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In recent years, prominent among the revolutions in personal finance and savings has been the rise of microfinance or microcredit as it is also known as.
To understand how this works, picture yourself as a small businessperson (you can be a farmer with a marginal landholding, a woman with a home based business or a group of small businesspeople) who is in need of finance but in amounts that are considered negligible by mainstream banks and financial institutions.
What happens is that because of the lack of small credit avenues, you would be forced to borrow from the local moneylender at exorbitant rates of interest which would leave you poorer than richer at the end of the day.
Further, considering that most small businesspeople do not have collateral such as titles to their meager property and other forms of assets, even those institutions that are in a position to offer them credit would think twice because neither the borrower has a credit history nor is any asset pledged as collateral.
This is where microfinance and microcredit institutions enter the picture as these agencies often with governmental backing in implicit and explicit forms make it a point to lend the small amounts that such entrepreneurs need.
Indeed, as the success of this trend shows, more often than not, all that is lacking for the aforementioned segment is access to small capital which was hitherto denied to them. Not anymore as most Third World countries now have established microcredit institutions for the express purpose of lending to the poor and the marginalized and make it a point to lend only to them.
The microcredit revolution has been pioneered by the Nobel Laureate and Bangladeshi entrepreneur, Mohammed Yunus who with his Grameen Bank ensured that those at the “Bottom of the Pyramid” have access to credit in a manner that is easy, without red tape, and on terms that are congenial and favorable to the borrowers.
Traditionally, governments were unable to find resources especially in the Third World which they could channelize to the small entrepreneurs as well as had to face resistance from established banks and financial institutions who pointed to the abysmal record of repayment.
Microcredit has found a way around the criticism that small entrepreneurs default on their loans by ensuring that groups of such small entrepreneurs receive loans wherein each of them stand guarantee for the others. In this way, the microcredit agencies ensure that they are making loans to a pool of borrowers instead of individuals alone.
Moreover, microcredit agencies also make it a point to lend for shorter durations as well as encourage repayment by educating and enlightening the borrowers of the advantages of credit repayment and further access to funding.
Having said that, it is not the case that microcredit has been an unqualified success all over the Third World.
For instance, in the state of Andhra Pradesh in India, there has been a spate of failures of reputed microcredit agencies wherein because of mismanagement, fraud, and over stretching their limits to force the borrowers to repay, these agencies ran afoul of the regulators leading to a full blown crisis in this sector.
The lessons from this debacle are that just like the Central Banks and the Regulators monitor traditional and mainstream banks and financial institutions, they must also regulate the microcredit agencies.
Moreover, the government must also ensure that both the credit disbursement and repayment adhere to strict norms wherein the tendency to become over greedy either by the agencies or the borrowers is contained and instead, a balanced approach is adopted.
Despite these failures, microcredit has indeed ushered in a revolution among the poor and the underprivileged in many Third World countries.
Some of the suggestions that experts have made to improve this further include broadening the base of borrowers by including artisans, and even medium scale enterprises as well as cooperatives so that following the principle of group lending, there can be an attempt to foster greater discipline as well as tighter procedural norms in the process.
Apart from that, the other suggestions include enhancing the skills of the small entrepreneurs so that they do not become stuck in the same skill based work for which they have taken the loans and risk stagnation.
In other words, the aim is to ensure that the process becomes scalable, repeatable, and improves with each iteration.
Another aspect of microcredit is that once the borrowers achieve scale, they are in a position to access funding from traditional sources as well as setting an example for other borrowers and potential borrowers who would emulate them in terms of fiscal discipline and repayment.
Moreover, by encouraging the formation of Self Help Groups or SHGs wherein each member of the group is given a seed capital and the group as a whole receives funding, these SHGs are then encouraged to rotate the seed capital among themselves as well as fund future growth from their revenues and accruals from past activities.
As the name implies, these groups are catalyzed by the government or the microcredit agencies to help themselves and help the whole system in the process. Some of these groups can be found across India and other parts of Asia wherein with the seed capital and the initial funding, they have been largely able to stand on their feet and set an example for other groups to follow.
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