Sunday, October 28, 2007

This article is specific to small loans. For financial services to the poor see Microfinance. For small payments see Micropayment.
Microcredit is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs and to others living in poverty who are not considered bankable. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of financial services to the very poor; apart from loans, it includes savings, microinsurance and other financial innovations.
Microcredit is a financial innovation which originated in developing countries where 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 these microcredit borrowers should more correctly be categorized as pre-bankable; thus, microcredit is increasingly gaining credibility in the mainstream finance industry and many traditional large finance organizations are contemplating microcredit projects as a source of future growth. Although almost everyone in larger development organizations discounted the likelihood of success of microcredit when it was begun in its modern incarnation as pilot projects with ACCION and Muhammad Yunus in the mid-1970s, the United Nations declared 2005 the International Year of Microcredit.

Focus on Women
The concept of microcredit can be traced back to portions of the Marshall Plan at the end of World War II in the middle of the 20th century or even back to the mid-1800s and the writings [3] of abolitionist/legal theorist Lysander Spooner who wrote concerning the benefits of numerous small loans for entrepreneurial activities to the poor as a way to alleviate poverty. It is also tied to New York's Providence Fund. However, in its most recent incarnation it can be linked to several organizations starting in the 1970s and onward.

In 1959, Dr. Akhtar Hameed Khan as the founder of East Pakistan (now Bangladesh) Academy for Rural Development introduced the idea of microcredit (microfinance. His Comilla Cooperative Pilot Project is considered an early example of microcredit and rural development initiatives in developing countries.

Bangladesh (formerly East Pakistan) Academy for Rural Development
In 1971, Al Whittaker resigned as president of Bristol Myers and established Opportunity International's first US office in Washington DC. The first loan was made to Carlos Moreno in Colombia to expand his one-man spice and tea business. About the same time Australian philanthropist, David Bussau, began making microloans in Indonesia. The two men met and formed Opportunity International, which provides opportunities for people in chronic poverty to transform their lives by creating jobs, stimulating small businesses, and strengthening communities. Small loans ranging from USD 25 to USD 500 helped poor families lift themselves out of poverty. Other Opportunity International offices are in Australia, Great Britain and Canada, each targeting countries within their region.

Opportunity International
In 1973 Accion International, a Peace Corps-like group, started to switch their focus toward providing economic opportunity to poor people instead of working on construction/infrastructure projects in order to create lasting improvements in the lives of those they were helping. Their plan first appeared in Recife, Brazil in 1973 when ACCION staff began to offer microloans to poor people eager to start small businesses. ACCION offered an alternative to the under-served population that were ineligible for traditional loans and wanted to avoid the exploitive lending practices of loan sharks.
Within four years, the experiment had shown its success in having provided 885 loans with a repayment rate of over 90%. The loans also helped to create or stabilize 1,386 new jobs. This success in making a lasting impact in peoples lives, as contrasted with the previous projects they had done seemingly steered ACCION firmly in the direction of being a microfinance organization. Since this beginning ACCION has expanded its microlending operation to countries throughout South and Central America, the United States, Africa and India.
ACCION claims that these loans were the first modern pioneers of microcredit.

ACCION International

Main article: Grameen BankMicrocredit Grameen Bank
In 1976, Women's World Banking was founded in New York by Ela Bhatt (India), Esther Ocloo (Ghana) and Michaela Walsh, an American investment banker. Bhatt had earlier founded the Mahila SEWA Cooperative Bank in 1974, and she served as WWB's chair from 1980 until 1998. The WWB president was reported in 2002 as claiming that of half the microcredit loans made worldwide to 25 million people, three-quarters of them were made to women, and had been made by WWB.

Women's World Banking
In the 1980s FINCA International continued the successful trend of microcredit in Bolivia. John Hatch, founder of FINCA, had worked on other international credit programs and started doing microcredit on his own in Bolivia, stressing local autonomy and putting the poor in charge of the programs. "Give poor communities the opportunity, and then get out of the way!" he said. He called his approach village banking.
After Hatch had had assembled a team, within four weeks, they had created 280 village banks serving 14,000 families with loans worth $630,000. While the original program was shut down, it was not because of a lack of success, but because its backers felt uncollateralized lending was too risky.
Despite this setback, Hatch continued to pursue his work and incorporated FINCA in 1985, this time working in El Salvador. In El Salvador the program focused on women, as many of the other micro credit programs have.
The mission of FINCA International is to provide financial services to the world's lowest-income entrepreneurs so they can create jobs, build assets, and improve their standard of living. In 2005, FINCA reached more than 400,000 clients, providing in excess of $100 million in small loans averaging $360. FINCA currently operates programs in 21 countries in Africa, Latin America and the Caribbean, Eastern Europe and Central Asia. Women comprise 80 percent of its small loan clients, and the organization has a loan repayment rate of 97 percent.

Microcredit FINCA International
Thengamara Mohila Sabuj Sangha (TMSS) is an NGO from Bangladesh. It was established in 1964 in Bogra District of Bangladesh. TMSS is a Women-oriented Leading Bangladeshi National Non-government Organization. The history says a lady with the lamp who was a day laborer formed along with other poor women in Thengamara village of Bogra. In 1980, a botany professor Dr. Hosne-Ara Begum came forward to redirect the NGOs social activty. She engaged herself as the Founder Executive Director of TMSS.
With the main patronizer Palli Karma Shahayak Foundation (PKSF),TMSS is engaged in uplifting the living condition of the most distressed poor people particularly women and children of both urban and rural areas. TMSS believes in self-help sustainable development of the targeted beneficiaries through their own efforts and resources. Main objective of TMSS is to alleviate poverty and upgrade the living standard of the most degraded poor to a dignified level through diversified ways. Over the years, TMSS has emerged as one of the most efficient and dynamic NGOs in the country. It has extensive network almost all over the country. TMSS has a large contingent of well-trained and skilled manpower, including 9000 regular staffs, 7,000 voluntary and part-time staffs. The number of target beneficiaries increased from 126 in 1980 to more than 1.8 million in 2005. The microcredit loan disbursement increased from US $ 8,000 to US $ 125 million during the same period with a recovery rate of 99%.

Vikram Akula founded SKS Microfinance in 1998, "to empower the poor to become economically self-reliant by providing financial services in a sustainable way", in the process pioneering the Microcredit and Microfinance movements in India.
According to its website, SKS Microfinance is one of the fastest growing microfinance organizations in the world, having provided over $ 180 million (Rs 740 crores) and has maintained loans outstanding of $68 million (280 crores) in loans to nearly 632,000 women clients in poor regions (spread across 11 states) of India. Borrowers take loans for a range of income-generating activities, including livestock, agriculture, trade (such as vegetable vending), and production (from basket weaving to pottery). SKS also offers interest-free loans for emergencies as well as life insurance to borrowers. Its affiliate, SKS Education, provides education services to poor children, including running a government-funded school for girls who have dropped out of school. SKS India aims to reach 5 Million clients by 2010. "Last year alone SKS Microfinance achieved 161% growth" (2006-07?).
In May 2006, Vikram Akula was named to TIME Magazine's Top 100 List of Most Influential People for the year 2006, wherein he was highlighted for his work as a pioneer in the microfinance industry and dedication to improving the lives of the poor in India.
In 2006, SKS Microfinance attracted the attention of Venture Capitalists such as Vinod Khosla, Small Industries Development Bank of India, Unitus Equity Fund, Sequoia Capital and they have invested in SKS India.

SKS India
The Governement of India is mulling some regulation for the Microfinance / Microcredit industry in India and in his budget speech on 28 February 2006, the Finance Minister P Chidambaram said "I had proposed major initiatives in respect of micro finance in the last Budget. RBI has since issued guidelines to enable banks to appoint banking correspondents and banking agents. A window to access ECB funds has also been opened. A Bill to provide a formal statutory framework for the promotion, development and regulation of the micro finance sector will be introduced in this session".
At a seminar on microfinance organised by the Confederation of Indian Industry (CII) and the Small Industries Development Bank of India (SIDBI) in Delhi, in September 2006, the Chairman & Managing Director of the Indian Bank, K C Chakrabarty, said "Micro Finance Institutions are limited in their delivery - most are simply engaged in lending. Micro finance is also about saving, insurance, and investment. Sadly, these products are not being delivered. So far, micro finance initiatives have failed to link the beneficiaries to the capital market, and have met with little success when it comes to developing micro-entrepreneurship. In most of rural India, people still borrow to meet their daily consumption, not to fund an income generating enterprise".

Some recent developments in India
The World Bank estimates that there are now more than 7,000 microfinance institutions, serving some 16 million poor people in developing countries. CGAP experts estimate that 500 million households benefit from these small loans. Cambodia and Kenya were put forward as examples. Asia and the Pacific region represent 83% of the opened accounts in developing countries, which is equivalent to 17 accounts for 100 persons . In November 1997, more than 2000 delegates from 100 countries gathered at a Microcredit Summit in Washington, DC, with the goal of reaching 100 million of the world's poorest families, with credit for self-employment and other financial and business services by the year 2005. Support for these goals has come from prominent world leaders and major financial institutions.
The Economic and Social Council of the United Nations proclaimed the year 2005 as the International Year of Microcredit to call for building inclusive financial sectors and strengthening the powerful, but often untapped, entrepreneurial spirit existing in communities around the world. There are five goals associated with "The Year" which are:

Assess and promote the contribution of microfinance and microcredit to the MDGs;
Increase public awareness and understanding of microfinance and microcredit as vital parts of the development equation;
Promote inclusive financial sectors;
Support sustainable access to financial services, and
Encourage innovation and new partnerships by promoting and supporting strategic partnerships to build and expand the outreach and success of microcredit and microfinance for all. Today
Grameen Bank and its founder Muhammad Yunus were awarded the Nobel Peace Prize for 2006. The press release states:
"The Norwegian Nobel Committee has decided to award the Nobel Peace Prize for 2006, divided into two equal parts, to Muhammad Yunus and Grameen Bank for their efforts to create economic and social development from below. Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights. Muhammad Yunus has shown himself to be a leader who has managed to translate visions into practical action for the benefit of millions of people, not only in Bangladesh, but also in many other countries. Loans to poor people without any financial security had appeared to be an impossible idea. From modest beginnings three decades ago, Yunus has, first and foremost through Grameen Bank, developed micro-credit into an ever more important instrument in the struggle against poverty. Grameen Bank has been a source of ideas and models for the many institutions in the field of micro-credit that have sprung up around the world. Every single individual on earth has both the potential and the right to live a decent life. Across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development. Micro-credit has proved to be an important liberating force in societies where women in particular have to struggle against repressive social and economic conditions. Economic growth and political democracy can not achieve their full potential unless the female half of humanity participates on an equal footing with the male. Yunus's long-term vision is to eliminate poverty in the world. That vision can not be realised by means of micro-credit alone. But Muhammad Yunus and Grameen Bank have shown that, in the continuing efforts to achieve it, micro-credit must play a major part."

2006: Microcredit awarded Nobel Peace Prize
An increasingly large body of published literature and conference proceedings has begun to seriously study the implications and debate the relative significance of different aspects of this important financial innovation. For those who are interested in a reading more detailed, theoretical studies of this field of economics and finance, a separate ESR Review has existed since the fall of 1999. From published literature and conference proceedings, it is possible to summarize several fundamental lessons from the microcredit success and failures over the last three decades.
A savings|investment as preferable aid: Independent borrowers earn the dignity and lasting self-confidence associated with responsible loan repayment. Institutional managers are more careful to ensure borrower success and generally perform better when there are risks involved.
Entrepreneurial talent and energy are scarce invaluable resources for economic growth: Our economies cannot afford not to find and develop independently responsible entrepreneurs and public bankers who are financial critical thinkers. These individuals can be attracted to the microcredit industry, but they are individuals with options – they will not risk their future on short-term or unpredictable bureaucratic support.
Traditional private banks should not be expected to offer microcredit: Existing banks with a traditional operating philosophy typically have significant investments in facilities and costly operating structures. Because of the significant overhead of such banking operations, these bank operations naturally gravitate to large, profitable transactions with affluent borrowers.
A new generation of banking institutions [and the banking professionals to run them] is arising: Banking institutions motivated by a less myopic vision of profitably serving the common good can be capitalized for the primary purpose of entry-level economic development. By lowering the transaction costs through institutional specialization and innovation in delivery systems, they will be able to operate profitably in markets characterized by very small transaction sizes and less affluent clients.
Poor entrepreneurs possess the same survival skills as the toughest, most affluent business operators: Poor entrepreneurs save money, carefully apply their entrepreneurial energy and repay debts as scheduled to maintain access to future loans. In other words, poor entrepreneurs are not only prebankable, they represent the population of those individuals who will be aggressively pursued as successful, very affluent captains of enterprise in 10, 25 or 50 years from now.
A radically efficient, large-scale, NEW banking operating infrastructure required: Simply modifying old methods will not successfully expand poor people's participation in their country's economy. Investment in self sustaining institutions that finance poor residents is a comparatively cost-effective use of scarce subsidies for economic development. The costs of doing research in the microcredit and microenterprise areas are extremely low compared to other strategies to stimulate economic development such as tax abatement or continued support for welfare programs.
Beyond enterprise lending and savings: Increasingly, microfinance is expanding beyond its roots in savings and business lending and now offers other forms of financial services, including most notably insurance and housing microfinance. In many ways, microfinance offers the promise that it could eventually evolve into a specialized form of banking catering to economically active poor people who currently happen to be unbanked. Some new microfinance focused-organizations, see for instance the Development Innovations Group (DIG),have embraced this more expanded vision of microfinance and speak of financial services for the poor or of development finance, rather than of microfinance.

Fundamental Principles
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 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. Groups pay a reasonable 11-12% annual rate of interest. 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 Opportunity International, Catholic Relief Services, CARE, APMAS and Oxfam. 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.

Gina Neff of the Left Business Observer has described the microcredit movement as a privatization of public safety-net programs.