Microcredits favor inclusive business models.
A microcredit is a small loan that aims to promote social inclusion and mitigate a situation of poverty. Generally, its interest rate is low and it is granted with little or even no guarantee.
The term is made up of two components: the compositional element micro – (which refers to that which is very small) and the noun credit (money that is lent by agreeing to certain conditions for its return). The concept is usually associated with microfinance : financial services aimed at microbusinesses and low-income individuals.
History of microcredit
The history of microcredit began in the 18th century . Although so-called popular credits already existed, it is considered that the notion was coined by the Irish writer Jonathan Swift ( 1667 - 1745) , famous for his work "Gulliver's Travels" .
Swift , who was also an Anglican priest, promoted the creation of the Irish Loan Funds in 1721 to help alleviate poverty in his nation after a famine. Through the system devised by Swift, loans of between 5 and 10 pounds were granted, without interest.
Also in Ireland and in the 18th century , the Dublin Musical Society began granting loans of up to 4 pounds, using the profits from its artistic performances to finance them. Already in the 19th century , microcredit broke out in Germany through rural cooperatives that granted small loans using the savings of their members as capital.
Closer in time, microcredits had a great boost thanks to Muhammad Yunus , founder of the Grameen Bank in 1976 . This Bangladeshi institution is known as the "bank of the poor" since it finances farmers who cannot access traditional banks because they do not meet the requirements related to guarantees. Thanks to their contribution to financial inclusion and economic empowerment , Yunus and the Grameen Bank were awarded the Nobel Peace Prize in 2006 .
Social enterprises are usually financed with microcredits.
Main features
Microcredits are limited amount loans with low interest rates . They are usually granted by community banks or credit cooperatives and are generally given to a social enterprise because their purpose is to contribute to the eradication of poverty and sustainable development .
Due to their characteristics, they are mentioned as a banking product for the poor . It is also framed in the solidarity economy and ethical finance .
A microcredit can be a credit without guarantee or that is backed by joint guarantees. They are loans with high social impact that allow microenterprises to be started and that in many regions help rural development by promoting small-scale agriculture.
It is also highlighted that microcredits allow the creation of decent work and achieve a reduction in inequality . The establishment of alternative financial markets to that of large commercial banks means that people who are not banked can receive financing.
It is important to differentiate between microcredits and minicredits . While microcredits are aimed at promoting production and work activity, minicredits focus on consumption and usually have very high interest rates.
At this point it should be noted that microcredits are usually granted by non-profit entities . However, in recent years, financial companies that offer microcredits with a lucrative desire have grown, seeking benefits by fixing interest rates.
Microcredits can help strengthen women's businesses.
Types of microcredit
Microcredits can be classified in several ways. A frequent distinction is made between individual microcredits and group microcredits.
An individual microcredit is granted to an entrepreneur who needs financing to acquire an asset for his business or who requires working capital. A group microcredit , on the other hand, is given to a group of subjects who organize themselves to buy a good or start or strengthen an enterprise . These group loans serve to boost local economies.
Another classification, taken into account by the Central Bank of Ecuador , differentiates between subsistence microcredit (for self-employed workers and groups with a solidarity guarantee), simple accumulation microcredits (provided by local cooperatives) and expanded accumulation microcredits (provided by cooperatives and banks). These types of microcredits are defined by the amount of the loans and the level of sales of the recipient.
Advantages and disadvantages
The advantages of microcredits are numerous for those who request these loans. The most notable is that no guarantee is requested or a minimum is accepted , which contributes to financial inclusion.
On the other hand, they can be processed in a simple way. The management is simple and is usually completed quickly since it is flexible and has few formal requirements .
Another advantage is that its interest rate is fixed , so the final cost is known from the beginning.
As points against, the ease of processing and the few requirements can lead to over-indebtedness when microcredits are taken from two or more entities simultaneously. Another aspect to consider is that an individual can allocate the funds for a purpose other than the original one, with which microcredit loses its social function.