What is microcredit?
Microcredit is the provision of financial services to poor people who have been excluded from the formal banking sector. Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment, or a verifiable credit history. It is designed to support entrepreneurship and alleviate poverty.
Microcredit refers to provide loan service assistance in no collateral, low service charge, small amount for a specific short period.
General features of Microcredit
1) It promotes credit as a human right.
2) Its mission is to help the poor families to help themselves to overcome poverty. It is targeted to the poor, particularly poor women.
3) Most distinctive feature of microcredit is that it is not based on any collateral or legally enforceable contracts. It is based on “trust”, not on legal procedures and system.
4) It is offered for creating self-employment for income-generating activities and housing for the poor, as opposed to consumption.
5) It was initiated as a challenge to the conventional banking which rejected the poor by classifying them to be “not creditworthy”. As a result it rejected the basic methodology of the conventional banking and created its own methodology.
6) It provides service at the door-step of the poor based on the principle that the people should not go to the bank, bank should go to the people.
7) In order to obtain loans a borrower must join a group of borrowers.
8) Loans can be received in a continuous sequence. New loan becomes available to a borrower if her previous loan is repaid.
9) All loans are to be paid back in installments (weekly, or bi-weekly).
10) Simultaneously more than one loan can be received by a borrower.
11) It comes with both obligatory and voluntary savings programmes for the borrowers.
12) Generally these loans are given through non-profit organizations or through institutions owned primarily by the borrowers. If it is done through for-profit institutions not owned by the borrowers, efforts are made to keep the interest rate at a level which is close to a level commensurate with sustainability of the programme rather than bringing attractive return for the investors. Microcredit’s thumb-rule is to keep the interest rate as close to the market rate, prevailing in the commercial banking sector, as possible, without sacrificing sustain-ability. In fixing the interest rate market interest rate is taken as the reference rate, rather than the moneylenders’ rate. Reaching the poor is its non-negotiable mission. Reaching sustainability is a directional goal. It must reach sustainability as soon as possible, so that it can expand its outreach without fund constraints.
13) Microcredit gives high priority on building social capital. It is promoted through formation of groups and centres, developing leadership quality through annual election of group and centre leaders, electing board members when the institution is owned by the borrowers. To develop a social agenda owned by the borrowers, it undertakes a process of intensive discussion among the borrowers, and encourage them to take these decisions seriously and implement them. It gives special emphasis on the formation of human capital and concern for protecting environment. It monitors children’s education, provides scholarships and student loans for higher education. For formation of human capital it makes efforts to bring technology, like mobile phones, solar power, and promote mechanical power to replace manual power.
A broad classification of microcredit :
-Traditional informal microcredit (such as, moneylender’s credit, pawn shops, loans from friends and relatives, consumer credit in informal market, etc.)
-Microcredit based on traditional informal groups (such as, tontin, su su, ROSCA, etc.)
-Activity-based microcredit through conventional or specialized banks (such as, agricultural credit, livestock credit, fisheries credit, handloom credit, etc.)
-Rural credit through specialized banks.
-Cooperative microcredit (cooperative credit, credit union, savings and loan associations, savings banks, etc.)
-Bank-NGO partnership based microcredit.
-Grameen type microcredit or Grameen credit.
-Other types of NGO microcredit.
-Other types of non-NGO non-collateralized microcredit.