May 11, 2007

Microcredits are  institutions of finance which contribute a lot in development. However, according to interest rates which are often between 25 and 70%, couldn’t this just be an other way to make profit on the poorest people?

Although microcredits are the cornerstone in terms of development in poor countries, it can also have its inconvenients. Indeed, the disadvantages of microcredits are various and concern institutions, loan institutions and borrowers. For instance, we frequently observe a certain lack of credibility towards microcredits institutions which are often unpredictable (their budget depends on subsidises from the goverment or NGOs)  and especially in the most vulnerable areas. Moreover microcredits financed by banks are,  most of the time, not allowed to the poorest (refunding problems).



An example of microcredit

February 16, 2007

Karnachi is 32 years old. She has two children, Kumar and Pratap, who are 10 and 8 years old respectively.She set up her micro-company by painting pictures in the street.Very soon, she rent a new market space, near a temple. With a 2000 roupies loan (about 35euros), awarded by IMED, Karnachi bought more equipment, such as tins of paint and tracing paper.Thanks to this new selling place and her management abilities, Karnachi has now regular wages. She also took on her husband.The average profits have increased by 100 roupies a day, (about 1,8euros) but should rise quickly, thanks to her husband contribution.Today, she has no more financial problems, and hopes for a good prospect for her children.Karnachi never imagined that such a change was the direct consequence of her business ability. 


Why the women????

February 16, 2007

Women and men have different experience with work because a division of labor in most cultures assigns men to paid work outside the home and women to unpaid labor in the home. Consequently, women’s paid work can be sumed up in household chores.
Microcredits help women to transform their own life giving more responsibilities, but also to tranform their family members’ life. It represents a means to have the control over their life becoming politically and economically autonomous. That allows health, nutrition and education improvements, and family members who are particularly concerned are children. In fact, it has been proved that women are those who are the most able to manage the money of the household. Experience has shown that women are a good credit risk, and that women invest their income surround 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.
But it’s possible for women not to have the expected results. In many cases, even if women receive the loan, husbands use it for their own projects.

How does it work?

February 16, 2007

Various actors operate in this system:
– Support services , the institutions which group  in networks;
– the state responsible for the installation of the legal framework;
– financers, financial partners (like World Bank, afdd, usaid…), trade banks…

The institutions

February 16, 2007

There is a great diversity of microfinance institutions : about 10000 in the world, 3164 are indexed including 3046 in developing countries. That gets approximately 92 million customers. The 7000 others are smaller local structures. If we quantifie, that gives: 81 million customers in Asia, it represents 90% of the customers all over the world, 7 million in sub-Saharan Africa, 3.8 million in Latin America and 0.2 million in North Africa. Millions of microfinance institutions are viable worldwide.

The Grameen Bank

February 16, 2007

The creation of the Grameen Bank in Bangladesh in 1976 is often regarded as the founder act of modern microfinance. Actually, the financial systems based on solidarity existed before, but Mohammed Yunnus, founder of the Grameen Bank, popularized it with a media impact, and two revolutionary ideas:

-the poor people refund often better than the rich people,

-and because access to property is vital for them, a financial institution adressing to the poor can be viable.

The Grameen Bank is based on a method of interdependent suitabilities named credits. The principle is simple: to compensate the absence of material guarantee, the borrowers set up groups of five people, if one does not refund, the others reimburse. The Grameen Bank is addressed almost exclusively to the poor women in rural zones. All the loans are over after one year. Moreover, the customer must compulsorily save five percent of the amount. Those five percent can be used  when they decide not to borrow anymore.

Microcredits are the extension of very small loans (microloans) 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 credits. Microcredits are 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.  Microcredits are a financial innovation which originated in developing countries where it has successfully enabled impoverished people (mostly women) to work independently and set up projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty. Due to the success of microcredits, many in the traditional banking industry have begun to realize that these microcredits borrowers should more correctly be categorized as pre-bankable; thus, microcredits are 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 didn’t believe in microcredits success at the begining, lead by 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 microcredits institutions and agencies worldwide. The reasoning behind this is the observation that loans to women tend to  often more 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.

Why Micro credits?

February 16, 2007

Countries and organizations often help in emmergency by sending food, clothes, etc. But after the urgency, the most effective way to help poor people is to permit a better access to the local bank and credit , for women and men who want to become independent of charitable assistance and subsidies, and also want to create their own economic activity, even if it would be modest. However, these people, and more especially women, see themselves refusing the access to a traditional bank.