What is microcredit ?

Microcredit is an aspect of microfinance which provides several financing services to the poor such as credit, savings, insurance, and other basic financial services. It describes small loans that are granted to individuals with low incomes who are excluded from the traditional banking system . The modern microfinance occurred during the mid-1970s, pioneered by 2006 Nobel Peace Prize winner, Dr Muhammad Yunus, professor of economics at the University of Chittagong (Bangladesh), with The Grameen Bank Project, a microfinance organization and community development bank that gave small loans, named microcredit. The first loan he gave was $27 to 42 rural women from his own pocket at an interest rate of 0% in order to help them sell bamboo stools and break from the debt spiral. Thanks to the success of The Grameen Bank, the number of new microfinance institutions (MFIs) kept growing around the world. Nowadays, the majority of MFIs are started by NGOs and funded by grants and subsidies from public and private sources. It allows impoverished people to start self-employment projects which gives them an income and helps them exit poverty .

The main target group of microcredit programs are women for many reasons: they are the most deprived on a social and economic level among the poor, they are more likely to repay the loans than men and they are better at improving the welfare of the household by breaking the cycle of poverty. They also often experience important self-empowerment thanks to this system. The majority of the borrowers are from India, Vietnam, Bangladesh and Peru. In recent years, many innovations and experiments were done in the microfinance sector, notably in the mobile banking industry where people use their mobile phones in order to send and receive money, like M-Pesa in Kenya a new micro-finance institution whose economic model is based on a “pay-as-you-go” system. It means that the customer pays small amounts of money with his phone to use an item which he comes to own on maturity.

Theoretical framework and practical tools regarding the topic

In this part, we will define and explain each theoretical concept of the case study in order to understand this topic. First, the concept of “microcredit”. The key implications of microcredit are in its name itself: ‘micro’ which means “relatively small amounts of money that are being borrowed or saved”. The loans are ‘micro’, which means very small in size, the small size of savings, the small frequency of loans, the short repayment periods and amounts, the micro or local level of activities, the community-based immediacy of microcredit. Then “credit” refers to the notion of borrowing: it is someone’s ability to borrow and the amount borrowed by that individual. When it comes to loans, someone’s “credit” is his reputation as a borrower. It indicates to lenders how likely he is to repay his loans which helps them decide whether or not to approve the loan request and how much to charge him .

The aim of microfinance is to move from traditional aid towards a sustainable one. Therefore, interest rates charged by MFIs are higher than those offered by traditional financial institutions for several reasons: the costs of administering the loans in rural areas and sending loan officers to collect repayments every week are higher than those in developed urban area; the costs and risks of funding MFIs for foreign funders are higher in developing countries; the exchange rate risk of currency volatility and high inflation is higher in developing countries and the risk of borrower default is higher because borrowers cannot give credit history. The lead paradigm in CSR: the Pyramid Model of CSR by Carroll can help us understand the concept of microcredit. Microfinance helps to fulfil the first level of the pyramid (economic) because it is a type of strategic CSR that can contribute to economic and social development in developing countries for very poor people at the bottom of the pyramid (BOP). The BOP is a second CSR socio-economic concept useful to understand microcredit. It is the largest but poorest group of the world’s population who suffers from many social problems brought about by poverty with an average income of $2.50 a day. It is expected by the global economy to become the next big market worthy of 4 to $5 billion . In the book “The Fortune of the Bottom of the Pyramid”, CK Prahalad and Stuart L. Hart wish to create a new inclusive capitalist economic system, without paternalism , which will be adapted to this population and build with them a “win-win” relation with adapted financial products to reduce poverty such as microcredit while generating economic benefits. Microfinance can also mobilize CSR through philanthropy, which is still the main expression of CSR in developing countries and is at the top of the Pyramid Model of CSR.
Then, let’s explain what “a developed country” means. A developed country is by definition “a country with a lot of industrial activity and where people generally have high incomes” . It implies most of the time a well-established and stable economic system and infrastructure, a low poverty rate and high living standards, meaning that people have sufficient financial means to cover the basic human needs such as shelter, security, water, food, etc. The UN classified the countries in the world in three categories: developed economies, economies in transition and developing economies. They based their classification on the GNI (per capita gross national income) established by the World Bank. The developed countries are listed in table A that can be found in Appendix 5. We will base our document on that definition and classification.

An important concept to also specify is the word “tool” which is defined as “an item or implement used for a specific purpose” . In this particular topic, we are considering tools as any action or system established to help implement microcredit into the financial concepts used by the citizens. Microcredit, although intended in the first place to help developing countries, became accessible to citizens in developed countries around 2005 for personal microcredit and was already available in France in 1988 to help boost small companies. Microcredits are not only a mean to help small business owners access financial loans they could not get otherwise, it can also help low-income households with purchasing a good to increase their standard of living. The microcredit sector is diverse in terms of size, structure and markets in the EU only. In all developed countries micro credit terms are different. Different rates of interest, different set of rules to be admissible, etc. The amount of a micro loan is between 300 and 3000€ in France and can go up to 10000€ in Bulgaria. There is a clear lack of continuity and homogeneity in this sector. Despite the potential and growth of this sector, research on microcredit programs in developed countries is still limited but not non-existent. A study showed that the main area where micro loans need improving is in the accompaniment of people. Some people who benefit from this type of loans are most of the time failing due to the lack of formations and support necessary to comprehend what it includes and put together a viable business plan and follow up on the payments .
Although microcredit is most of the time an efficient solution in developing countries (we will go further in details later on) it came across a few difficulties in our economic system showing us its difficulties to work in a pre-established set of rules and organizations. The microfinance solution needs to be adapted and more thought through to be able to be successful and efficient in developed countries to answer the problematics raised in the last ten years.