Microcredit

also see; emerging markets , Microfinance , microcredit and inflation

Microfinance - includes savings accounts, and other functions beyond just credit

microcredit - only credit

Microcredit is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs and to others living in poverty who are not considered bankable. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of financial services to the very poor; apart from loans, it includes savings, microinsurance and other financial innovations.

Microcredit is a financial innovation which originated in developing countries where it has successfully enabled extremely impoverished people to engage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty. Due to the success of microcredit, many in the traditional banking industry have begun to realize that these microcredit borrowers should more correctly be categorized as pre-bankable; thus, microcredit is increasingly gaining credibility in the mainstream finance industry and many traditional large finance organizations are contemplating microcredit projects as a source of future growth. Although almost everyone in larger development organizations discounted the likelihood of success of microcredit when it was begun in its modern incarnation as pilot projects with ACCION and Muhammad Yunus in the mid-1970s, the United Nations declared 2005 the International Year of Microcredit.

Focus on Women

Women have become the focus of many microcredit institutions and agencies worldwide. The reasoning behind this is the observation that loans to women tend to more often benefit the whole family than loans to men do. It has also been observed that giving women the control and the responsibility of small loans raises their socio-economic status, which is seen as a positive change to many of the current relationships of gender and class.

For investors in emerging markets:

The two distinct fields of microcredit and Microfinance are hot right now, as investors seek ways to not only find attractive returns, but to also invest in projects with unique social appeal. Seeking economic development of some of the poorest regions on earth, this movement was initially brought to the world stage by the incredible efforts of such groups as the Grameen Bank of Bangladesh and Professor Prahalad of the University of Michigan. Since then, there has been a boom in the credit markets to service the bottom of the pyramid marketing, as banks, individuals and commercial stores have collectively realized the value that can be obtained by extending credit to the emerging consumer classes. In response, we are seeing how the new opportunities with consumers of low income is transforming commodity markets around the world, as projects such as the Bolsa Familia in Brazil spur a whole generation of buyers to seek new automobiles, washing machines, etc. See our discussion on the Rise of purchasing power in emerging markets

Risk: inflation can ruin the microcredit business model

There is a risk that inflation can ruin the microcredit business model. Read more in our discussion on microcredit and inflation

and rising inflation worries 2008

Effects of the (USA) credit crunch:

Global effects

Other than countries that were direct buyers of US asset-backed securities (mortgages), I don't see much of a contraction of credit in emerging markets.

Let's look at Brazil for example; In May of 2008 (6+ months into the "credit crisis of 2007"), I see no contraction of credit conditions at all. In fact, there is an ongoing explosion of credit available to consumers in Brazil (even if the industrial credit markets are still as tight as ever). On the consumer side, however, it appears as if Brazil is swimming in available credit, in spite of the so-called "credit crisis". Maybe the troubles are not as global as some analysts are predicting. Not directly anyways.

Mexico is another example. According to a recent article from the Economist magazine, lending in Mexico "has ballooned. Credit to the private sector has nearly tripled since 2001, while consumer credit has increased by around seven times." This is hardy a global credit crisis. Again, it seems to be localized just to banks that were buyers of mortgage backed securities, or other financial innovations. But, in Mexico, the article goes on to explain that there has been an increase in the sophistication of the credit markets, as there has also been a massive growth of mortgage-backed securities markets, and improved credit ratings systems. But, in contrast with the US, there has been a very minimal housing price increase (even less than inflation).

So, in spite of a credit crunch, it appears as if the phenomenon is mostly US-based one.

Additionally, the Mexican Banks are benefiting from the extra consumer credit (mentioned above), with which the banks charge large fees. The extension of the credit to the large and growing consumer class has been a boom for Mexican banks (as it has for all banks in emerging markets servicing the credit-to-the poor marketplace). (insert ethical discussion here if you wish...)

Companies to watch

Kiva

FINCA - Bolivia, Latin America focus

Grameen Bank - focus on India

more...

Women's World Banking

TMSS

SKS India

Longtime Springwise readers may remember Kiva, the venture we wrote about back in 2006 that facilitates charitable microloans to entrepreneurs in the developing world. Now the organization has found a way to make loans go even further through a partnership with credit card issuer Advanta.

Earlier this month Advanta and Kiva announced the KivaB4B Project, an initiative through which Advanta will match the loans made by holders of its business credit card with up to USD 200 per month per card. Card holders simply select a business owner to sponsor through Kiva and make a grant using their Advanta BusinessCard. Advanta matches that grant, dollar for dollar, and Kiva distributes the total resulting funds. As the funds are repaid, they get deposited back into the card holder's Kiva account, while the match funds go back to Advanta. In the meantime, donors get materials to publicize their support, such as a KivaB4B button to put on their website, stickers for their storefront and postcards to send to customers.

Started in 1951 with USD 30 in seed money, Advanta is now one of the largest credit card issuers in the US small business market. Ami Kassar, Advanta’s Chief Innovation Officer, explains: “In our years of working with small business owners, we’ve found that many of them remember the moment someone gave them inspiration, some good advice, or a little cash to get things going. Now, through KivaB4B, American small business owners can offer that same ray of hope to entrepreneurs in developing countries.”

San Francisco-based Kiva has already opened a whole new world of opportunity to entrepreneurs in developing countries—it's facilitated more than USD 27 million in loans since its inception in 2005. With the power of a major bank behind it—and a little cause-related marketing incentive for donors—there's no telling how far its effects might go.

Website: www.kivab4b.org

Contact: aholderer@advanta.com