Introduction
The Nobel Peace Prize for 2006 was awarded to Muhammad Yunus and the Grameen bank for the expansion of microcredit. [1] As the Nobel committee said, “lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty.” [2] Micro-credit is a way in which development can be stimulated in a matter that also serves to advance democracy and human rights. [3]
Microcredit is a topic that has been fairly underexplored in regards to business law. In this multipart essay, I will first introduce the foundations and workings of microcredit. Then, I will explore how microcredit can be applied to the poor in present day society in the United States and the barriers that stand in its way. A big constraint to the expansion of microcredit programs is the absence of a legal framework. However, before a comprehensive legal framework can be developed, the concept of microcredit has to be understood. [4]
One of the most intractable economic problems for poor countries has been the high price, or outright unavailability, of credit in rural communities. [5] One of the few concepts that have succeeded in expanding the availability of credit has been "microfinance;" a practice that involves the provision of small loans (generally of a few hundred dollars or so) to borrowers without conventional collateral. The success of micro-lending has been especially striking because its benefits have accrued primarily to groups ignored by traditional development assistance. These groups are the poorest segments of poor countries' populations and, in particular women. [6]
As many are aware, traditional banks generally do not provide financial services or loans to individuals with little or no cash income or other forms of collateral. [7] Banks must incur substantial costs to manage a client account, regardless of how small the sums of money involved. [8] The reasoning is that banks must incur substantial costs to manage a client account, regardless of the sum of money. [9] Because of these difficulties, when poor people borrow they often rely on relatives or a local moneylender. These unregulated and unconventional lenders can have very high interest rates. [10]
Brief History of Grameen Bank and the Goals of Microcredit:
The Grameen Bank is widely considered to be the pioneer of microcredit. The goals of the microcredit system are actually ingrained in the Grameen Bank organization. The origin of Grameen Bank can be traced back to 1976 when Professor Muhammad Yunus, Head of the Rural Economics Program at the University of Chittagong, launched an action research project to examine the possibility of designing a credit delivery system to provide banking services targeted at the rural poor. [11] The Grameen Bank Project came into operation with many objectives. These included: extending banking facilities to poor men and women, eliminating the exploitation of the poor by money lenders, creating opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh, bringing the disadvantaged (mostly women) from the poorest households, within the fold of an organizational format which they can understand and manage by themselves. Fortunately, microcredit provides the good way to reverse the age-old vicious circle of "low income, low saving & low investment", into virtuous circle of "low income, injection of credit, investment, more income, more savings, more investment, more income." [12] How Microcredit
Works: Solidarity Lending:
In order to achieve the aforementioned goals of microcredit, one must first understand the concept of “solidarity lending,” as it is a cornerstone of how microcredit works. [13] Essentially, the financial system of solidarity lending is the practice of bundling loans. Under this system, would-be borrowers form small groups (usually of between three and six), where each member agrees to guarantee the loans of the others in the group. [14] If any one individual member defaults on his or her loan, the other members of the group are required to cover the shortfall. [15] This involves a degree of peer pressure, social pressure, and moral pressure that can be even more effective than the threat of losing assets or collateral. This practice works well in small localized societies because generally, the respect and good name that one has is equally important as material possessions.
Successes and Hard Numbers:
Microcredit is generally considered to be a complete success in economic terms. An official announcement stated that more than 106 million of the world's people living on less than $1 per day received micro-loans, and that this goal was reached in late 2007. [16] Furthermore, the Grameen Bank, now employs more than 16,000 people, has more than seven million clients–mostly women–and has lent more than $7 billion. [17] Microcredit fueled enterprises make an important contribution to economic output and employment in developing economies. While estimates vary greatly depending on definitions, recent work by the World Bank suggests that almost 30 percent of employment in low-income countries is generated by the informal economy, while an additional 18 percent is provided by (formal) small and medium enterprises. [18] Currently, there is an immense global microfinance funding gap of at least $250 billion. Only about four per cent of the worldwide demand is being met. This problematic gap is where microcredit has the opportunity to jump in and resolve. [19] More and more large investment and pension pools are recognizing microfinance as a solid investment. Examples include the multibillion U. S. college pension fund and TIAACREF, which invested $100 million in global microfinance. [20] Aside from being implemented in poor rural areas of Bangladesh or parts of India, recently it was announced that former Algerian prison inmates will receive small loans to ease their re-integration into society and lower their chance of becoming repeat offenders. [21]
Problems and Criticism:
Microcredit as a concept has expanded throughout the world already. Microcredit institutions operate in a variety of institutional structures. They include research projects in China, non-governmental organizations, trusts, non-bank finance corporations, banks, financial companies, and so on. [22] Since there is no official legal position for microcredit programs, they adopt an uncomfortable home just to give themselves a legal cover. [23] While it solves immediate problems, it runs into the problems of being a guest in an adopted "home." These restrictions include restraints on certain lending practices and regulations that actually impede the lending process. [24] Many programs that have reached full scale in that they have permeated the local population and wish to convert themselves into formal financial institutions are unwilling to do so because of these potential legal problems. [25] These problems are a crucial factor in the application of microcredit in the United States and will be explored in the next part of the paper.
In addition to these external legal issues regarding the position of these organizations in the course of government regulation, there are also a variety of internal problems as well. Micro enterprise faces more problems in raising finance, as the provider of financing may not find the amazing return on investment when compared to the return on investment with a large enterprise. Also investors are more skeptical about repayment due to the nature of the loans and who the money is being loaned to. [26] There have been studies which have found that in order to ensure timely repayment, the loan centers, bank workers, and borrowing peers have been known to inflict an intense pressure on women clients. [27] In a community, many borrowers maintained their regular payment schedules through a process of loan recycling. This considerably increased the debt-liability on the individual households, increased tension and frustration among household members, and produced new forms of dominance over women and increases violence in society. [28]
Conclusion:
The concept of microcredit has tremendous potential in the world of banking. Micro-financing has a blend of social and economic characteristics which provide a strong foundation that can be used to achieve objectives of micro financing efficiently and effectively so long as one knows the pillars of micro financing. It can bring about positive change in the poverty stricken and underdeveloped parts of a country. Overall, this has been a brief introduction to the concept of microcredit and its origins. In part II, I will expand on how such a system could be implemented in the United States as well as explore the legal ramifications and possible negative consequences that such an application would have in our present day society.
[1] Press Release – Nobel Peace Prize 2006 (Oct. 13, 2006) available at http://nobelprize.org/nobel_prizes/peace/laureates/2006/press.html
[2] Id.
[3] Id.
[4] Muhammad Yunus, Expanding Microcredit Outreach to Reach the Millennium Development Goal-Some Issues for Attention, 2009 available at http://www.grameen-info.org/index.php?option=com_content&task=view&id=218&Itemid=172&limit=1&limitstart=0
[5] Jameel Jaffer, “Microfinance and the Mechanics of Solidarity Lending: Improving Access to Credit through Innovations in Contract Structure,” Harvard Law School, Olin Center for Law, Economics and Business, Working Paper No. 254 (April 1999).
[6] Id.
[7] ING CR – Microfinance, http://www.ingforsomethingbetter.com/our_story/business/microfinance_/ (last visited Nov. 9, 2009).
[8] Supra at note 4.
[9] Id.
[10] Id.
[11] Supra at note 5.
[12] A Short History of the Grameen Bank, 2009 available at http://www.grameen-info.org/index.php?option=com_content&task=view&id=19&Itemid=114
[13] Id.
[14] Id.
[15] Id.
[16] Bob Dickson, Blaise Salmon, SOME GOOD ECONOMIC NEWS, available at http://www2.canada.com/calgaryherald/news/story.html?id=9f0d93a8-a6b8-4e6b-a8ac-82cffeea9b14&p=1
[17] Id.
[18] Vrajlal K. Sapovadia, “Micro Finance: The Pillars of a Tool to Socio-Economic Development,” Indian Institute of Management Indore – Finance & Accounting; Development Gateway (2006).
[19] Supra at note 16.
[20] Id.
[21] Fidet Mansour, Microcredit measure aims to help Algeria's ex-cons, Magharebia, Oct. 27, 2009. available at http://www.magharebia.com/cocoon/awi/xhtml1/en_GB/features/awi/features/2009/10/27/feature-01
[22] Supra at note 7.
[23] Id.
[24] Id.
[25] Id.
[26] Id.
[27] Aminur Rahman, “Micro-credit initiatives for equitable and sustainable development: Who pays?,” Department of Anthropology, University of Manitoba, Winnipeg, Manitoba, Canada (15 May 1998)
[28] Id.