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]
This article is about small loans that are often provided in a pooled manner. For direct payments to individuals for specific projects, see Micropatronage. For financial services to the poor, see Microfinance. For small payments, see Micropayment.
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]
Principles[edit]
Economic principles[edit]
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:[16]
Examples[edit]
Bangladesh[edit]
Grameen Bank in Bangladesh is the oldest and probably best-known microfinance institution in the world. Grameen Bank launched their US operations in New York in April 2008.[21] Bank of America has announced plans to award more than $3.7 million in grants to nonprofits to use in backing microloan programs.[22] The Accion U.S. Network, the US subsidiary of the better-known Accion International, has provided over $450 million in microloans since 1991, with an over 90% repayment rate.[23] One research study of the Grameen model shows that poorer individuals are safer borrowers because they place more value on the relationship with the bank.[24] Even so, efforts to replicate Grameen-style solidarity lending in developed countries have generally not succeeded. For example, the Calmeadow Foundation tested an analogous peer-lending model in three locations in Canada during the 1990s. It concluded that a variety of factors—including difficulties in reaching the target market, the high risk profile of clients, their general distaste for the joint liability requirement, and high overhead costs—made solidarity lending unviable without subsidies.[25] Microcredits have also been introduced in Israel,[26] Russia, Ukraine and other nations where micro-loans help small business entrepreneurs overcome cultural barriers in the mainstream business society. The Israel Free Loan Association (IFLA) has lent more than $100 million in the past two decades to Israeli citizens of all backgrounds.[27]
India[edit]
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. In Asia borrowers generally pay interest rates that range from 30% to 70% without commission and fees.[28] 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 IFAD, Opportunity International, Catholic Relief Services, Compassion International, CARE, APMAS, Oxfam, Tearfund and World Vision.
United States[edit]
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] 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[edit]
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]