Microcredit - AbsoluteAstronomy.com

This article is specific to small loans. For financial services to the poor, see Microfinance
Microfinance
Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services....

. For small payments, see Micropayment
Micropayment
A micropayment is a financial transaction involving a very small sum of money and usually one that occurs online. PayPal defines a micropayment as a transaction of less than 12 USD while Visa prefers transactions under 20 Australian dollars, and though micropayments were originally envisioned to...

.

Microcredit is the extension of very small loan

Loan

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....

s (microloans) to those in poverty

Poverty

Poverty is the lack of a certain amount of material possessions or money. Absolute poverty or destitution is inability to afford basic human needs, which commonly includes clean and fresh water, nutrition, health care, education, clothing and shelter. About 1.7 billion people are estimated to live...

designed to spur entrepreneur

Entrepreneur

An entrepreneur is an owner or manager of a business enterprise who makes money through risk and initiative.The term was originally a loanword from French and was first defined by the Irish-French economist Richard Cantillon. Entrepreneur in English is a term applied to a person who is willing to...

ship. These individuals lack collateral

Collateral (finance)

In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...

, steady employment

Employment

Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...

and a verifiable credit history

Credit history

Credit history or credit report is, in many countries, a record of an individual's or company's past borrowing and repaying, including information about late payments and bankruptcy...

and therefore cannot meet even the most minimal qualifications to gain access to traditional credit

Credit (finance)

Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...

. Microcredit is a part of microfinance

Microfinance

Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services....

, 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

Grameen Bank

The Grameen Bank is a microfinance organization and community development bank started in Bangladesh that makes small loans to the impoverished without requiring collateral...

in Bangladesh

Bangladesh

Bangladesh , officially the People's Republic of Bangladesh is a sovereign state located in South Asia. It is bordered by India on all sides except for a small border with Burma to the far southeast and by the Bay of Bengal to the south...

. In that country, it has successfully enabled extremely impoverished people to engage in self-employment

Self-employment

Self-employment is working for one's self.Self-employed people can also be referred to as a person who works for himself/herself instead of an employer, but drawing income from a trade or business that they operate personally....

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

Finance

"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...

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

United Nations

The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...

declared 2005 the International Year of Microcredit

International Year of Microcredit

International Year of Microcredit is a special event of the United Nations which took place in the year 2005. The event highlighted microfinance as an instrument for socioeconomic development.The year was launched on November 18, 2004.- Goals :...

Early Beginnings

Ideas relating to microcredit can be found at various times in modern history.

Jonathan Swift

Jonathan Swift

Jonathan Swift was an Irish satirist, essayist, political pamphleteer , poet and cleric who became Dean of St...

inspired the Irish Loan Funds of the 18th and 19th centuries. In the mid-19th century, Individualist anarchist

Individualist anarchism

Individualist anarchism refers to several traditions of thought within the anarchist movement that emphasize the individual and his or her will over external determinants such as groups, society, traditions, and ideological systems. Individualist anarchism is not a single philosophy but refers to a...

Lysander Spooner

Lysander Spooner was an American individualist anarchist, political philosopher, Deist, abolitionist, supporter of the labor movement, legal theorist, and entrepreneur of the nineteenth century. He is also known for competing with the U.S...

wrote about the benefits of numerous small loans for entrepreneurial activities to the poor as a way to alleviate poverty. At about the same time, but independently to Spooner, Friedrich Wilhelm Raiffeisen

Friedrich Wilhelm Raiffeisen

Friedrich Wilhelm Raiffeisen was a German mayor and cooperative pioneer. Several credit union systems and cooperative banks have been named after Raiffeisen, who pioneered rural credit unions.- Life :...

founded the first cooperative lending banks to support farmers in rural Germany

Germany

Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...

. Ideas relating to microcredit were mentioned in portions of the Marshall Plan

Marshall Plan

The Marshall Plan was the large-scale American program to aid Europe where the United States gave monetary support to help rebuild European economies after the end of World War II in order to combat the spread of Soviet communism. The plan was in operation for four years beginning in April 1948...

at the end of World War II

World War II

World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

.

In the 1950s, Akhtar Hameed Khan

Akhtar Hameed Khan

Akhtar Hameed Khan was a Pakistani development activist and social scientist credited for pioneering microcredit and microfinance initiatives, farmers' cooperatives, and rural training programmes in the developing world. He promoted participatory rural development in Pakistan and other developing...

began distributing group-oriented credit in East Pakistan. Khan used the Comilla Model

Comilla Model

The Comilla Model was a rural development programme launched in 1959 by the Pakistan Academy for Rural Development...

, in which credit is distributed through community-based initiatives. 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.

Modern Microcredit

The origins of microcredit in its current practical incarnation can be linked to several organizations founded in Bangladesh

Bangladesh

, especially the Grameen Bank

Grameen Bank

The Grameen Bank is a microfinance organization and community development bank started in Bangladesh that makes small loans to the impoverished without requiring collateral...

.The Grameen Bank, which is generally considered the first modern microcredit institution, was founded in 1976 by Muhammad Yunus

Muhammad Yunus

Muhammad Yunus is a Bangladeshi economist and founder of the Grameen Bank, an institution that provides microcredit to help its clients establish creditworthiness and financial self-sufficiency. In 2006 Yunus and Grameen received the Nobel Peace Prize...

. Yunus began the project in a small town called Jobra, using his own money to deliver small loans at low-interest rates to the rural poor. Grameen Bank was followed by organizations such as BRAC

BRAC (NGO)

BRAC, based in Bangladesh, is the world's largest non-governmental development organization. Established by Sir Fazle Hasan Abed in 1972 soon after the independence of Bangladesh, BRAC is present in all 64 districts of Bangladesh, with over 7 million microfinance group members, 37,500 non-formal...

in 1972 and ASA

Association for Social Advancement

The Association for Social Advancement ' is a non-governmental organization based in Bangladesh which provides microcredit financing. It was established in 1978 by Shafiqual Haque Choudhury and a team of people who were then working for other established NGOs but who themselves were arguing for...

in 1978. Microcredit reached Latin America with the establishment of PRODEM in Bolivia in 1986; a bank that later transformed into the for-profit BancoSol. Microcredit quickly became a popular tool for economic development, with hundreds of institutions emerging throughout the third world. Though the Grameen Bank was formed initially as a non-profit organization dependent upon government subsidies, it later became a corporate entity and was renamed Grameen II in 2002. Muhammad Yunus

Muhammad Yunus

was awarded the Nobel Peace Prize

Nobel Peace Prize

The Nobel Peace Prize is one of the five Nobel Prizes bequeathed by the Swedish industrialist and inventor Alfred Nobel.-Background:According to Nobel's will, the Peace Prize shall be awarded to the person who...

in 2006 for his work providing microcredit services to the poor.

Economic Principles of Microcredit

Microcredit is based on a separate set of principles, which are distinguished from general financing or credit. Microcredit organizations were created to serve in the place of loca [loan-sharks] known to take advantage of clients. Many microcredit organizations began as non-profit organizations, running off of government or private subsidies. By the 1980s, the ‘financial systems approach,’ influenced by neoliberalism

Neoliberalism

Neoliberalism is a market-driven approach to economic and social policy based on neoclassical theories of economics that emphasizes the efficiency of private enterprise, liberalized trade and relatively open markets, and therefore seeks to maximize the role of the private sector in determining the...

and propagated by the Harvard Institute for International Development

Harvard Institute for International Development

The Harvard Institute for International Development was a think-tank dedicated to helping nations join the global economy, operating between 1974 and 2000...

became the dominant ideology among microcredit organizations. The commercialization of microcredit began with the formation of Unit Desa (BRI-UD) within the Bank Rakyat Indonesia

Bank Rakyat Indonesia

Bank Rakyat Indonesia or PT. Bank Rakyat Indonesia , , is one of the larger banks in Indonesia. It specialises in small scale and microfinance style borrowing from and lending to its approximately 30 million retail clients through its over 4,000 branches, units and rural service posts...

in 1984, which offered ‘kupedes’ microloans based on market interest rates. Most microcredit organizations now function as independent banks, leading to high interest rates and a greater emphasis on savings programs. The application of neoliberal economics to microcredit has generated much debate among scholars and development practitioners , with some claiming that microcredit bank directors, such as
Muhammad Yunus, are employing the practices of a loan shark for their own personal enrichment. Indeed, a Wall-street style scandal involving the Mexican microcredit organization Compartamentos illuminated the limitations of profit-driven microcredit institutions.

Microcredit emphasizes trust building, which can enable micro-entrepreneurship, so generating employment and helping people to help themselves during enterprise initiation and during difficult times.

Group Lending

Though group-lending has long been a key part of microcredit, microcredit initially began with the principle of lending to individuals. Despite the use of solidarity circles in 1970s Jobra, Grameen Bank

Grameen Bank

The Grameen Bank is a microfinance organization and community development bank started in Bangladesh that makes small loans to the impoverished without requiring collateral...

and other early microcredit institutions initially focused on individual lending. Indeed, Muhammad Yunus

Muhammad Yunus

propagated to notion that every person has the potential to become an entrepreneur. The use of group-lending was motivated by economics of scale, as the costs associated with monitoring loans and enforcing repayment are significantly lower when credit is distributed to groups rather than individuals. Many times the loan of one participant in group-lending depends upon the successful repayment of another member, thus transferring repayment responsibility off of microcredit institutions to loan recipients.

Lending to Women

Lending to women has become an important principle in microcredit, with banks and NGO’s such as BancoSol, WWB, and Pro Mujer

Pro Mujer

Pro Mujer is a 20-year-old women’s development and microfinance organization that provides poor women in Latin America with an integrated package of financial services, healthcare, and training to lift themselves and their families out of poverty...

catering to women exclusively. . Though Grameen Bank

Grameen Bank

The Grameen Bank is a microfinance organization and community development bank started in Bangladesh that makes small loans to the impoverished without requiring collateral...

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. 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. Subsequently, many microcredit institutions have used the goal of empowering women to justify their disproportionate loans to women. 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

India

India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...

, the National Bank for Agriculture and Rural Development

National Bank for Agriculture and Rural Development

National Bank for Agriculture and Rural Development is an apex development bank in India having headquarters based in Mumbai and other branches are all over the country...

(NABARD) finances more than 500 banks that on-lend funds to self-help group

Self-help group (finance)

A self-help group is a village-based financial intermediary usually composed of 10–20 local women. Most self-help groups are located in India, though SHGs can also be found in other countries, especially in South Asia and Southeast Asia....

s (SHGs). SHGs comprise twenty or fewer members, of whom the majority are women from the poorest caste

Caste

Caste is an elaborate and complex social system that combines elements of endogamy, occupation, culture, social class, tribal affiliation and political power. It should not be confused with race or social class, e.g. members of different castes in one society may belong to the same race, as in India...

s 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 30% to 70% APR

Annual percentage rate

The term annual percentage rate , also called nominal APR, and the term effective APR, also called EAR, describe the interest rate for a whole year , rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate...

, or 12% to 24% a year, based on the flat calculation method

Flat rate (finance)

Flat interest rate loans are often used by traditional moneylenders in the informal economy of developing countries. They are also used by many microfinance institutions. One reason for their popularity is their ease of use...

. 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

Opportunity International

Opportunity International is an organization that provides small business loans, savings, insurance and training to more than two million people working their way out of poverty in the developing world...

, Catholic Relief Services

Catholic Relief Services

Catholic Relief Services is the international humanitarian agency of the Catholic community in the United States. Founded in 1943 by the U.S. bishops, the agency provides assistance to 130 million people in more than 90 countries and territories in Africa, Asia, Latin America, the Middle East and...

, Compassion International

Compassion International

Compassion International is a Christian child sponsorship organization dedicated to the long-term development of children living in poverty around the world. Compassion International, headquartered in Colorado Springs, functions in 26 countries such as Bolivia, Colombia, Mexico, Haiti, Kenya, and...

, CARE, APMAS, Oxfam

Oxfam

Oxfam is an international confederation of 15 organizations working in 98 countries worldwide to find lasting solutions to poverty and related injustice around the world. In all Oxfam’s actions, the ultimate goal is to enable people to exercise their rights and manage their own lives...

, Tearfund

Tearfund

Tearfund is a UK Christian relief and development agency which works in over 50 countries. It is a founding member of both the Micah Network and the Disasters Emergency Committee.-History:...

and World Vision

World Vision

World Vision, founded in the USA in 1950, is an evangelical relief and development organization whose stated goal is "to follow our Lord and Saviour Jesus Christ in working with the poor and oppressed to promote human transformation, seek justice and bear witness to the good news of the Kingdom of...

. 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."

Tazul Islam suggests that the evidence demonstrates a “positive impact on enterprise and household income

Household income

Household income is a measure of the combined incomes of all people sharing a particular household or place of residence. It includes every form of income, e.g., salaries and wages, retirement income, near cash government transfers like food stamps, and investment gains.Average household income can...

and asset

Asset

In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...

accumulation, household consumption, and positive influence on social welfare indicators (education

Education

Education in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...

, expenditure on health

Health

Health is the level of functional or metabolic efficiency of a living being. In humans, it is the general condition of a person's mind, body and spirit, usually meaning to be free from illness, injury or pain...

and nutrition

Nutrition

Nutrition is the provision, to cells and organisms, of the materials necessary to support life. Many common health problems can be prevented or alleviated with a healthy diet....

)”.

Abudulai argues that microcredit improves the standard of living

Standard of living

Standard of living is generally measured by standards such as real income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality and educational standards are also used. Examples are access to certain goods , or measures of health such as...

by raising awareness

Awareness

Awareness is the state or ability to perceive, to feel, or to be conscious of events, objects or sensory patterns. In this level of consciousness, sense data can be confirmed by an observer without necessarily implying understanding. More broadly, it is the state or quality of being aware of...

, aiding decision making

Decision making

Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...

, and reducing poverty

Poverty

among rural

Rural

Rural areas or the country or countryside are areas that are not urbanized, though when large areas are described, country towns and smaller cities will be included. They have a low population density, and typically much of the land is devoted to agriculture...

beneficiaries. In this regard, according to Cheston and Kuhn, Microcredit programs have the potential

Potential

*In linguistics, the potential mood*The mathematical study of potentials is known as potential theory; it is the study of harmonic functions on manifolds...

to transform power relations and empower

Empowerment

Empowerment refers to increasing the spiritual, political, social, racial, educational, gender or economic strength of individuals and communities...

the poor

Poor

Poor is an adjective related to a state of poverty, low quality or pity.People with the surname Poor:* Charles Henry Poor, a US Navy officer* Charles Lane Poor, an astronomer* Edward Erie Poor, a vice president of the National Park Bank...

—both men and women—. As for women’s empowerment

Empowerment

Empowerment refers to increasing the spiritual, political, social, racial, educational, gender or economic strength of individuals and communities...

, Goetz and Gupta show that women experience higher bargaining

Bargaining

Bargaining or haggling is a type of negotiation in which the buyer and seller of a good or service dispute the price which will be paid and the exact nature of the transaction that will take place, and eventually come to an agreement. Bargaining is an alternative pricing strategy to fixed prices...

and decision making

Decision making

power within the family as they bring more income

Income

Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...

to the household

Household

The household is "the basic residential unit in which economic production, consumption, inheritance, child rearing, and shelter are organized and carried out"; [the household] "may or may not be synonymous with family"....

. The increase in the household income

Household income

trickles down to impact higher consumption standards, education

Education

for children, and better nutrition

Nutrition

Nutrition is the provision, to cells and organisms, of the materials necessary to support life. Many common health problems can be prevented or alleviated with a healthy diet....

.

Moreover, Putnam asserts that dense networks within society is shown to positively correlate with political democracy

Democracy

Democracy is generally defined as a form of government in which all adult citizens have an equal say in the decisions that affect their lives. Ideally, this includes equal participation in the proposal, development and passage of legislation into law...

and economic growth

Economic growth

In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...

, as reinforced by the evidence of economic stagnation

Economic stagnation

Economic stagnation or economic immobilism, often called simply stagnation or immobilism, is a prolonged period of slow economic growth , usually accompanied by high unemployment. Under some definitions, "slow" means significantly slower than potential growth as estimated by experts in macroeconomics...

that followed the declining stocks of social capital

Social capital

Social capital is a sociological concept, which refers to connections within and between social networks. The concept of social capital highlights the value of social relations and the role of cooperation and confidence to get collective or economic results. The term social capital is frequently...

in neighborhoods and communities. So in the last decade or two, we have seen the shift of development discourse

Discourse

Discourse generally refers to "written or spoken communication". The following are three more specific definitions:...

from “basic needs” or welfare

Welfare

Welfare refers to a broad discourse which may hold certain implications regarding the provision of a minimal level of wellbeing and social support for all citizens without the stigma of charity. This is termed "social solidarity"...

approaches to poverty alleviation to an alternative approach using social capital

Social capital

manifested in social networks and associational life as resources that could fuel development from the bottom up.

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.

New platforms that connect lenders to micro-entrepreneurs are emerging on the Web, for example Kiva

Kiva (organization)

Kiva Microfunds is an organization that allows people to lend money via the Internet to microfinance institutions in developing countries around the world and in the United States, which in turn lend the money to small businesses and students...

, Zidisha

Zidisha

Zidisha is a nonprofit peer-to-peer microfinance internet platform that allows people to lend small amounts of money directly to entrepreneurs in developing countries. "Zidisha" is the Swahili word for "grow" or "expand", as in a business, an investment, or a quality such as freedom or prosperity...

, Lend for Peace, the Microloan Foundation

Microloan Foundation

The Microloan Foundation is a UK-based microfinance charity making small business loans to women in Malawi and Zambia in Southern Africa...

, and iMicroInvest. Another WWW-based microlender United Prosperity

United Prosperity (organisation)

United Prosperity is a not-for-profit Web-based microcredit organisation.Unlike most microcredit or person-to-person lending organisations, United Prosperity does not directly lend to the micro-entrepreneur, but instead the micro-loans are used to provide a guarantee to a local bank, which lends to...

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-entrpreneur. 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. In 2009, the US-based nonprofit Zidisha

Zidisha

became the first peer-to-peer microlending platform to link lenders and borrowers directly across international borders without local intermediaries. Vittana

Vittana

Vittana is a non-governmental organization that allows people to lend money via the Internet to students in the developing world. It is a 501 non-profit organization headquartered in Seattle. Vittana focuses on student loans because student loans are nearly unavailable in developing...

allows peer-to-peer lending for student loans in developing countries.

In the developed world

Microcredit is not only provided in poor countries, but also in one of the world's richest countries, the USA, where 37 million people (12.6%) live below the poverty line. Among other organizations that provide microloans in the United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

, Grameen Bank

Grameen Bank

The Grameen Bank is a microfinance organization and community development bank started in Bangladesh that makes small loans to the impoverished without requiring collateral...

started their operation in New York in April 2008. According to economist Jonathan Morduch

Jonathan Morduch

Jonathan Morduch is a Professor of Public Policy and Economics at the NYU Robert F. Wagner School of Public Service. He is a prominent development economist most well known for his significant academic contributions to assessing the impact of microfinance since the early years of the movement...

of New York University

New York University

New York University is a private, nonsectarian research university based in New York City. NYU's main campus is situated in the Greenwich Village section of Manhattan...

, microloans have less appeal in the US, because people think it is too difficult to escape poverty through private enterprise. Bank of America has announced plans to award more than $3.7 million in grants to nonprofits to use in backing microloan programs.

Other developed countries in which the micro-loan model is in fact gaining impetus include Israel, Russia, the Ukraine and more, where micro-loans given to small business entrepreneurs are also used to overcome cultural barriers in the mainstream business society. The Israel Free Loan Association (IFLA) has lent out over $100 million in the past two decades to Israeli citizens of all backgrounds.

Even so, efforts to replicate Grameen-style solidarity lending

Solidarity lending

Solidarity lending is a lending practice where small groups borrow collectively and group members encourage one another to repay. It is an important building block of microfinance.-How it Works:...

in developed countries have generally not succeeded. For example, the Calmeadow Foundation tested an analogous peer-lending model in three locations in Canada, rural Nova Scotia and urban Toronto and Vancouver, 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. However, debates have continued about whether the required subsidies may be justified as an alternative to other subsidies targeted to the entrepreneurial poor, and VanCity Credit Union

Vancity

Vancouver City Savings Credit Union, commonly referred to as Vancity, is a member-owned financial institution in Vancouver, British Columbia and the largest English-speaking credit union in Canada...

, which took over Calmeadow's Vancouver operations, continues to use peer lending.

Some organizations, however, have been able to find success bringing the microfinance model to the United States. ACCION USA

Accion USA

ACCION USA is an American microfinance organization headquartered in New York, NY.- About :ACCION USA offers microloans and other financial services to low- and moderate-income entrepreneurs in the United States who are unable to access bank credit for their small businesses...

, the US subsidiary of the better-known ACCION International

Accion International

ACCION International is a nonprofit organization that supports microfinance institutions in their work to provide financial services to low-income clients. ACCION provides management services, technical assistance, debt and equity investment and training to microfinance institutions and...

, has been able to provide US$117 million in microloans since 1991, with an over 90% repayment rate.

Criticism

Gina Neff of the Left Business Observer has described the microcredit movement as a privatization of public safety-net programs. 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 that 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. As a result, borrowers are kept out of waged work and pushed into the informal economy.

Many studies in recent years have shown that risks like sickness, natural disaster and overindebtedness are a critical dimension of poverty and that very poor people rely heavily on informal savings to manage these risks (see, for example, The Microfinance Revolution: Sustainable Finance for the Poor by Marguerite Robinson). It might be expected that microfinance institutions would provide safe, flexible savings services to this population, but—with notable exceptions like Grameen II—they have been very slow to do so. Some experts argue that most microcredit institutions are overly dependent on external capital. A study of microcredit institutions in Bolivia in 2003, for example, found that they were very slow to deliver quality microsavings services because of easy access to cheaper forms of external capital. Global data tables from The Microbanking Bulletin show that savings represent a small source of funds for microcredit institutions in most developing nations.

Because field officers are in a position of power locally and are judged on repayment rates as the primary metric of their success, they sometimes use coercive and even violent tactics to collect installments on the microcredit loans. Some loan recipients sink into a cycle of debt, using a microcredit loan from one organization to meet interest obligations from another. Also, counter to the original intention of the microcredit system to empower women, one of the effects of an infusion of cash into local economies has been to increase dowries

Dowry

A dowry is the money, goods, or estate that a woman brings forth to the marriage. It contrasts with bride price, which is paid to the bride's parents, and dower, which is property settled on the bride herself by the groom at the time of marriage. The same culture may simultaneously practice both...

, with women forced at times to take microcredit loans as the only means to pay these increased dowries for their daughters.

Bangladesh's former Finance and Planning Minister M. Saifur Rahman charges that some microfinance institutions use excessive interest rates. In recent years, there has been increasing attention paid to the problem of interest rate disclosure, as many suppliers of microcredit quote their rates to clients using the flat calculation method

Flat rate (finance)

, which significantly understates the true Annual Percentage Rate

Annual percentage rate

.

The BBC

BBC

The British Broadcasting Corporation is a British public service broadcaster. Its headquarters is at Broadcasting House in the City of Westminster, London. It is the largest broadcaster in the world, with about 23,000 staff...

Business Weekly program reported that much of the supposed benefits associated with microfinance, are perhaps not as compelling as once thought. In a radio interview with Professor Dean Karlan

Dean Karlan

Dean Karlan is a Professor of Economics at Yale University and a Research Fellow at the Abdul Latif Jameel Poverty Action Lab at the Massachusetts Institute of Technology...

of Yale University

Yale University

Yale University is a private, Ivy League university located in New Haven, Connecticut, United States. Founded in 1701 in the Colony of Connecticut, the university is the third-oldest institution of higher education in the United States...

, a point was raised concerning a comparison between two groups: one African, financed through microcredit and one control group in the Philippines. The results of this study suggest that many of the benefits from microcredit are in fact loaned to people with existing business, and not to those seeking to establish new businesses. Many of those receiving microcredit also used the loans to supplement the family income. The income that went up in business was true only for men, and not for women. This is striking because one of the supposed major beneficiaries of microfinance is supposed to be targeted at women. Professor Karlan's conclusion was that whilst microcredit is not necessarily bad and can generate some positive benefits, despite some lenders charging interest rates between 40-60%, it isn't the panacea that is purported to be. He advocates rather than focusing strictly on microcredit, also giving citizens in poor countries access to rudimentary and cheap savings accounts.

Furthermore, there are widespread accumulations of studies that indicate that the Grameen Bank

Grameen Bank

The Grameen Bank is a microfinance organization and community development bank started in Bangladesh that makes small loans to the impoverished without requiring collateral...

system does not reach very far down the poverty

Poverty

pectrum], either in absolute terms or relative to other income

Income

categories. So according to Tazul Islam, it risks the exclusion of the below poverty line, since the clients of the bank incline to be clustered around the poverty line of predominantly moderately poor or vulnerable non-poor. Also, of the poor who join the bank’s microcredit program, a high percentage often dropout after only a few loan cycles, while many others eventually dropout in later loan cycles as loan amounts begin to exceed their repayment capacity. For women, their loans are seen as the source of capital

Capital (economics)

In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...

acquisition and this may lead to manipulation of women by putting pressure

Pressure

Pressure is the force per unit area applied in a direction perpendicular to the surface of an object. Gauge pressure is the pressure relative to the local atmospheric or ambient pressure.- Definition :...

on them to gain membership of a credit group. Also, there are criticisms over microfinance

Microfinance

institutions (MFIs) in creating small-debt traps for the poor with high interest rates and coercive methods of recovery. In Andhra Pradesh, the villagers who take out the loan often do not know the interest that they were being charged and are not aware of the consequences of taking multiple loans as they take the second loan to clear the first loan. Also, some studies reveal that the repayment rate of Grameen’s loans does not match anywhere near what the bank claims, that at least one quarter of its loans were being used for household consumption and there is no serious supervision of bank, which leads to bank delaying defaults and hiding problem loans.

Negative Impact on Women

Studies note that there is increase in domestic violence

Domestic violence

Domestic violence, also known as domestic abuse, spousal abuse, battering, family violence, and intimate partner violence , is broadly defined as a pattern of abusive behaviors by one or both partners in an intimate relationship such as marriage, dating, family, or cohabitation...

for women who do not get the loan or have to wait a long time to get the loan and often times their loans are given over to their male relatives or husbands. Women are more likely to retain control over their loans in traditional women’s work like livestock rearing that are considered “women’s work”. Moreover, the bigger the size of the loan, women lose their control more. For example, Montgomery’s studies show that women have 100% control over loans that are smaller than 1000 TK but only 46% of control if the loan is bigger than 4,000 TK. Women also face the situation that they have to depend on men when they cannot generate enough income

Income

, which can lead to gendered pattern of dependency and new source of tension within the household.

Policy Implications

Because the large majority of microloans are awarded to women under the pretense of ensuring their empowerment, several improvements must be made to the distribution of microcredit in relation to women. Parmar takes issue with the idea that empowerment can be given to women by (mostly male) development practitioners in the form of loans, arguing that empowerment is a self-directed process. Rebecca Vonderlack believes that measures must be taken to ensure that female loan recipients exert full control over their loans, and have access to markets. Johnson argues for the inclusion of more female employees in microcredit institutions, and gender awareness training for existing staff. Additionally, Leach claims that men must be included in the process of lending to women in order to diminish gender antagonism, as men often feel excluded from microcredit services.

Many scholars and practitioners suggest an integrated package of services (‘a credit-plus’ approach) rather than just handing out money. When access to credit

Credit (finance)

is combined with other services, such as additional financial services

Financial services

Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...

(voluntary savings facilities, non-productive loan facilities, insurance

Insurance

In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...

), enterprise development (production-oriented and management training, marketing support) and welfare-related services (literacy and health services, gender and social awareness training), the adverse effects discussed above will be diminished. Goetz and Gupta argue that more experienced [entrepreneurs] who are getting loans should be qualified for bigger loans to ensure the success of the program. Furthermore, scholars assert that the use of microcredit programs in development should be limited to the natural of the potentially helpful tool that they are, i.e., for opening doors of economic opportunity for the poor in helping to alleviate the economic resources trap that they often face.

External links

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
Pierre Omidyar
Pierre Morad Omidyar is a French-Iranian American entrepreneur and philanthropist/economist, and the founder/chairman of the eBay auction site...

and Tufts University
Tufts University
Tufts University is a private research university located in Medford/Somerville, near Boston, Massachusetts. It is organized into ten schools, including two undergraduate programs and eight graduate divisions, on four campuses in Massachusetts and on the eastern border of France...

.
"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 enpowerment of the poor, BRAC Bangladesh
Bangladesh
Bangladesh , officially the People's Republic of Bangladesh is a sovereign state located in South Asia. It is bordered by India on all sides except for a small border with Burma to the far southeast and by the Bay of Bengal to the south...
The European Union Project "Credit Cooperatives - Russian Federation" official web site
Small Fortunes: Microcredit and the Future of Poverty web site for a PBS documentary

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Early Beginnings

Modern Microcredit

Economic Principles of Microcredit

Group Lending

Lending to Women

Strengths

Microcredit and the Web

In the developed world

Criticism

Negative Impact on Women

Policy Implications

See also

External links