SOME KEY ISSUES ON THE MICRO-CREDIT

Micro-credit is it an economic development tool?

Is it possible to create businesses and to resolve some of the problems of employment and expand economic growth through micro-credit?

The answer is not simple. Two studies conducted in Asia (1) gives us an interesting answer first:

The funds below $ 100, granted to women, create only very rarely (less than 3%) small businesses or new jobs. These credits improve the social situation of the beneficiaries who can find the funds necessary to satisfy basic needs (health, food, housing, schooling, etc.).. So there is improvement, but there are few beneficiaries who exceed the poverty line.

These micro-credit, however, have an essential role is primarily a "more social" and that it must be developed.

Credits between 100 and 1,000 USD are similar. However, they improve

on the proportion (7-12% depending on the countries and cases) to create jobs and new small businesses.

These are loans of $ 5,000 USD and more that trigger a process

growth through investment in new production units,

improving productivity and opening new markets.

Another interesting example of management of micro-credit is given to us

by the activities of IDESI / PRO EMPRESS Peru. This organization support (2), which has created a financial institution, manages more than 50,000 records of micro-credit in urban and rural areas and has become an effective instrument of economic development.

IDESI / PRO EMPRESS divides its market into four sectors:

The micro-enterprise sector, from 1 to 10 workers and annual turnover up to $ 40,000 USD per company. The credits allocated to these micro-enterprises range from 50 to 900 USD for an average period of six months.

The small business sector, 10 to 20 employees and a minimum annual turnover greater than $ 40,000 USD per company. The funds allocated will then 1,000 to $ 5,000 USD for an average period of 24 months.

Medium enterprises sector, holding 20 to 100 workers and making a turnover greater than $ 750,000 USD per year per company. The credits then distributed vary from 3 to $ 10,000 USD or more per company and a loan period of 8 to 24 months.

IDESI / PROEMPRESSA distinguished in the management of those credits, micro-credits, awarded for "growth" of those awarded, small loans for the "market" (small businesses) and those allocated for the "development" (means and large firms).

 

Thus, it is necessary to choose the target beneficiaries of the credit when you start a program. If you wish to reach the poorest, we will do with credits 20 to $ 300 and a social goal not necessarily cost effective. If you want to create jobs and significantly increase revenues, it is then necessary to use different clients and credits of a larger amount. If an NGO wants to go at once to several categories of customers, it will then separate the management of each program and adopt different strategies and methods as appropriate.

At what interest rate should I pay?

Some, particularly donors Christian NGOs North and their Southern partners, defending the principle that the poor can not pay interest at market prices and therefore we must lend without interest or interest rates very low (1-3% regardless of inflation). While this view is defensible, but it is clear that such a model can work only with outside help, or in a very localized and restricted to self-managed savings and credit, through volunteering, without financial costs. Moreover, these programs are not generally related to the modern financial sector.This model has major limitations and little future.

The savings and credit mutuals, their federations and unions, like Raiffeisen, adopt interest rates below market rates, when the states in which they operate allow them. They can, because they do little or no reward savings harvested (the example of the savings banks and credit Nyegigiso Mali) or benefit from subsidized credit lines and / or donations from international aid.This model is applied in many countries in Asia, like Africa or Latin America.

Increasingly there are many other organizations that manage micro-credit. Lending rates of credit not only include the cost of bank interest (including inflation), but also participating in a hedge fund risk, the payment being received in support of training and advice and even contributions to solidarity funds involved in the event of death or special events.

Thus, like many foundations and NGOs in the South, cited above, the interest rates of loans vary from 2 to 5% per month for small short-term loans. Many organizations therefore lend between 30 and 60% or more. Should we then speak, as some do, the rates of close to wear?Not sure! The beneficiaries of credit do not complain of these rates. They believe receive competent and useful of these NGOs, and the cost of credit is in any case well below those of loan sharks. In addition, it should be noted that these organizations management of micro-credit are the only ones capable of self-financing and therefore last! At a conference of experts organized by the OECD in Paris in 1998, we concluded, by sharing our experiences, the programs that used the interest rates the highest were also those who were most successful and more effective.

Therefore, this issue has a clear answer. We can help the poor with interest-free loans or subsidized interest, but we can not continue "to play Mother Teresa's" without being aware that such programs are not sustainable and will end with the end of aid.

If these programs want to be financially independent, they must take the means of their political and financial costs and charge them for the support or training to the beneficiaries. The issue seems to be that of poverty, but more than the necessary training to the beneficiaries increase their incomes enough to be able to not only pay the interest, but to maximize their economic activities and make a profit.

But is it to local beneficiaries in the villages and neighborhoods, ie the poorest to pay these costs? Management of micro-credit is very expensive. International aid could in future focus its intervention on the subsidization of these intermediate costs (training, participation in risk coverage, facilitating negotiations, management costs of bank guarantees progressivemnent that connect to local commercial banks, etc) must be accounted for separately and do not enter the cost of credit management.

 

What are the risks?

Most organizations management of micro credit announce the results of repayment of loans ranging from 95 to 100%. What to think? Is there little or no risk to make micro-credit?

The answer is not simple. Often, for strategic reasons, these organizations do not take into account certain costs or not refunds. In addition, external conditions can significantly increase the risk. Recently, in Bangladesh, floods that destroyed property acquired by women through credit, prevented him from repaying their credit Grameen Bank. Or, as the Peru-Canada Fund, the risk increased to 20% for small borrowers who were affected by El Nino (3), forcing the program to restructure completely.

 

The study of the reality shows that the risk is higher than advertised and is very closely related to the quality of support and monitoring of loans.Hence, as a result of significant monitoring costs.Success in micro-credit is it not so tied to grants required that these costs should not be used to calculate the profitability of lending operations management?

Moreover, the risks are also related to skills management agencies of micro-credit. NGOs too often unskilled and have paid little or no been repaid. No serious follow-up, questionable accounting, good feelings, and ultimately the "breaks". These organizations have done much harm. They have confused "gifts" and "ready"."We do not lend to those who can not pay, if not kill it ..." they say now in the Sahel.

However, it is true that the risks are different for different categories of people, if they are mutual guarantee groups, or whether it advances for small business or a loan for agricultural production. "Women pay back better than men."It is true that, if they are organized, their rate of repayment of loans is close to 100%. It is also true, as demonstrated GUENEAU Marie Christine (4) that certain service sectors or production are less risky because more profitable than others.