Fundamental Financial Concept: Microcredit

Introduction:

Entrepreneurial ventures are one of the drivers of economic development. This is because entrepreneurial ventures introduce new products, including products which are capable of satisfied those needs which the present firms are either not able to fully or not at all. Start-ups create employment opportunities and herald socioeconomic development. However, entrepreneurs often face shortage of financial resources. Even SMEs which are operating face shortage of financial resources. They are often not able to borrow business loans from banks since they do not qualify the stringent criteria of the banks which include securing the loan provided with collaterals. Microcredit is a financial product which has been designed to provide financial assistance to the SMEs having limited financial resources. The aim of the report would be exploring the concept of microcredit.

Meaning of microcredit in economics:

The term microcredit in economics refers to a very small amount of loan which is provided to a business organisation or an individual to start or run a business. The amount provided is extremely small and usually need not be supported by a collateral. Microcredit is usually provided to a group of people so that they can start a business. The groups applying for microcredit usually have not source of fixed income and cannot afford to secure the lent amount with securities. Hence, the small amount of money lent to them as microcredit is usually lent with an understanding that they would repay the loan as they would generate revenue from the business set up. The parties borrowing microcredit are usually poor people including women who cannot afford to borrow loans from banks. The system is proving helpful to boost entrepreneurial ventures in rural regions and interior regions. The financial product is indeed helping to bring about socio-economic development in these areas. The bodies lending microcredit usually include government organisations and non-profit organisations like Oxfam.

Features of microcredit:

Microcredit has several features. The first feature is that it is a form of loan. The second feature is that the loan amount provided is extremely small. The third feature is that microcredit is usually provided to a group of individuals to start a business. The group here acts as a security. A group of people living in backward areas or from below poverty line is more likely to succeed to launch a business than an individual. The fourth feature transpires from the first two features. The loan amount is usually not secured by a collateral. The fifth feature of microcredit is that it is usually not provided by major banking companies. Government organisations and non-profit organisations usually are the main lenders in this segment of the financial market. The sixth attribute of microcredit is that it encourages entrepreneurial ventures and socioeconomic developments in the villages.

Microcredit examples:

There are several examples of microcredit. The National Bank for Agriculture and Rural Development or NABARD in India provides microcredit to self-help groups or SHGs. These groups consists of individuals, majority of them consisting of women to borrow money to start-up businesses. The members of the help group save their meagre income in form of group funds. They can borrow from group funds to meet their emergency financial needs. Groups of people who succeed in repaying the loan amount become eligible for borrowing more amount of money. Accord US Network is a no-profit organisation based in the United States which is lending to people not having sufficient financial backing to borrow loan from a bank. Several for-profit organisations in the United States Citi Foundation have collaborated to form Grameen America. Grameen America provides financial help to the poor people in the cities of Bronx, Brooklyn, Manhattan, and Queens. The organisation also provides help to people in other cities like Indiana. Peer-to-peer lending on the online platform is a form of microcredit in which groups seeking microcredit can directly contact with providers of microcredit. Zidisha and Microloan Foundation are two of such online platforms.

Advantages of microcredit:

Microcredit has several advantages to the borrowers, lenders, and to the economy on the whole. As far as the borrowers are concerned, they can easily get access to loan, though in small amount. They can start businesses with the amount.

The bodies providing microcredit can derive several advantages by providing microcredit. First, bodies can start lending small amounts in the initial phase in the form of microcredit. As the financial capabilities of the groups are concerned, as they commence in their businesses, their financial capabilities increase. The borrowers remain loyal to the lenders. The organisations lending microcredit can later on expand their operations more using the support of this loyal base of customers. Secondly, companies which provide microcredit even as a part of their community development initiatives can project their social responsibility in a big way. This would strengthen their market images, thereby boosting their long-term growth.

Microcredit helps in development of start-ups in the countries. It thus boosts their economic conditions.

Difference between microfinance and microcredit:

There are several differences between microfinance and microcredit. Microfinance is a term which is used to refer to financial companies providing financial assistance to SMEs. Microcredit on the other hand refers to a small amount of loan provided to individuals usually in a group to start a business. The second difference in between the two is that microfinance includes a host of financial services of which loan is a part whereas microcredit is a loan and does not include other financial products. Microfinance companies serve both SMEs and multinational companies with financial assistance involving small amounts. Microcredit is provided to poor people to start businesses. Microfinance companies may not be associated with socioeconomic development among the backward classes but microcredit is.

Conclusion:

It can be concluded that microcredit holds immense importance in promoting entrepreneurial ventures. It promotes socio-economic development among the backward classes. It can be recommended on the basis of the discussion that major banks should enter the sector and help in socio-economic development among the poor people. The government should incentivise organisations to provide microcredit to the economically backward groups to encourage more companies to enter the sector.