The word “microcredit” did not exist or familiar before the seventies. Now “microcredit” word has become a word among the development. No one now gets shocked if somebody uses the term “microcredit” to mean agricultural credit or rural credit or cooperative credit or consumer credit or credit from the savings and loan associations or from credit unions. At that time People were suffer illegal contact from money lenders from long time. Some time someone claims microcredit has a thousand year history or a hundred year history. Someone finds it as an exciting piece of historical information.
We think this is creating a lot of misunderstanding and confusion in the discussion about microcredit. We really don’t know who is talking about what. We obvers various types of microcredit in the world. We can clarify at the beginning of our discussion which microcredit we are talking about. This is very important for arriving at clear conclusions, formulating right policies, designing appropriate institutions and methodologies. Instead of just saying “microcredit” we should specify which category of microcredit.  “Microcredit” also operate through group/somity and it is a supervisory loan program.
  1. Traditional informal microcredit (such as, money lenders credit, shops, loans from friends and relatives, consumer credit in informal market, etc.) Microcredit based on traditional informal groups etc.
  2. Activity-based microcredit/smoll loan through conventional or specialized banks (such as, agricultural credit, livestock credit, fisheries credit, handloom credit, etc.)Rural credit through specialized banks
  3. Cooperative microcredit (cooperative credit, credit union, savings and loan associations, savings banks, etc.)
  4. Consumer microcredit.
  5. Bank-NGO partnership based microcredit.
  6. Other types of NGO microcredit
  7. Other types of non-NGO non-collateralized microcredit. “Microcredit” also operate through group/somity and it is a supervisory loan program.
This is a classification of microcredit. The point is that, when we use the word “microcredit”. We should make it clear which type of microcredit we are talking about. Otherwise we’ll continue to create endless confusion in our discussion. Needless to say that the classification we have suggested is only tentative. We can refine this to allow better understanding and better policy decisions.
Classification can also be made in the context of the issue under discussion. We arguing that we must discontinue using the term “microcredit” or “microfinance” without identifying its category.
Microcredit data are compiled and published by different organizations. We find them useful. We propose that while publishing these data we identify the category or categories of microcredit each organization provides. Then we can prepare another set of important information? Number of poor borrowers, and their gender composition, loan disbursed, loan outstanding, balance of savings, etc. under each of these categories, countrywide, region wise, and globally.
These sets of information will tell us which category of microcredit is serving how many poor borrowers, their gender break-up, their growth during a year or a period, loans disbursed, loans outstanding, savings, etc. The categories which are doing better, more support can go in their direction. The categories which are doing poorly may be helped to improve their performance. For policy-makers this will be enormously helpful. For analysis purpose this will make a world of difference.
Someone urge Microcredit Summit Campaign secretariat to present the information that they already collect on number of clients, number of the poorest among them, number of poorest clients that are women, number of clients that have crossed the poverty line broken down for each of the categories of microcredit. This will help donors to select the categories they would like to support. This sorting out is very important for the donors, as well as the policymakers.
Whenever someone use the word “microcredit” actually have in mind Grameen type microcredit. But if the person talking to understands it as some other category of microcredit then arguments will not make any sense to him.
Let we list below the distinguishing features of Grameencredit. This is an exhaustive list of such features. Some programmes are strong in some of the features, while others are strong in some other features. But on the whole they display a general convergence to some basic features on the basis of which they introduce themselves as Grameen replication programmes.
  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
  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 instalments (weekly or bi-weekly or monthly)
  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 (that organizations cannot declared yearly Dividend and surplus is again invest for the profit of the member). 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 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 centers, developing leadership quality through annual election of group and center leaders, electing board members when the institution is owned by the borrowers. 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.
Microcredit is based on the premise that the poor have skills which remain unutilized or under-utilized. It is definitely not the lack of skills which make poor people poor. Microcredit believes that-
  1. The poverty is not created by the poor
  2. It is created by the institutions and policies which surround them.
  3. In order to eliminate poverty all we need to do is to make appropriate changes in the institutions and policies, and/or create new ones.
  4. Microcredit believes that charity is not an answer to poverty.
  5. Traditinol Banking arragement and Mony lander Loan only helps poverty to continue.
  6. Traditinol Banking arragement and Mony lander Loan creates dependency.
  7. Microcredit takes away individual’s initiative to break through the wall of poverty.
  8. Microcredit ensure unleashing of energy, creativity in each human right and poverty reduction.
Microcredit brought credit to the poor, women, the illiterate and the people who pleaded that they did not know how to invest money and earn an income. Microcredit created a methodology and an institution around the financial needs of the poor, and created access to credit on reasonable term enabling the poor to build on their existing skill to earn a better income in each cycle of loans.
If donors can frame category wise micro credit policies they may overcome some of their discomforts. General policy for microcredit in its wider sense, is bound to be devoid of focus and sharpness. All Government can help for Microcredit for help their people/country.
Credit Delivery System and silectan of loan receiver:
  1. Establishing clearly the eligibility criteria for selection of targeted clientele and adopting practical measures to screen out those who do not meet them.
  2. In delivering credit, priority has been increasingly assigned to women.
  3. The delivery system is geared to meet the diverse socio-economic development needs of the poor.
  4. Borrowers are organized into small homogeneous groups.
  5. Such characteristics facilitate group solidarity as well as participatory interaction.
  6. Organizing the primary groups of members and federating them into centres has been the foundation of MFIs system.
  7. The emphasis from the very outset is to organizationally strengthen the clientele, so that they can acquire the capacity for planning and implementing micro level development decisions.
  8. The Centres are functionally linked to the MFIs, whose field workers have to attend Centre meetings every week.
  9. Special loan conditionality’s which are particularly suitable for the poor.
  10. Loans given without any collateral
  11. Loans repayable in weekly, weekly or bi-weekly or monthly instalments spread over a year.
  12. Eligibility for a subsequent loan depends upon repayment of first loan.
  13. Individual, self-chosen, quick income generating activities which employ the skills that borrowers already possess close supervision of credit by the group as well as the MFI staff.
  14. Stress on credit discipline and peer support solidarity.
  15. Special safeguards through savings to minimize the risks that the poor confront.
  16. Transparency in all MFIs transactions most of which take place at centre meetings.
  17. Simultaneous undertaking of a social development agenda addressing basic needs of the clientele.
  18. Raise the social and political consciousness of the newly organized groups.
  19. Focus increasingly on women from the poorest households, whose urge for survival has a far greater bearing on the development of the family.
  20. Encourage their monitoring of social and physical infrastructure projects – housing, sanitation, drinking water, education, family planning, etc.
  21. Design and development of organization and management systems capable of delivering programme resources to targeted clientele.
  22. The system has evolved gradually through a structured learning process that involves trials, errors and continuous adjustments.
  23. A major requirement to operationalize the system is the special training needed for development of a highly motivated staff, so that the decision making and operational authority is gradually decentralized and administrative functions are delegated at the zonal levels downwards.
  24. Expansion of loan portfolio to meet diverse development needs of the poor.
As the general credit programme gathers momentum and the borrowers become familiar with credit discipline, other loan programmes are introduced to meet growing social and economic development needs of the clientele. Besides housing, such programmes include:
  1. Credit for building sanitary latrines
  2. Credit for installation of tube-wells that supply drinking water and irrigation for kitchen gardens
  3. Credit for seasonal cultivation to buy agricultural inputs
  4. Loan for leasing equipment / machinery
  5. Finance projects undertaken by the entire family of borrower.
The underlying premise of Grameen is that, in order to emerge from poverty and remove themselves from the clutches of usurers and middlemen landless peasants need access to credit without which they cannot be expected to launch their own enterprises however small these may be. In defiance of the traditional rural banking postulate whereby “no collateral means no credit” the MFI experiment set out to prove successfully that lending to the poor is not an impossible proposition on the contrary it gives landless peasants the opportunity to purchase their own tools or equipment or other necessary means of production and on income-generating ventures which will allow them escape from the vicious cycle of “low income, low savings, low investment”.
The manager and the workers start by visiting villages to familiarise themselves with the local milieu in which they will be operating and identify the prospective clientele, as well as explain the purpose, the functions and the mode of operation of the MFIs to the local population. Groups (prospective borrowers) are formed in the first stage and receive a loan. The group is observed for a month to see if the members are conforming to the rules of the MFIs. Because of these restrictions there is substantial group pressure to keep individual records clear. In this sense the collective responsibility of the group serves as the collateral on the loan.
Loans are maybe small but sufficient to finance the micro-enterprises undertaken by ability. The repayment rate on loans is maximum due to group pressure and self-interest as well as the motivation of borrowers.
Although mobilization of savings is also being pursued alongside the lending activities of the MFIs most of the latter’s loanable funds are increasingly obtained on commercial terms from the central bank other financial institutions the money market and from bilateral and multilateral aid organizations.
Three C’s of Credit
Character: Means how a person has handled past debt obligations from credit history and personal background honesty and reliability of the borrower to pay credit debts is determined.
Capacity: Means how much debt a borrower can comfortably handle Income streams are analyzed and any legal obligations looked into which could interfere in repayment.
Capital: Means current available assets of the borrower such as real estate savings or investment that could be used to repay debt if income should be unavailable.
Breaking the vicious cycle of poverty through microcredit
The MFIs is based on the voluntary formation of groups to provide mutual, morally binding group guarantees in lieu of the collateral required by conventional banks arrangement.
The assumption is that if individual borrowers are given access to credit, they will be able to identify and engage in viable income-generating activities–simple processing and transport services. Group base poor people were given equal access to the schemes and proved not only reliable borrowers but astute entrepreneurs. As a result, they have raised their status, lessened their dependency and improved their homes and the nutritional standards of their children.
Intensive discipline, supervision, and servicing characterize the operations of the MFIs. The rigorous selection of borrowers and their projects by these workers the powerful peer pressure exerted on these individuals by the groups and the repayment scheme based on installments, contribute to operational viability to the system designed for the poor. Savings have also been encouraged.
The success of this approach shows that a number of objections to lending to the poor can be overcome if careful supervision and management are provided. For example it had earlier been thought that the poor would not be able to find remunerative occupations. In fact MFIs borrowers have successfully done so. It was thought that the poor would not be able to repay. In fact repayment rates reached high percent.
It was also thought that the poor cannot save. In fact group savings have proven as successful. It was thought that power structures would make sure that such a bank failed but the MFIs has been able to expand rapidly.
It is estimated that the average household income of MFIs members is about 50 percent higher than the target group in the control poor people. The landless have benefited most, followed by marginal landowners. This has resulted in a sharp reduction in the number of MIFs members living below the poverty line. There has also been a shift from agricultural wage labor to self-employment in petty trading. Such a shift in occupational patterns has an indirect positive effect on the employment and wages of other agricultural waged laborers. What started as an innovative local initiative “a small bubble of hope”, has thus grown to the point where it has made an impact on poverty alleviation at the national level.