Loans over a comparatively small sum are traded under a variety of names, which are often used as equivalent synonyms. However, there are clear differences, especially between micro-credit or mini-credit and microcredit. The best way to describe microcredit and mini-credit as a short-term loan, since their term usually covers only a few months due to the small amount of credit.
Mistakenly, such a loan is also often referred to as microcredit, as it does not seem quite clear what makes a microcredit exactly different from other microcredit forms of credit. The basic commonality, a sum of money in the three-digit or low four-digit range, also applies to microcredit, but the framework conditions are designed differently. As a loan model, microfinance is explicitly aimed at entrepreneurs only, so it is tied to a purpose and may not be used for private spending. So what makes microcredit something special?
Microcredit as an all-purpose weapon against social ills
The key word on microcredit is development aid, which sets this form of micro-loan apart from ordinary credit models. The purpose and amount of the loan also define the concept of microfinance.
With a comparatively low sum, startups, small entrepreneurs or the self-employed receive a financial boost to initiate the “help for self-help”, the core concerns of microfinance – at least in theory.
The target group are people or entire sections of the population who have no other means of access to financial resources. Due to lack of collateral or the insufficient amount of the required loan amount. This mainly affects developing countries but is also used in Europe.
In industrialized nations such as Germany, it may seem a bit exaggerated that with a cash injection of perhaps 100 euros, the fate of a whole family is changed. In developing countries in South America, Asia or Africa, however, such a sum can certainly make a big difference.
At times, the “new” idea of microcredit in developing countries has been touted as a groundbreaking solution to the fight against poverty, with Nobel Peace Prize winner Muhammad Yunus and Grameen Bank, which he founded, as a representative figurehead.
Decisive for the success beyond theory, however, is not just the cash flow itself, but a parallel network structure in order to make sensible use of the investments. As a universal solution in the fight against global poverty, both euphoric and critical voices are circulating on the principle of microcredit.
The emergence of the model “microcredit as development aid”
The basic idea of small loans for the impoverished population of developing countries is not new, however, the clearly defined motivation, why these microcredits are awarded. Muhammad Yunus, who gained worldwide recognition for the combination of development aid and micro-credit, has been instrumental in shaping the microfinance movement as a tool against poverty.
Using the example of his home country Bangladesh he shows the necessity of such a loan program and how it should be implemented in his opinion. Without starting credits, however small it may be, a way out of the lack of prospects is virtually impossible for impoverished sections of the population on their own. However, in order to break the prevailing vicious circle and not have to borrow money for everyday expenses, the “normal” banking system does not offer efficient solutions.
Due to the lack of collateral and the small amount needed, banks and credit institutions have little interest in granting microcredit. Too great an effort to test collateral, which in most cases does not exist according to conventional standards anyway. Too great the risk of not receiving reliable repayment without additional and detailed advice and support. But the money is actually needed by the people, so the business flourishes the so-called loan sharks and money traders.
A chance out of poverty
In the long run, nothing will change the bad situation of those who rely on the money of the loans, in the normal case, the debt trap will be even greater. So microcredits not only provide a financial bottleneck but also the need for socially acceptable and economically viable repayment terms that are adapted to the clientele. The deciding factor of the loan program is not only that small sums of money are given to poor people, but also under what conditions this happens.
The aim of the original microcredit idea was to add a social component in a world of capitalism, so as to allow the previously neglected sections of the population to participate in the market economy as much as possible. A project that has led to the model of microcredit being used in about 60 developing countries.
Without money can be established no existence, who has no money, gets none. It seems so easy to break this vicious circle. By giving those who have no security a leap of faith and giving the poorest of the poor a chance to prove their talents.
Loans without a debt trap should provide the system initiated by Muhammad Yunus. Small and targeted loans in his home country Bangladesh, to offer fast and pragmatic help on the ground.
According to the motto, even the poorest can be creditworthy with the right support, microcredits should be able to absorb those who normally go out of business at the credit institutions in conventional ways. Where no collateral is available, the microcredit principle will create it.
More than just financing – Help for self-help with the Microcredit Framework Program
Personal destinies and stories shape the path of microcredit right from the start, with a large percentage of them being given to women from impoverished populations in countries like India or Bangladesh. In some cases, only women are accepted as borrowers. The first step in this “development aid” is that these women should not continue to depend on dodgy characters and their methods of lending money.
The second step, apart from the loan itself, is the conditions to which it is assigned. The money is not available at leisure, but for purchases and investments that stimulate economic development. Poverty reduction and gender equality and empowerment are buzzwords that are closely linked to microcredit in developing countries.
For the poor, most dependent on microloans, there is a lack of money as well as basic professional knowledge to use it wisely and profitably. Therefore, microcredit is coupled with conditions right from the beginning to prevent the daily shortage from being bridged.
The exclusive use must be in the business area, the investment in the long-term self-employment is a prerequisite of the authorization. In parallel with the financial support, a network within the community must emerge, which serves as a security for the reliable repayment. A personal bond within these networks ensures that the borrowers ideally feel obligated to repay themselves. In theory, this guarantees a high repayment rate, based on the sense of duty of the poor population. Strengthened independence instead of debt trap so.
Criticizing so-called development aid – How humane does reality still look like?
Humanity vs. Reality of the market economy
Microcredits as a panacea for poverty worldwide – a nice idea, which was particularly successful at the beginning of the microcredit wave in Bangladesh and India. Reliable repayment rates of 90% still circulated and are still circulating to underpin the success of financial development assistance. But the sometimes ugly reality of the market economy and the global financial world is not without its mark on this model.
Positive and above all long-term effects of socially motivated microcredits seem to have fallen victim to ubiquitous capitalism. Positive effects beyond the 5% can hardly be scientifically proven or proven. The usury rates of the loan sharks did not differ in some ways from those of Grameen Bank, which was founded by Muhammad Yunus, but should be outweighed by the added value of advice, support and a sustainable start-up. But traditional securities are still not available, the money has long been consumed, what remains is a mountain of debt, which many Indian women then try again with the help of the loan sharks to abolish.
High interest rates and no way out in sight
The main argument, humane repayment conditions and unselfish empowerment of the impoverished population, for example, by a number of suicides in south India’s Andhra-Pradesh a damper. Women who could no longer service their credit were driven to acts of desperation such as suicide, including through the network, which was actually linked to support, in their personal environment.
Because in the event of death the open credit claim expires. There can be no question of selflessness and humane repayment conditions in such cases. For many providers of microcredit, which seeks to go public for the most part, it has long been more about their own profits than selfless development aid.
Microcredits in Europe and the German economy
Microfinance has played a not inconsiderable role since the 1990s, and not only in developing countries, but also in Europe. The basic principle of “help for self-help” is to help small and micro-entrepreneurs, even if the implementation is regulated somewhat differently than, for example, in Bangladesh or India. According to the motto “One for all, all for one”, according to which the cooperatives already acted in the 19th century, this model is now revived in Germany.
Microfinance institutions as an alternative to large banks
As in developing countries, micro-credit in Germany is also about providing financial resources for short-term bridging. In this category fall unexpected financial bottlenecks or one-time expenses, which can decide with small entrepreneurs even in the low three-digit range over a continuation of the own existence basis.
Balancing bad economies or wrong decisions is clearly not a suitable use of microcredits. For regular banks, the administrative burden on these loans is not worth it, so officially accredited microfinance institutions take on this task. Audited applications and recommendations on lending will be passed on to the GLS Bank, as the microfinance institutions themselves have no banking approval, but act as a trusted intermediary.
One for all, all for one – The renaissance of cooperatives
By founding cooperatives, self-employed and micro-entrepreneurs on the ground also create a community of values which forms the basis for mutual support in the regional association in terms of networking. A common concern, be it by being seated in the same neighborhood or working in the same sector within a city or region, promotes a sense of unity and, in the long term, opens new avenues for small businesses. Mutual support and accompanying counseling services ensure that a microcredit becomes a sustainable investment and that the available financial resources are put to good use.
Originated from regional model projects and in cooperation with the Federal Employment Agency and banks and foundations, the German Microfinance Institute (DMI) has been coordinating the allocation of microcredits in Germany since 2004. And thus offers small businesses a way to secure their livelihood by small amounts, for which otherwise loans from the private sector would have to be procured.