Microcredit
Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment, and a verifiable credit history.
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 by their current Chief Adviser Muhammad Yunus.
"[3] 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 Mr. 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.
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.
[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.
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.
[15] The commercialization of microcredit officially began in 1984 with the formation of Unit Desa (BRI-UD) within the Bank Rakyat Indonesia.
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.
[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.
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.
[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.
The Israel Free Loan Association (IFLA) has lent more than $100 million in the past two decades to Israeli citizens of all backgrounds.
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.
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.
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.
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.
[37] Critics say that microcredit, if not carefully directed, may not increase incomes, and may drive poor households into a debt trap.
They add that the money from loans may be used for durable consumer goods or consumption instead of being used for productive investments, that it may fail to empower women, and that it may not improve health or education.
When access to credit is combined with savings facilities, non-productive loan facilities, insurance, 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 can be diminished.
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%.
Analyst David Roodman contends that in mature markets, the average interest and fee rates charged by microfinance institutions tend to fall over time.
