Defining Microcredit

Defining Microcredit

February 25, 2011 at 6:52 PM - by Leah Gage - 0 comments

The term microcredit is multifaceted; it is difficult to define and refers to a wide variety of lending practices. Clients of microcredit borrow individually and in groups, known as self-help groups (SHGs); they borrow to invest directly in their business, or in their children’s education; they borrow to pay for healthcare, or build a personal home. Microcredit encompasses not only loans, but financial tools such as savings accounts and insurance.

Lenders and investors in microcredit can invest directly – in a family or friend they know; or they can utilize a Microfinance Investment Vehicle like Oikocredit to invest their money for them. As a financial tool, microcredit encourages small business development, but can also encourage social responsibility, improved education, expanded healthcare, and women’s empowerment.

The many facets of microcredit are enumerable. But, according to Muhammad Yunus and Oikocredit’s Tor G. Gull, the definition of microcredit must never include profiting from the poor. It is a way to help those in need rather than financially benefit from them.

“People with a motive of making profits should not use the term microcredit to describe their activities,” Muhammad Yunus said in response to questions regarding the recent upswing in the commercialization of microfinance.  This statement truly and substantially reflects the mission of the sector, and of Oikocredit specifically.

Yunus created the Grameen Bank to provide small loans to the poor without forcing them to pay outrageous interest rates; it was financial empowerment without exploitation. However, since then many have started to look at microcredit as a means for financial gain. That is why now it is imperative to clearly define, and reclaim, the term microcredit.

Tor G. Gull, Oikocredit International’s Managing Director, recently said in an interview, “Our primary goal is not the financial return but really to achieve social impact…[Our investors] believe what we are doing, and believe that we can achieve this social impact with the money that has been given to us.”  The primary purpose of microfinance should be the alleviation of poverty. While it is necessary to charge some interest, people must not mistake microfinance as a way to make profit.

Coumba Coulibaly, a client of Soro Yirisawo in Mali. Oikocredit has recently stepped up its investments in African partners which, though higher financial risk, have a greater social return by providing access to poorer clients in more remote areas.

In Yunus’ opinion, the main problem is not in gaining financial profit through small loans to poor, it is in calling it microcredit. At the Clinton Global Initiative annual conference last year, he debated the point with Vikram Akula, founder of SKS Microfinance, which has recently gone public. You can follow this debate here.

While commercialization in the microcredit industry will no doubt continue, there is no question as to where Oikocredit stands. We are committed to funding socially responsible project partners who are not in the business of profiting from their poor clients. Oikocredit has always been a leading advocate of client protection principles, social performance, and alleviating extreme poverty. To learn more about Oikocredit’s primary commitment to our borrowers, click  here to learn more about our development approach.

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