Micro credit: towards greater economic equality

The financial system still does not benefit the poorest, for whom the traditional bank loans is often inaccessible. So what to do to access a loan when it affects only € 600 per month? Focus on micro-credit, a device that combines some banks to partners wishing to offer this "social leverage" their beneficiaries ..

 Tool for social innovation:

 Micro credit has its origins in the developing world, where people are often excluded from traditional banking system. A vulnerability that is matched only by the boundless energy of these men to innovate to improve the daily life. It is the economist Muhammad Yunus, himself a native of Bangladesh, which popularized micro credit economic whose principle is simple: a loan of a small amount is allocated to support the development of an activity. With its success, Yunus founded the first bank specialized in microfinance in 1983: the Grameen Bank.

In France Agency for the Right to Economic Initiative (ADIE) awarded 14,500 cases in 2009,and helped many disadvantaged people to create their own jobs. Very successful since the rate of employability of micro-entrepreneurs financed and accompanied by Adie approaching80% and 68% of small businesses are perennial two years after their creation.

 Development of micro credit staff:

In addition to this dedicated to creating micro credit activity is a personal or social micro credit said. Intended for people without access to traditional consumer credit, the micro credit can borrow usually up to € 3000, if not to be in serious debt. The loan application must be part of a personal or professional, such as buying a vehicle for returning to work, or the payment of expenses of moving.

With 6000 loans granted in 2009, micro credit staff progressing slowly in France, where 25% to 30% of households have no access to conventional loans. Too often families are turning to the revolving credit (or revolving), very expensive and involved in many cases of over indebtedness.

Supporting and empowering

 Another feature of micro credit, obtaining the loans not made ​​direct to a bank but passes through an attendant. Its role is multiple: it checks the feasibility of the project, assistance in setting up the file, dialogue with the bank, but also informs, advises and empowers the applicant. The accompanying also monitors by offering MTR sifters obtaining the loan.

The counselor is a vital link in the chain of Micro credit, and its ability to take into account the unique situation of each person is essential to the device can play its full role in society. For if, in the words of Martin Hirsch, micro credit staff can "demoralizer the consumer credit", it is first and foremost to help people in need. One way to put man at the center of the economy.

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.

Micro credit, designed for poor countries, it expands in U.S. by the crisis

San Francisco Sonia and her husband are about to achieve his dream of expanding your business, a small neighborhood hardware store, thanks to micro credit , but this couple does not live in Rwanda or in El Salvador, but in New York.

Like millions of people in Third World countries, Sonia and her husband will benefit from the success of these loans to people without access to commercial banks, which both helped disadvantaged economies, which now makes its way into the First World.

The credit crisis that has shaken the U.S. in the last year has increased the difficulties of small businesses in obtaining financing and encouraged to specialize in micro credit organizations to apply models that are already successfully operating in developing countries.

Grameen America, a division of Bank of Grameen Nobel Peace Prize Muhammad Yunus came to the U.S. a year ago and, in view of the success, has opened a new office in Nebraska primarily to help the immigrant community in the area.

The organization has granted loans amounting to $ 1.5 million U.S. small businesses in a few years and expected to be present in all 50 states.

Kiva, an organization based in San Francisco which takes several years coordinating micro loans to small entrepreneurs in the Third World, has started operations this month in the U.S..

"Some of our lenders we were told that local people wanted to help," said Fiona Ramsey Efe, a spokesman for Kiva. "The timing was right because for U.S. small businesses is now much harder to get credit."

                    
Through its website, Kiva half between entrepreneurs and anyone wishing to make a contribution of at least $ 25.

Borrowers on the web explaining the details of the project and the time within which return the loan.

The lender recovers its capital without interest and may choose to invest in another project or donate to Kiva, which in the U.S. operates through the Opportunity Fund and Action USA, two institutions specializing in microfinance.

Among the thirty or so small businesses in the Kiva page dominated by Hispanic-around 85 percent, according to Ramsey, and it is always individuals whose personal circumstances have no access to conventional bank loans.

Mary, of San Francisco, you need $ 8,000 to open a daycare in her home and has already raised 53 percent of this amount. Carlos, of Queens, New York, asking $ 5,750 for business messaging and Ecuador still lacks about $ 3,000.

                                          

Lenders also tend to reside in the U.S., but projects like Kiva sometimes make is the one who helps South to North.

"One of our contributors is a Kenyan woman who wanted to help a small business in the U.S.," says Ramsey. "He could have chosen someone in your country, but said Africa had received so much help that it seemed logical to return part of it."

Despite the credit crunch in the U.S., these organizations face the problem of potential lenders feel that the money is most needed doing in the Third World and allocate their funds there.

Controversy of Micro credit

Despite the success of the micro credit system, there have been some criticisms of the same, as summarized in the following:

Its main beneficiaries are the poorest, vulnerable and excluded in developing countries.
The central idea on which are founded the micro credit the poor can indefinitely spend more than they have-generates a false understanding of the true causes of social and economic imbalances in the world and how to deal with, but also of architecture global institutional instituted to understand and address these human problems.
   

The emerging discourse of microcredit is based on the idea that the banking sector which has to take care of poverty.
It would be a way of privatizing poverty.
Conceal the real causes of poverty and underdevelopment and the poor become ultimately responsible for their situation and direct.
They are an effective weapon to dismantle the political and ethical commitment we have.
Serve to inactivate transforming policies of international cooperation in banking policies and poverty becoming eternal debt.
The transformation of poverty in debt, advocated by supporters of microcredit, is based on social Darwinism, according to which those in a more precarious and vulnerable because they are not willing or able to borrow.
Borrowing far more vulnerable to those who have less.
For many women, taking microcredit is an overload on their domestic occupations, already enormous, raising tensions in the care and upbringing of their children.
It is true that women are going to work for the return of microcredit and are much more responsible than men to meet the debts assumed, but actually it is men who decide directly on their use and management.
They say that micro loans are so good that their delinquency is very low, demonstrating that the poor always pay. This thesis will require much higher moral values ​​than the rest of the population while the poor are not allowed to not be as good payers.
More, the Grameen Bank, which declares a return rate of 98% in their reports with other reports that late payment is 25% ... to the point of insurance impose on the indebted families so that in case of death, the mourners are those who assume the payment of loans taken.
    The argument that micro credit to the poor become responsible for their own developments in turn makes them guilty of their survival, nullifying the role of states, governments and international community.

  South America is a world of microfinance, particularly the countries of Bolivia and Peru, who are prominent in this sector, show levels of profitability, efficiency, reliability, main etc. Las promotion of micro credit institutions in charge NGOs as Accion International, Magdala Foundation and Planet Finance, which are characterized by the accumulation of experience of experts from around the world.

Micro credit organizations in Latin America

In Latin America there is a number of organizations dedicated to micro credit . Even in Colombia there are several organizations involved in this issue (Cooperative Undertake Fin America Foundation, Santo Domingo, etc). There are no mechanisms to promote them.

 

These are organizations that provide loans to low income individuals at or below the poverty line. The reason that these organizations have flourished in Latin America is due to its high profitability levels that make it a sustainable operation. Not only NGOs are involved in this but also conventional banks. In countries like Ecuador, Bolivia and Peru, conventional banks (Banco Solidario, BancoSol and Mibanco) have managed to expand in the country through a business model that serves the low income population.