Micro-credit

Micro-credit is literally small amounts of money loans. These loans most often have limited or no collateral.

Why should I be aware of this?

Micro-credit lending is gaining acceptance by organizations like the World Bank and the UNDP. The UN General Assembly had designated 2005 as the International Year of Micro-credit and invited governments, the United Nations system, concerned non-government organizations and others from civil society, the private sector and the media to join in raising the profile and building the capacity of the micro-credit and micro-finance sectors. This elevated micro-credit to the status of a worldwide movement.

Grameen Bank of Bangladesh alone has disbursed over $ 4 billion in microloans over the last 10 years. In India, about 1,000 microcredit organizations and 300 commercial banks lent $1.3 billion to 17.5 million people in 2006.

All about Micro-credit

• Micro- credit programs extend small loans to very poor people for self-employment projects that generate income.
• These loans are targeted at that section which cannot offer collaterals for loans and are hence not considered creditworthy by conventional financial institutions.
• Micro-credit is a part of microfinance, which provides financial services to the very poor.
• These loans are given so that the poor can use their entrepreneurial abilities to earn their livelihood instead of depending on subsidy, handout, or charity.
• Some microcredit organizations give their clients more than loans, offering education, training, healthcare, and other social services.
• These services are considered the first step towards organised poverty alleviation.

Micro-credit has worked out to be an effective and popular measure against poverty, enabling those without access to lending institutions to borrow at bank rates, and start small business. Many countries, which require collaterals worth three to four times the value of the loans, have failed to reach the poor. Micro-credit aims to fill this gap by introducing group-based lending, to reach the poor, especially women, who are not able to access traditional financial institutions.

Criteria that define Micro-credit

Some of the defining criteria used include

• Size - loans are micro, or very small in size
• Target users – micro-entrepreneurs and low-income households
• Utilization - the use of funds - for income generation, and enterprise
• Development, but also for community use (health/education) etc.
• Terms and conditions - most terms and conditions for micro-credit loans are flexible and easy to understand, and suited to the local conditions of the community.

A broad classification of types of Micro-credit

• Traditional informal micro-credit (such as, moneylender's credit, pawn shops, loans from friends and relatives, consumer credit in informal market, etc.)
• Activity-based micro-credit through conventional or specialized banks (such as, agricultural credit, livestock credit, fisheries credit, handloom credit, etc.)
• Rural credit through specialized banks.
• Cooperative micro-credit (cooperative credit, credit union, savings and loan associations, savings banks, etc.)
• Consumer micro-credit.
• Bank-NGO partnership based micro-credit.
• Grameen type micro-credit or Grameen-credit.
• Other types of NGO micro-credit.
• Other types of non-NGO non-collateralized micro-credit.

Noticeable impact of Micro-credit schemes

Micro-credit beneficiaries, most of whom are women, are found to cross the border of poverty line within three to four years of taking the loan. According to a Citigroup assessment there have been the following income impacts on the lives of their clients:

• Average annual savings per household increased 3 fold from Rs 460/- to Rs 1444/-
• Average borrowings per year per household increased from Rs 4282/- to Rs 8341/-
• Average value of assets ( livestock, consumer durables etc. ) per household increased 72.3% from Rs 6843/- to Rs 11 793/-
• Average net income per household increased by 33% from Rs 20 177/- to Rs 26 189/-.

Source: NABARD study of 2000, impact after 2 years of participation.

Impact on empowerment

Related to economic issues

• 65.4% contributing to family income
• 89.1% feeling improvement in financial status
• 74.2% feel enhanced contribution to household income after

joining the group

• 60.2% feeling consulted in finance related decisions

Related to self development

• 42.0% not formally educated, now read forms in banks
• 41.4% read newspapers regularly or occasionally
• 65.6% more confident in taking decisions on their own

Interactions with others and local level decision making

• 59.0% feel recognized by family
• 44.0%feel being increasingly consulted by other women
• 75.0% feel more confident in dealing with people
• 59.0%feel more confident in dealing with various institutions with which they interact regularly
• 41.0% regularly attend village meetings
• 96.0% cast their votes in last local elections

Women and Micro-credit

Women have become the focus of many micro-credit institutions and agencies worldwide. The main reason 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.

Issues and challenges associated with Micro-credit

• Problems faced in lending:

1. Exact targeting.
2. Screening problem of distinguishing the creditworthy from the non creditworthy.
3. Monitoring productive usage of loans.
4. No legal action can be taken for non-repayment of loans.

• Special features of lending:

1. Defining criteria is the size of loans
2. Targeting population contains micro-entrepreneurs especially women, from low-income households.
3. Laying down other conditions like attendance at weekly member meetings, which discourages the really non-poor from taking the loans.
4. The concept of group borrowing is driven by the idea that solidarity among the like-minded people living in similar social and economic conditions is crucial to the success of the programs.
5. The bank insists on putting the loan to use within a specified period of time usually seven days.

Failings of Micro-Finance

• Micro-credit does not aid development but is only a survival tool.
• Development requires massive capital, state-directed investments. Micro-credit schemes co-exist with these entrenched structures, and serve as a safety net for people excluded and marginalized by them. It does not transform them.
• Micro-credit has so far managed to barely keep people above subsistence level. Poor borrowers take only small, conservative loans aimed at protecting their subsistence and do not go for anything higher, like investing in new technology or hiring of labor.
• To the poorest the high interest rates of 2 percent to 4.5 percent per month hardly give them enough chance of success. Though it is much lower than what unorganized money lenders charge, the fact remains that if they can’t earn more than their investment they will become poorer.

See Also

• Grameen Bank
• Barefoot College
• Social Accountability International
• Socially Responsible Investing
• Community Investing

Reference

• Hype and Hope: The Worrisome State of the Microcredit Movement
• Microfinance for the Poorest: A Review of Issues and Ideas for Contribution of Imp-Act
• Enterprise Development:Micro-Credit and Equality Between Women and Men
• Micro Credit and Women's Empowerment
• Good things come in small packages:Microcredit makes a little money go a long way

Additional Information

You can see this video Breaking Through to get a glimpse of what micro-credit has meant for millions throughout Africa, Asia, the Americas and the Middle East.