Microcredit

Microcredit has gained support worldwide as an effective tool for poverty alleviation.

Our village banking model is a borrowed best practice utilized by worldwide microcredit organizations such as FINCA International and the Grameen Bank (created by Mohammed Yunus, 2006 Nobel Peace Prize recipient.) It is a key strategy for meeting the UN Millennium Development Goal to ensure that 175 million of the world’s poorest families, especially the women of those families, receive credit for self-employment and other financial and business services by 2015. By providing poor families with small loans to invest in their microenterprises, Village Banking empowers them to create their own jobs, raise their incomes, build assets, and increase their own well-being.

Microcredit FAQs

Who benefits from microcredit?
The United Nations Development Fund notes that one in five people in the world – more than 1 billion people – still survive on $1 a day. This is a level of poverty so abject that it threatens survival. Another 1.5 billion people live on $1 – $2 a day. Subsequently, more than 40 percent of the world’s population constitutes, in effect, a global under-class faced daily with the reality or the threat of extreme poverty. Microcredit has been described as the “poverty vaccine.” A 2007 Microcredit Summit Campaign Report noted that over 3,552 reporting institutions practicing microcredit have served 107 million of the poorest people.

Why do we need microcredit?
Women in poverty do not have options to pay for the unexpected such as illnesses, natural catastrophes or other losses. When faced with a need for extra money, the only alternatives available to many of our borrowers are informal moneylenders or local loan sharks, who typically charge astronomical amounts of interest per day. In borrowing money in this manner, those in poverty only sink further into poverty.

Traditional banks will not lend to those in poverty due to a lack of collateral, no credit history or business track record. Many clients live in geographically remote areas; since they can’t easily travel to a bank (even if the bank wanted their business), the bank would have to travel to them. Also, poor people are often illiterate, unable to read a standard loan agreement or sign their name to it without special attention which banks are unlikely to provide. There is also a general distrust of banks and many feel (and are) unwelcome there. Banks in developing countries do have histories of instability or corruption, and do believe in some cases that having poor people in their lobbies will alienate their customers, who are usually that country’s elite. Finally, the loan sizes that poor people need are too small, and thus the transaction costs too high, to be attractive business to most commercial banks

How does the DiscoverHope microcredit model work?

  • Neighbors come together in financial support groups called “Village Banks.” Individuals borrow working capital for their microenterprises, and because they have little to offer for collateral, the group guarantees those loans.
  • DiscoverHope village banks form with 5 – 25 women who borrow together, pay back together, and create a structure for their group to function with pride, respect, and ownership. Village Bank women begin to create a tight-knit unit with their co-borrowers, creating local BBQs, sewing clothing for each others children and helping others through sickness and death.
  • Microcredit loans are monitored by information collection by our “promotoras” (Peruvian field officers) who meet with the village banks monthly. Promotoras help DiscoverHope collect basic information about the beneficiaries in the village bank where the funding is used such as their loan amounts, their small business choices, and other socioeconomic information.
  • The women use these small loans to develop their small businesses, the most popular business contexts are textiles, food production, agriculture, and artisan products.
  • As businesses grow, families earn more, purchase more nutritious foods, and parents are better able to send their children to school.
  • The women pay back their loan in very small increments over a five – eight month period.
  • DiscoverHope has a compulsory savings component to our loans so that women end up saving some of their income and eventually having enough collateral to create self sufficient businesses and “graduate” from our program.

What is the payback rate for these loans?
Globally, the average on-time repayment rate for this type of microcredit work is more than 97 percent (Microcredit Summit Campaign) so this money cycles back in for further loans for other women. DiscoverHope is currently at a 100 percent payback success.

Why does DiscoverHope only work with women?
We know from programmatic experience that investing in women entrepreneurs is a highly efficient means to achieve economic and social change. Indeed, the central voice of microcredit, The Microcredit Summit Campaign, explains that women are often responsible for the upbringing of the world’s children and the poverty of the women generally results in the physical and social underdevelopment of their children. Women manage household finances in most of the developing world; as more cash and assets get into the hands of women, most of these earnings get into the mouths, medicine, and schoolbooks of their children (www.microcreditsummit.org).

Other relevant reasons for working with women include:

  • Investing in low income women entrepreneurs is a highly efficient means to achieve economic and social objectives. Women manage household finances in most of the developing world. As more cash and assets get into the hands of women, most of these earnings get into the mouths, medicine and schoolbooks of their children. A woman’s economic position directly affects her ability to purchase needed improvements in health, housing and education and her bargaining position and power in the family
  • Most poor people are women and most women are poor. Almost all low income women are economically active. Most are microentrepreneurs and self-employed in the informal sector. The major economic roles of low income women entrepreneurs and producers are often undervalued and ignored.
  • Low-income women entrepreneurs and producers – the majority of the world’s women – need and merit expanded access to finance, information and markets. Access to finance and economic participation is key to building a woman’s confidence and capacity to use her voice to reshape her life.
  • Credit access enhances women’s status in the community and enables a woman to build income and assets that are clearly hers. Access to finance is central if women are to leverage their time and talents to transform themselves, their families, their enterprises, their economies and their world.
  • Women are major actors in the global economy. Women’s roles as the farmers, traders, and informal sector industrialists are major, and often overlooked.
  • Global experience with microlending demonstrates that women are better credit risks than men, and that poor entrepreneurs have higher repayment rates than large bank clients.
  • Increasingly, many households are headed by women, relying on the woman’s earnings as the main or sole source of income for the family.
  • Women tend to be honest, practical and reliable. This results in a low percentage of business failures and loan defaults among women business owners
  • Most women place a high utility on security. This means major potential for large savings mobilization, if the mechanisms are women-friendly (Information from Report of the UN Expert Group on Women and Finance).

What are DiscoverHope’s microcredit loan requirements?
Before receiving a microloan, the women must:

  • Attend an introductory meeting on DiscoverHope and its purpose
  • Propose participation in a village bank group (group of women borrowers)
  • Participate in an introductory poverty targeting interview to asses the poverty level and needs related to loan as well as payback propensity (conducted by bank officer/promoter in the field)
  • Allow for a visit to existing business that they wish to expand (if applicable) or communicate what business they would like to initiate. In general, the initial interview will include an additional discussion about what materials are specifically needed for a proposed business or amplification of an existing business. This interview is also critical to determining how much money the woman really needs and how much she can pay back and still make her life better, not more difficult.
  • Allow for a home visit from a DiscoverHope representative to assess household assets and vulnerabilities (conducted by bank officer/program manager)

Microcredit’s impact

  • For many women, helping establish and operate their Village Banking group is their first experience in self-governance and democracy; serving as a Village Bank officer is their first leadership opportunity.
  • Women’s status within the home increases as their self-confidence and economic self-sufficiency grow. They demonstrate significantly greater empowerment as measured by physical mobility, ownership and control of productive assets such as land, involvement in family decision-making, and legal and political awareness and participation. And their empowerment increases the longer they stay with their microfinance programs – compelling evidence of a causal link.
  • Microcredit lending is based on a culture of accountability and ownership where women have a setting to realize their potential with total dignity. Since this is their money, their responsibility, their skills and their businesses, they take total ownership
  • After a year or more, many Village Bankers make significant improvements to their businesses, their homes, and their lives. Because neighbors support each other while growing their businesses, Village Banking helps invigorate entire communities.

By having access to credit and by building collateral through participation in these programs, borrowers can eventually graduate into a more formal system that will provide them with loans for education, health, housing, and emergency family funds. Microcredit grows self-esteem for borrowers because it provides options and opportunities to become independent economically.

Microcredit institutions combine microfinance, new technologies, and innovation to empower the world’s poorest people to escape poverty. From simple small loans, the world’s poorest families can then create their own jobs, raise household incomes, and improve their standard of living.

Microcredit Resources

FINCA
The Grameen Foundation
“Banker to the Poor” by Muhammad Yunnis
“A Billion Boostraps” by Eric Thurman and Phil Smith
“Pathways out of Poverty” by Sam Daley-Harris
“The End Of Poverty” by Jeffrey Sachs