Microcredit

= the extension of very small loans (microloans) to those in poverty designed to spur entrepreneurship. [1]

URL = http://en.wikipedia.org/wiki/Microcredit

Definition

"Microlending is a decentralized activity where the poor manage their own credit risk by saving and borrowing in circles of five people each, who all guarantee each other’s loans. This decentralization of the credit risk not only makes the microlending work, but with real and regular loan repayments, it also teaches the borrowers the responsibility of tight business and financial management." (http://beckstrom.com/kaputei.html)

Description

Microcredit:

"In 1974 Bangladeshi Economics Professor Muhammad Yunus observed a poor countrywoman and calculated that, if she could raise less than thirty cents, she might escape the poverty imposed by middle-men who manipulated the prices at which she bought her raw material and sold her finished furniture. Bemoaning the failure of his American economics Ph.D. to highlight this travesty Yunus founded the `Grameen' (meaning `Community') Bank. But how could it make these loans and get them repaid when its borrowers had no collateral to put up and Bangladeshi culture was shot through with corruption and debt evasion?

The secret was lending to individuals, but doing so within groups of people - particularly women - all of whom went co-guarantor. People might walk away from a loan to themselves, but these `solidarity groups' helped transfer skill and share risk as well as radiating both the financial pain and the social shame of default. These groups, the desire to increase borrowing as businesses grow, and the `training' that borrowers get enable the Grameen Bank inculcate a culture of trust and repayment and a default rate of around one percent.

Group and self-interest coalesce a deft and miraculous new combination." (http://troppoarmadillo.ubersportingpundit.com/archives/009157.html)

Characteristics

Hans Schuhmacher:

"Concise definition: Small-scale credit developed in the global South (Frontrunner: Grameen Bank, Bangladesh), typically employed to finance labour-intensive small-scale trade and industry with minor material costs. Microcredit bridges lack of access to the regular banking sector for the poor and, thus, mobilises economic potential.

• Application for technology cooperation : Financing of small-scale business activities in

threshold and developing countries, for example implementation of technologies in households, maintenance, distribution. Volume: less than 10.000 EUR in case of community projects; consumer credits in the global South, for example for solar cookers or Compact Flourescent Lamps (CLFs).

• Achievement potential: Microcredit is particularly suitable for the financing of very smallscale

entrepreneurial activities, in the context of technology cooperation for example implementation of household technologies, maintenance and distribution.

• Prerequisite for effectiveness : Economically sustainable interest rates which minimize the

risk of project failure due to overindebtedness of borrowers. Microinsurance (analogous conditions) for further risk mitigation. Valid credit assessments and feasibility analyses, valid risk management systems. Collaboration with microfinance institutions (MFIs) that act in a target-aimed manner in the sphere of technology cooperation, when appropriate founding of such MFIs.

• Practical experiences: Microcredit is successful regarding the mobilisation of economic

potential. There are already positive practical experiences in the sphere of technology cooperation. „Grameen Shakti“, for example, offers soft consumer credits for climatefriendly technologies and supports small-scale industry and trade activities geared up to the implementation of these technologies by means of microcredit and training.4

• Possible correlations : The Peer-to-Peer microcredit platform Kiva5 works with MFIs which

transfer non-interest-bearing loans from private individuals and civil society organisations to small-scale entrepreneurs in developing countries as interest-bearing loans. It should be examined whether such a combined instrument would be suitable for technology cooperation."

(SourceClimate Justice as Business Case: Innovative Business Models for the Transfers of Climate-Friendly Technologies. By Hans Schuhmacher, with support from Julio Lambing et al. European Business Council for Sustainable Energy. Preliminary English version. 06 December 2009 [ http://www.e5.org]

Discussion

Hans Schuhmacher:

"Microfinance attracted considerable attention in recent years, not least due to the conferment of the Nobel Prize to Muhammad Yunus, the founder of the Grameen Bank. Its subsidiary, Grameen Shakti, utilises microcredit for the implementation of solar modules on houses in Bangladesh for years. Meanwhile, a multitude of MFIs throng in the market. The strength of microcredit is its ability to reach those who are classified as unbankable and do not have access to credit under reasonable conditions. The volume of a single microcredit ranges from 1 EUR and 10.000 EUR. MFIs can be specialised finance institutions, but also NGOs.

Interest rates typically range between 15% and 40%, run durations are short. Payback and monitoring are usually organised by groups of borrowers. The Grameen Bank, like many other MFIs, grants new credits when the old ones are repaid. This brings about tight social control which, in turn, results in very few dead losses. Activities financed by means of microcredit are usually labour-intensive and require minor material expenditure.

Microcredit, however, cannot bring about sustainable economic development on its own when infrastructure, healtcare and access to education, training and qualification are deficient or not present at all.6 There is also the problem of, in places, extremely high interest rates (in some cases up to 70%) which are accounted for inflation, high administrative costs and the difficulties involved with aquiring capital by the MFIs in question.

Disproportionate interest rates can affect the application potential of mcrocredit for technology cooperation negatively. Success of technology cooperation also depends on mid-term and longterm solvency of local partner entrepreneurs and companies and on their capability to prosper.

Therefore. technology companies wishing to employ microcredit in technology cooperation projects should choose with care a MFI and collaborate with it. The interest rates of this MFI should be oriented towards sustainability. This applies both to financing of economic activities that are part of the project and to credits in the project's environment. It is advisable to take into account the national or regional rate of inflation when evaluating interest rates, the „real“ interest rate may in fact be lower than the figures indicate. It should be possible that microcredit debtors obtain positive accounts in credit in the long run in order to strengthen local purchasing power. Furthermore, microinsurance for loan loss should be available under advantageous conditions.

In case there is no suitable MFI present in the region, institutional investors may play this role or found special MFIs, so lang as the asset managers of institutional investors are increasingly bound to invest in sustainable projects..

Another possibility would be the founding of special MFIs by already existing MFIs or joint ventures in developing countries. Appropriate education and training of students and interns from developing countries may bring about functioning banking systems in regions where there is a lack of them, led by executives who understand local environments."

More Information

1. Microcredit lending models
2. Here's a critique of the microfinance movement and the bottom of the pyramid movement by Paul Hawken, author of The Ecology of Commerce and Natural Capitalism, athttp://valuenewsnetwork.com/article.cfm?id=12
3. Networks and networking in microfinance
4. Spotlight on the Grameen Bank

See also: Social Lending