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What is Microcredit?

SONIA'S PINEAPPLE BUSINESS

We met Sonia Gutierrez Vlandon during the summer of 1998 while volunteering with FINCA International (one of the microcredit organizations interviewed in Small Fortunes) in steamy Nicaragua. She had been living in a small dilapidated house with her husband and six children ever since the Sandanista government had provided the land to her family. Across the dirt access road into her neighborhood was a large pineapple field. Since moving to the area, she had been purchasing pineapples on credit at an obscene rate and reselling them in the local area. She told us how she was never able to get ahead.

In 1997 Sonia joined a group of FINCA Village Bank borrowers called La Arroyito (Spanish for little stream) that met at the home of a neighbor-usually under a large, shady tree. After a few initial training sessions, Sonia received a microloan for the equivalent of 100 U.S. dollars guaranteed only by her word and backed by the social collateral of the members of her Village Bank. In turn, she joined with the other members and guaranteed their loans. If any of the twenty women in La Arroyito defaulted on their loan, it would be the responsibility of the other nineteen women to repay that debt-otherwise they would receive no further loans as a Village Bank group.

A year later Sonia was still reselling pineapples but was earning enough money to send her children to the local primary school, provide better food for her family, purchase medicines, and start building a new, larger, and more comfortable house. How was she able to accomplish all of this? Instead of purchasing the pineapples from a middleman at an outrageous interest rate, she used her microloan to purchase pineapples directly from the farmer for cash. These pineapples, purchased in larger quantities, yielded a much lower cost per pineapple, giving her far greater profits.

MICROCREDIT/MICROFINANCE/MICROENTERPRISE

Microcredit definitionSonia's experience is a good illustration of the benefits of microcredit that excite many economic developers. First, the bulk of her added profits went directly to benefit her family. Second, because each loan is paid back with interest, it becomes part of a perpetual loan fund. Thus, Sonia's repayments recycled as loans to other village women and men, again and again.

Gratefully, stories like Sonia's are now common. Estimates in 2005 show more than 100 million women and men accessing microcredit throughout the developing and developed world. The microcredit story is powerfully simple: provide very small loans to men and women who cannot access formal banking systems so that they can start or improve a very small business that lifts them out of poverty's grip.

A GROWING MOVEMENT

In the 1970s and 1980s, the pioneers of the microcredit movement such as the Grameen Bank, ACCION International, and FINCA International started spontaneous efforts to provide these small loans as a way to help impoverished families escape the bonds of poverty through enterprise. Though informal lending from family members and various types of creditors has existed for hundreds of years, this new type of lending took on a momentum of its own. It truly was a revolution in banking.

By the end of the 1990s, thousands of microfinance institutions were providing microcredit services to 23.5 million borrowers worldwide. These microfinance institutions usually came in two main forms, the nonprofit organization and the regulated financial institution. Networks and associations of or for the microfinance institutions also surfaced in the 1990s to support the organizations and improve the impacts of their microcredit efforts. One such organization, the Microcredit Summit Campaign, a consortium of over 3,000 microfinance institutions, has established a target in support of the Millennium Development Goal to bring microcredit services to 175 million of the world's poorest families—those living on less than one U.S. dollar per day or the poorest half of those living in poverty for a given country—and ensure that 100 million of these families move out of the "poorest" category.

The microcredit movement is gaining the momentum needed to achieve these goals. The United Nations declared 2005 to be the International Year of Microcredit. The goal is to bring more interest to the movement as well as to highlight the potential of microcredit.

Many of the thousands of microfinance institutions worldwide are providing more innovative financial products and services to meet the needs of families they serve, such as, but certainly not limited to, the following:

  • Multiple loan products (home, education, agricultural, etc.)
  • Additional educational services (health care, business development services, human rights, etc.)
  • Integrated insurance programs (health, life, home, etc.)
  • New banking instruments (savings, ATM cards, etc.)

Furthermore, the microfinance institutions themselves are changing. Many of the more successful programs are replicating their services in additional countries. Some are transforming into regulated banking institutions. A few are accessing capital via worldwide markets rather than relying on donations and grants. As a movement, metrics and systems are being put into place to better rate and qualify the microfinance institutions as well.

Microcredit, like other development interventions, is not a panacea to poverty. However, it is a powerful tool that provides many of the tangible and intangible resources needed to help the poorest to lift themselves out of poverty through self-employment. We believe that the microcredit movement will continue to grow in impact, status, and acceptance, and will become increasingly recognized as one of the most innovative methods to have positively altered economic and social systems for the poor in all parts of the world.

by Todd Manwaring
Managing Director, BYU Center for Economic Self-Reliance


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