Microcredit
Micro-credit emerged in the 1970s when social innovators began to provide financial services to the poor. ACCION and Grameen Bank were the first successful micro-finance institutions. Micro-finance institutions (MFIs) target people who are excluded from the larger financial industry. These people are excluded because they may not be formally employed, lack collateral, may be illiterate, and are not part of a profitable population. A 2004 statistic asserts that 80% of the world’s population does not have access to financial services. MFIs hold savings, offer insurance for homes and micro-businesses, and provide small loans to these people who can receive traditional financial services. There are currently about 7000 banks for the poor of which 1500 are recognized internationally which serve 44 million savers and 23 million barrowers. These MFIs have been and are established by independent non-governmental organizations, humanitarian associations, and infrequently by commercial banks.
MFIs help people in impoverished countries to generate income and build wealth in order to exit poverty. Small loans, normally less than $100 are given to the poor so they can establish self-employment projects, micro-enterprises, which generate income and improve their living conditions. These small enterprises may include sewing clothes, selling cooked goods on streets, or selling vegetables. Micro-credit firms target women, since women tend to use loans to benefit the family more than men do. These loans have short loans cycles, normally six to twelve months, and have high interest rates. The global average interest rate for micro loans is 35%. People in extreme poverty lacked the collateral, steady employment, and credit history to retain traditional loans before micro-credit.
Micro-credit lenders give small short term loans at high interest rates. Different from most banks, these lenders do not focus entirely on revenue and collateral when making loans. Instead of a tradition credit score, a loan officer judges the client on his or her drive and references from client’s customers. Loans can be given to individuals or groups of borrowers. Solidarity group lending, a preferred practice by MFIs, acts as a form of collateral, since members of the group can cross guarantee payments to lender.
The success of micro-credit has made it gain credibility in the main stream finance industry. Many large finance firms are looking into micro-credit as a way of generating future growth. However, with smaller profit margins, micro-lending banks must rely on small transaction and other cost in order to see profits. Larger firms which rely on larger profit margins and have higher costs may find it hard to find success in this newly evolving industry.
