A microcredit is a microcredit, ranging from one USD to a few thousand USD, which is given to small businesses and mainly in developing countries. Such loans are usually issued by specialized financial service providers or non-governmental organizations to promote development in certain developing countries.
The reason for microcredit
The reason for microcredit is an economic principle. The repayment of these loans should be in a socially acceptable form. The microcredit issuing organizations were created as a counter-pool to the existing loan sharks that their clients exploit.
A large number of these organizations started as non-profit organizations and received government funds or private subsidies, which were then passed on to small businesses. The microcredit was then offered for the first time at current interest rates when the dollar unit was founded within Bank in Indonesia.
These organizations at that time now work as a kind of independent bank. This has also led to a significant rise in interest rates on microcredit. Interest rates of up to 20% then came about here. This led to the accusation of many development experts that these banks had taken over the business of the loan sharks.
Granting microcredit in developing countries
Allocation to groups – group formation
Although the original idea for microcredit was to lend it to individuals, today the main business in this area is lending to groups. One speaks here of a “solidarity circle”. This is a group of borrowers who support each other. However, responsibility for repaying the loans rests with a single person. Lending practice is often carried out in such a way that the granting of a loan to a member of this group is dependent on the successful repayment of another member from this group. This creates a procedure similar to that of a guarantee.
Awarded to women
Another focus is on lending microcredit to women. In South America, some organizations link lending to borrower health care because borrower health is an important prerequisite for repayment of the microcredit. Women make up more than 75% of all micro-borrowers worldwide.
The customer contact
Customer contact is also an important part of microcredit. The microbank carries out a thorough review of the borrower’s business model and the bank then adjusts the repayment dates of the installments to the cash flow in the company (for monthly or weekly repayments).
The amount of microcredit
The number of microcredit borrowers is estimated to be up to 200 million worldwide. A financing volume of approximately 70 billion US dollars is currently assumed. The number of lending organizations is around 70,000. The focus of microfinance is currently in Bangladesh and India. India is the largest market worldwide. There, the number of current microcredit is around $ 75 million.
The interest rate
The effective annual interest rate for microcredits is often significantly higher than the interest rate for classic loans, often over 20%. The reason for this is the significantly higher costs and the necessary intensive advice that accrues when granting microcredit.
Based on studies, however, it can be assumed that interest rates are sometimes even between 30 and 70% pa. However, there are also positive exceptions. For example, the Lite Bank divides lending into three different groups. These are corporate loans at an interest rate of 20%, construction loans at an interest rate of 8% and educational loans for higher education of children at an interest rate of 5%. In the case of microcredit, the calculation is simple interest (a so-called residual value amortization) and no compound interest is charged.
By adhering to the rules for group formation, focusing on women and close customer contact, the repayment rate is 95% to 100%. However, this varies from country to country. According to Bangladeshi data, the repayment rate for microcredit in this country is around 65% despite the group pressure. The high repayment rates also result from many debt restructuring.