambridge, Mass: The MIT Press.
- ^ de la Torre, Augusto; Gozzi, Juan Carlos; Schmukler, Sergio L. (2017). "Microfinance: BancoEstado's Experience in Chile". Innovative Experiences in Access to Finance: Market-Friendly Roles for the Visible Hand?. pp. 221–251.
- ^ Nobel Prize.org:The Nobel Peace Prize 2006:Muhammad Yunus, Grameen Bank Archived August 9, 2018, at the Wayback Machine, retrieved on 13 February 2012
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- ^ Muhammad Yunus, “Sacrificing Microcredit for Megaprofits” New York Times (15 January 2011) A.23.
- ^ a b "BRI-Unit Desa, Indonesia". Archived from the original on June 28, 2022. Retrieved May 16, 2012.
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- ^ University of Michigan, Urban and Regional Planning Economic Development Handbook: Microcredit strategies for assisting neighborhood businesses Archived May 28, 2008, at the Wayback Machine, 22 March 2005, retrieved on 13 February 2012
- ^ "Bank of America Issues Grants for Microloans". Wall Street Journal. October 6, 2010. Archived from the original on November 7, 2017. Retrieved January 30, 2012.
- ^ "U.S. Network". June 5, 2014. Archived from the original on February 22, 2018. Retrieved May 19, 2015.
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- ^ Cheryl Frankiewicz. "Calmeadow Metrofund: A Canadian Experiment in Sustainable Microfinance", Calmeadow Foundation, April 2001.
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- ^ "Zidisha Set to "Expand" in Peer-to-Peer Microfinance", Microfinance Focus, Feb 2010 Archived 2010-02-28 at the Wayback Machine
- ^ Rao. L. (2010). Vittana Applies The Kiva Model To Help Finance Education In Developing Countries. Retrieved March 9, 2011, from https://techcrunch.com/2010/03/15/vittana-applies-the-kiva-model-to-help-finance-education-in-developing-countries/ Archived November 5, 2016, at the Wayback Machine
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- ^ Tonelli M. and C. Dalglish, 2012. “Micro-Credit is Necessary but Not Sufficient for Entrepreneurs in Desperate Poverty”, FSR Forum, Vo.14, Issue 4 (p.16-21). ISSN 1389-0913
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Further reading
- Adams, Dale, Doug Graham and J.D. Von Pischke (eds.). Undermining Rural Development with Cheap Credit. Westview Press, Boulder, Colorado, 1984.
- Bateman, Milford. 'Why Doesn't Microfinance Work? The Destructive Rise of Local Neoliberalism'. Zed Books, London, 2010.
- Drake, Deborah, and Elizabeth Rhyne (eds.). The Commercialization of Microfinance: Balancing Business and Development. Kumarian Press, 2002.
- Rhyne, Elizabeth. Mainstreaming Microfinance: How Lending to the Poor Began, Grew and Came of Age in Bolivia. Kumarian Press, 2001.
- Fuglesang, Andreas and Dale Chandler. Participation as Process – Process as Growth – What We can Learn from the Grameen Bank. Grameen Trust, Dhaka, 1993.
- Gibbons, David. The Grameen Reader. Grameen Bank, Dhaka, 1992.
- Harper, Malcolm and Shailendra Vyakarnam. Rural Enterprise: Case Studies from Developing Countries. ITDG Publishing, 1988.
- Hulme, David and Paul Mosley. Finance Against Poverty. Routledge, London, 1996.
- Johnson, Susan and Ben Rogaly. Microfinance and Poverty Reduction. Oxfam, Oxford UK, 1997.
- Kadaras, James & Elizabeth Rhyne. Characteristics of equity investment in microfinance. Accion International, 2004.
- Khandker, Shahidur R. Fighting Poverty with Microcredit. Bangladesh edition, The University Press Ltd, Dhaka, 1999.
- Ledgerwood, Joanna. Microfinance Handbook. Washington, D.C., World Bank, 1998.
- Rutherford, Stuart. ASA: The Biography of an NGO, Empowerment and Credit in Rural Bangladesh. ASA, Dhaka, 1995.
- Small Enterprise Development. Intermediate Technology Publications, London.
- Todd, Helen Women at the Center: Grameen Borrowers After One Decade. University Press Ltd, Dhaka, 1996.
- Wood, Geoff D. & I. Sharif (eds.). Who Needs Credit? Poverty and Finance in Bangladesh. University Press Ltd., Dhaka, 1997.
- Moingeon Bertrand & Laurence Lehmann-Ortega, "Building Social Business Models: Lessons from the Grameen Experience", April-June, vol 43, n° 2-3, Long Range Planning, 2010, p. 308-325"
- Tonelli M. and C. Dalglish, 2012. "Micro-Credit is Necessary but Not Sufficient for Entrepreneurs in Desperate Poverty", FSR Forum, Vo.14, Issue 4 (p. 16-21). ISSN 1389-0913
- Yunus, Muhammad. Banker to the Poor: Micro-Lending and the Battle Against World Poverty. Public Affairs, 2003.
- Padmanabahn, K.P., Rural Credit, Intermediate Tech. Publ. Ltd., London 1988.
- Germidis D. et al.,Financial Systems and Development: what role for the formal and informal financial sectors?, OECD, Paris 1991.
- Robinson, Marguerite S., The microfinance revolution, The World Bank, Washington D.C., 2001.
- Mauri, Arnaldo, (1995): A new approach to institutional lending and loan administration in rural areas of LDCs, International Review of Economics, ISSN 1865-1704, Vol. 45, no. 4, pp. 707–716.
- Goetz, A.-M.; Sengupta, R. (1996). "Who Takes the Credit? Gender, Power and Control over Loan Use in Rural Credit Programmes in Bangladesh". World Development. 24: 45–63. .
- Johnson, S. 1997. Gender and Micro-finance: guidelines for best practice. Action Aid-UK.
- Kabeer, N. 1998. 'Money Can't Buy Me Love'? Re-evaluating Gender, Credit and Empowerment in Rural Bangladesh. IDS Discussion Paper 363.
- Mayoux, L. 1998a. Women's Empowerment and Micro-finance programmes: Approaches, Evidence and Ways Forward. The Open University Working Paper No 41.
- Rahman, A (1999). "Micro-credit Initiatives for Equitable and Sustainable Development: Who Pays?". World Development. 27 (1): 67–82. .
- CHESTON, S. and KUHN, L. (2002). Empowering Women through Microfinance. Pathways Out of Poverty: Innovations in Microfinance for the Poorest Families.
- Harper, A. ( 1995). Providing women in Baltistan with access to loans – potential and problems. Lahore, AKRSP Pakistan.
- Mutalima, I. K., 2006, Microfinance and Gender Equality: Are We Getting There?: Micro Credit Summit, Halifa, Royal Tropical Institute and Oxfam Novib.
External links
- Latest Findings from Randomized Evaluations of Microfinance Access to Finance Forum by CGAP and Its Partners No. 2, December 2011
- Building a Microfinance Institution from Scratch Institution's objective is to offer financial services on a self-sustaining yet efficient basis to microentrepreneurs.
- Journal of Microfinance, a forum for practitioners in microfinance and microenterprise development to exchange information and ideas
- Omidyar-Tufts Microfinance Fund, a partnership between Pierre Omidyar and Tufts University.
- "Microfinance in the U.S." Helping ensure egalitarian access to needed financial services.
- The Promise of Microfinance for Poverty Relief in the Developing World
- Microcredit Regulatory Authority, MRA The central body to monitor and supervise microfinance operation of NGOs of Bangladesh
- Alleviation and poverty and empowerment of the poor, BRAC Bangladesh
- The European Union Project "Credit Cooperatives – Russian Federation" official web site