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Reasons for Micro Credits

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Reasons for Micro Credits I. Introduction: Every entrepreneur knows that “the bank gives you an umbrella when it’s sunny but not when it’s raining and that banks are for people with money, not for people without” this means that banks are generally reluctant to give credit, especially to those starting a business without proper collateral. Consequently many small businesses were being denied credit due to an insufficient guarantee or to perceived high risks, all this makes such poor entrepreneurs “unbankable” and thus of no interest to commercial banks. A solution to this state of exclusion is Microfinance with its microcredit. II. Definition and history of Micro credits : Microcredit is the extension of very small loans, and other financial services such as savings, to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families. Microcredit belongs to the group of financial service innovations under the term of microfinance, other services according to microfinance is micro savings, money transfer vehicles and micro insurance. Both are based on the simple principle of “banking the unbankables” that is bringing credits, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks, who lack collateral, steady employment or a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Microcredit is a financial innovation that is generally considered to have originated with the Grameen Bank in Bangladesh in the 1970s and onward, for which its founder Muhammad Younus was awarded the Nobel Peace Prize for his pioneering in this field. In that country, it has successfully enabled extremely impoverished people to engage in self-employment 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 it is an influential and fast- growing field in International Finance and Economics. From its origins in South Asia, it is being adopted in more and more countries across the world – in Europe and the Americas, as well as Africa and East Asia. III. Particularism of Microcredits: Size - loans are micro, or very small in size Target users – micro-entrepreneurs, poor and low-income households especially women 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 microcredit loans are flexible and easy to understand, loans are repaid within short periods of time suited to the local conditions of the community. 1. The size : The key implications of microcredit are in its name itself: 'micro'. A number of issues come to mind when 'micro' is considered: The small size of the loans made which rarely exceeds 100 USD in Asia, small size of savings made, the smaller frequency of loans, shorter repayment periods and amounts, the micro/local level of activities, the community-based immediacy of microcredit etc. Hence microcredit is not the solution, but is a menu of options and enablement, that has to be put together, a la carte, based on local conditions and needs. 2. The target users : The Microcredit Summit defines the poorest families in developing countries as the bottom 50% of those living below their country’s poverty line or those living on less than $1 a day adjusted for purchasing power parity. In the industrialized world, the Summit targets all those who live below the poverty line. Reaching 100 million of the world’s poorest families is only one step in eradicating poverty worldwide: currently, the World Bank estimates that 1.2 billion people (roughly 240 million families) are living on less than US$1 a day. Why target women? 1.2 billion People are living on less than a dollar a day. Women are often responsible for the upbringing of the world’s children and the poverty of the women generally results in the physical and social underdevelopment of their children. Experience shows that women are a good credit risk, and that women invest their income toward the well being of their families. At the same time, women themselves benefit from the higher social status they achieve within the home when they are able to provide income. IV. Advantages of Microcredits : Advantages of Micro lending are numerous, they include reaching the poor people and low-income house holds, empowering women, building financial self-sufficiency beyond ensuring social impact. 1. Reach the poorest, poverty alleviation : "If we are looking for one single action which will enable the poor to overcome their poverty, I would focus on credit" Muhammad Yunus, Microcredit plays an important role in fighting the multi-dimensional aspects of poverty. Microfinance increases household income, which leads to attendant benefits such as increased food security, the building of assets, and an increased likelihood of educating one’s children. Microfinance is also a means for self-empowerment. It enables the poor to make changes when they increase income, become businessowners and reduce their vulnerability to external shocks like illness, weather, natural disasters and more. 2. Building financial self sufficiency : “Microcredit is based on the premise that the poor have skills which remain unutilized or underutilized. It is definitely not the lack of skills which make poor people poor….charity is not the answer to poverty. It only helps poverty to continue. It creates dependency and takes away the individual’s initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty”. (Muhammad Yunus, Expanding Microcredit Outreach to Reach the Millennium Development Goals, International Seminar on Attacking Poverty with Microcredit, Dhaka, Bangladesh, January, 2003). Microcredit fits best to those with entrepreneurial capability and possibility. This translates to those poor who work in growing economies, and who can undertake activities that generate weekly stable incomes. For those who don’t qualify because they are extreme poor like destitute and homeless almost every microcredit institution have special safety programs that offer basic subsistence and later endeavours to graduate this members in their microfinance program making ordinary microcredits available. 3. Empowering women and the social impact : "Women have plans for themselves, for their children, about their home, the meals. They have a Vision. A man wants to enjoy himself." (Muhammad Yunus). The most of the microcredit institutions and agencies allover the world focuses on women in developing countries. Observations and experience shows that women are a small credit risk, repaying their loans and tend more often to benefit the whole family. In another aspect, it´s also seeing as a method giving the women more status in a social economic way and changing the current conservative relationship between gender and class when women are able to provide income to the household. Women are in most cases responsible for children, and in poor conditions it results in physical and social underdevelopment of their children, 1.2 billion people are living on less than a dollar a day. There are many reasons why women have become the primary target of microfinance services. A recent World Bank report confirms that societies that discriminate on the basis of gender pay the cost of greater poverty, slower economic growth, weaker governance, and a lower living standard for all people. At a macro level, it is because 70 percent of the world’s poor are women. Women have a higher unemployment rate than men in virtually every country and make up the majority of the informal sector of most economies. They constitute the bulk of those who need microfinance services. Giving women access to microcredit loans therefore generates a multiplier effect that increases the impact of a microfinance institution’s activities, benefiting multiple generations. 4. In the developing 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, Grameen Bank started their operation in New York in April 2008. According to economist Jonathan Morduch of New York University, microloans have less appeal in the US, because people think it too difficult to escape poverty through private enterprise .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 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, 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, which is the US subsidiary of the more well- know ACCION International, has been able to provide US$117 million in microloans since 1991, with an over 90% repayment rate.
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