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SCMP Reporter

FYI: I recently heard the term 'microcredit'.

What is it?

Microcredit is the  extremely successful financial practice of lending money to those who need it most - the poor and  destitute.  It's mantra commands that those who own nothing have most to gain from being given something: usually a small loan  over short repayment periods.

The Microcredit Summit Campaign defines it thus: 'Microcredit programmes extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families.'

Microcredit loans target those too poor to qualify for conventional bank loans because they have no collateral, no steady employment and no verifiable or credit history. Lend them a little money, microcredit theory posits, and the poor will work hard and repay the loan, escaping poverty in the process.

And repay they do. Repayment loans in Bangladesh, for instance, where the movement originated in the 1970s, stand at 98.4 per cent, a rate so enviable that corporations such as HSBC, Deutsche Bank and Citigroup are rumoured to be looking into  the schemes. The Bill and Melinda Gates Foundation  is  funding various microcredit projects in South America, while agencies are even popping up in  downtown US.

The founder of microcredit, Bangladeshi economics professor Muhammad Yunus, was recently awarded the Nobel Peace Prize for his 'efforts to create economic and social development from below'.  In 1974, amid a catastrophic famine, he found that a major component of the poverty trap was the high loan repayments  faced by the poor. He loaned 42 women  about HK$2 each

to establish their long-desired cottage businesses, making pots or chairs. They paid him back in full.

Thirty years on, his neo-cooperative Grameen Bank, which is now 94 per cent owned by borrowers, has lent a staggering  US$5.5 billion.

While traditional finance puts the onus for repayments on the individual company or borrower, microcredit agencies operate by placing responsibility on the collective. They lend small amounts to small groups on the strict proviso that if one member defaults, other members are  liable for the debt.

Some ask why,  if the sums lent are so small,  the money isn't simply given away.  It's a good question, but  not everyone wants handouts, and  the poor  can have as much pride as the rich.

There's another contributing factor to its success. Ninety-six per cent of Grameen Bank borrowers are women, largely because  Yunus believes they are more likely to spend the money on their children. They are also  better at managing their debts - a radical proposition in predominantly Muslim states such as Bangladesh. Unnerved by this,   Islamic extremists have bombed branches. Thankfully,  the movement has prevailed.



I recently heard the term 'microcredit'.