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Microcredit is the extension of very small loans to the unemployed, to poor entrepreneurs and to others living in poverty who are not bankable . These individuals lack collateral. steady employment and a verifiable credit history and therefore cannot meet even the most minimum 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 (mostly women) 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 .

Women have become the center focus of many microcredit institutions and agencies worldwide. The reasoning behind this is the observation that loans to women tend to more often benefit the whole family than loans to men do. It has also been observed that giving women the control and the responsibility of small loans raises their socio-economic status, which is seen as a positive change to many of the current relationships of gender and class. However, there is an ongoing debate about whether microcredit loans have the power to truly change established political and economic relationships. [1]

According to the Microcredit Summit Campaign:

"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." [2]

Many microcredit organizations focus completely on women borrowers. Pro Mujer and NamasteDirect are two organizations that directly work with women, but the Grameen Foundation. UN Secretary General Kofi Annan. and Hillary Rodham Clinton all emphasize women when they speak about microcredit.

[edit ] History

The concept of microcredit can be traced back to portions of the Marshall Plan at the end of WWII in the middle of the 20th century or even back to the mid-1800s and the writings [1] 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.

[edit ] Opportunity International

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 - cited in The Economist as the first "microloan." Opportunity International provided 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 with dignity. Other offices can be found in Australia, Great Britain and Canada, each targeting countries within their region.

[edit ] ACCION 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 (and recorded dates seem to indicate) that these loans were the first modern pioneers of microcredit.

[edit ] Muhammad Yunus and Grameen Bank

Around the same time as ACCION's experiment, and apparently independently, Muhammad Yunus. a U.S.-educated professor of economics started a similar experiment. Around 1974 during a famine in his native Bangladesh Yunus discovered that very small loans could make a significant difference in a poor person's ability to survive, but that traditional banks were not interested in making tiny loans to poor people, who were considered poor repayment risks. His first loan consisted of $27 from his own pocket which he lent to 42 people including a woman who made bamboo furniture. which she sold to support herself and her family.

In 1976. Yunus founded the Grameen Bank to make loans to poor Bangladeshis. Since then the Grameen Bank has issued more than $5 billion in loans to several million borrowers - at the close of 2005 the number of outstanding loans is more than 4 million. To ensure repayment, the bank uses a system of "solidarity groups": small informal groups, nearly all of them exclusively female, that meet weekly in their villages to conduct business with representatives of the bank, and who support each other's efforts at economic self-advancement. As it has grown, the Grameen Bank has also developed other systems of alternate credit that serve the poor. In addition to microcredit, it offers housing loans as well as financing for fisheries and irrigation projects, venture capital. textiles. and other activities, along with other banking services such as savings.

The success of the Grameen model has inspired similar efforts throughout the developing world and even in industrialized nations including the United States. Many, but not all, microcredit projects also emulate its emphasis on lending specifically to women. Close to 96 percent of Grameen loans have gone to women, who have been found to be much more likely than men to repay loans and to devote their earnings to serving the needs of the entire family. Originally the program started with men and women, but later focused on women when data showed a dramatically lower credit risk in women. In 2006, Yunus and the Grameen bank were honored for this achievement with the Nobel Peace Prize .

[edit ] FINCA International

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 the idea "village banking".

One of the unique things about Hatch's "village banking" was how quickly he implemented it. After he 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.

[edit ] The SEEP Network

The SEEP Network is an organization of more than 50 international non-governmental organizations that support micro and small business and microfinance institutions in the developing world. Its mission is to advance the practice of micro and small enterprise development among its members, their international partners, and other practitioners through innovation and practitioner-led tools and learning products.

SEEP began as The Small Enterprise Evaluation Project, “The SEEP Project,” in 1985. As a single-focused endeavor, The SEEP Project convened 25 International nongovernmental organizations to develop an alternative, practitioner-focused approach to evaluating small business projects for private development organizations. Practitioners wanted to implement a bottom-up approach to evaluations that would influence the way donors approached the subject. The work was carried out through workshops, engaging field staff to develop a monitoring system that would fit their own organization. Two years later, The SEEP Project published Monitoring & Evaluating Small Business Projects: A Step by Step Guide For Private Development Organizations (1987).

The successful completion and dissemination of the Step-by-Step Guide prompted the transformation of The SEEP Project into The SEEP Network. To jump-start the Network, SEEP established three working groups, Financial Services, Non-Financial Services and Institutional Development, in order to build a broader learning agenda. Over the years SEEP has followed the same methodology of testing and defining best practices ‘by practitioners, for practitioners’ that resulted in a number of key publications and training courses. The working groups have grown and evolved; today SEEP supports nearly fifteen working groups composed of its members and partners. Out of the working groups come learning products and publications that represent industry best practices and cutting-edge innovations. SEEP’s more than 47 Technical Notes, Progress Notes and discussion syntheses are available as free downloads on the SEEP website,; SEEP’s books in topics such as financial performance monitoring and client assessment are available via SEEP’s online bookstore. SEEP’s mission has evolved from being a thought leader and learning center to advancing the practices of small and microenterprise development among its members, their international partners, and other practitioners. The depth and outreach of the SEEP Network has become broader as it supports collective research to promote learning that advances professional development, increases program impact, fosters continuing innovation, and informs the policy arena.

During 1997–2000 SEEP expanded its programs to include work with regional and country-level microenterprise networks to build their capacity and provide relevant services to their clients. SEEP now provides mentoring and coaching services to over 25 networks. Additionally, SEEP opened up a competitive<--. clarify --> grant-making process that reaches deep<-- how deep? --> into the field for action research projects, and has made 47 grants in the meantime.

In 2005, over 100 member volunteers contributed to 17 working group activities shaping action research agendas in a range of topics: Standardized financial statements, small enterprise market research tools, HIV/AIDS and microenterprise, and environment and microenterprise development. These peer learning groups produce practical and innovative solutions to real problems by leveraging member knowledge and resources. Additionally, SEEP opened up its membership to regional and country-level microfinance networks. SEEP members are the center of its operations,

and SEEP will remain devoted to its members.

[edit ] Today

The World Bank estimates that there are now more than 7,000 microfinance institutions, serving some 16 million poor people in developing countries. According to Le Monde newspaper, World Bank experts estimated that 500 million people benefited from these small loans (about 80 euros), on a total of three billion poor people. 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 [3]. 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.

UNDP Year of Microcredit Logo

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:

  1. Assess and promote the contribution of microfinance and microcredit to the MDGs ;
  2. Increase public awareness and understanding of microfinance and microcredit as vital parts of the development equation;
  3. Promote inclusive financial sectors;
  4. Support sustainable access to financial services, and
  5. 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.

[edit ] 2006: Microcredit awarded Nobel Peace Prize

Grameen Bank and its founder Muhammed 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."

[edit ] Fundamental Principles

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 surmise 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.

[edit ] 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 the National Bank of 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.

[edit ] Criticism

Gina Neff of the Left Business Observer has described the microcredit movement as a privatization of public safety-net programs. [4] 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, and 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. [5] As a result, borrowers are kept out of waged work and pushed into the informal economy.

Another group of critics [citation needed ] believe that traditional schemes of credit for the poor, such as pawn shops and payday loans, are more effective, and claim that many microcredit schemes are simply disguised charity rather than an effective business model. Bangladesh's Finance and Planning Minister M. Saifur Rachman has pointed out that some microfinance institutions charge excessive interest rates. [6]

Some other problems that have been reported with microcredit: [citation needed ]

  • Turning a profit on the loan
  • Inability to reach the poorest of the poor
  • Microcredit dependency
  • Durability of poverty reduction
  • Excessive political interference to gain a vote bank

[edit ] Investment Groups

It is possible to invest in microcredit via certain investment groups including:

  • Microcredit Enterprises, Ltd was founded in 2005 with the conceptual leadership, seed funding and policy analysis of Freedom from Hunger .
  • ACCION Investment Funds. Since 1984, ACCION's financial experts have been successfully investing for double bottom line returns. Visit our site to learn more about socially responsible investment possibilities with ACCION International including the ACCION Global Bridge Fund, ACCION Latin America Bridge Fund, ACCION Investments in Microfinance, and the ACCION Gateway Fund.
  • Calvert Foundation. Community development financial institutions (CDFIs) are organizations which provide financing programs to do microenterprise lending and microcredit development work, providing the means for your community investment capital to impact disadvantaged communities. Many CDFIs accept direct investments from relatively wealthy individuals; on the other hand, financial intermediary facilities from socially-responsible investing organizations such as the Calvert Foundation allow individuals with a smaller amount to commit (as little as $1000) to purchase notes that is a piece of a larger pool of CDFI investments.
  • The Council of Microfinance Equity Funds(CMEF) is the first membership organization bringing together the leading private entities that make equity investments in microfinance institutions (MFIs) in the developing world. The Council’s members seek both social and financial returns from their investments in these institutions, all of which provide a range of financial services to poor households in developing countries.
  • PENSCO Trust Company. PENSCO Trust Company, chartered in New Hampshire, is a single-service special asset custodian for self-directed IRAs. Since 1989, the company has exclusively focused their services on the administration and custody of IRAs invested in non-traded assets, such as real estate and private placements. Permissible alternative self-directed investments include limited-liability companies, limited partnerships, corporations, and socially responsible charitable investing.
  • Grameen Bank Support Group Australia

Category: Payday loans

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