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Micro-Lending in Industrialised Economies
Summary
- Micro-lending provides capital primarily for micro-businesses which exist already or will exist through additional help. The credit as such does usually not create micro-businesses out of long-term unemployment. But if properly supported by services, information, help it can function as an educational programme which may significantly help to enter the labour market for dependent labour. Use of micro-lending must accordingly be entirely a matter of free choice and exit from it must be guaranteed. Its political are often more visible than its economic and social effects. It seems to be a cheap, modern and seemingly market driven way to combat unemployment and poverty. But there is little objective empirical evidence in developed countries with sophisticated bank systems that especially its credit function and not its additional help programmes achieve this goal.
- Microlending is no remedy to the retreat of banks from small business lending in low income areas.
- Micro-lending must avoid the relationships of personal dependency associated with credit provision in the infor-mal sector (credit provision to representatives of pyramid selling businesses, to employees by employers, to small businesses by money lenders, to the over-indebted by debt enforcement agencies, etc.).
- Micro-lending must achieve, as a minimum standard, the level of protection applicable to consumer loans in terms of both of its aspects: social protection at times of crisis and informal protection in terms of customer acqui-sition and assessment.
- These minimum standards, established by continental European consumer credit legislation, include transparency, protection of income for basic consumer needs against excessive interest charges, crisis protection, rights of termi-nation and cancellation, family protection, professional monitoring of credit providers and liability for misleading advice.
- Costs to the customer (frequently subsidised) must be set at a lower level than the proceeds of the capital put at risk and must not take the form of a deduction from wages. Interest rates set significantly above market levels and deducted from the borrower's livelihood must be prohibited.
- As in consumer credit, families must be protected from over-indebtedness when providing new security for loans. Group obligations and supervisory mechanisms should not impact excessively on the borrower's freedoms as an individual and should not involve disinterested third parties.
- Employment law principles relating to wage workers which have been wrongly defined as independent entrepre-neurs must also be applied to the relationship between customer and micro-lender in micro-lending transactions.
- Licensed, monitored and experienced financial service providers should be directly responsible for testing micro-lending programmes and for their empirical evaluation. Unqualified bankers in a grey banking sub-market for the poor must not be allowed to operate as a form of ghetto economy.
- A major objective of micro-lending should be to offer the ability to progress from micro-lending into the general banking sector, by using time-limits on credit to prevent borrowers from being trapped in micro-credit and by cre-ating the necessary educational process in relation to banking transactions ("basic financial education"), thus ena-bling micro-lending to prove its worth as a programme providing access to mainstream banking.
- Micro-lending should not relieve banks of their obligations in relation to financing small-scale borrowers. It should instead encourage a renewed commitment by the banks to small business finance.
- Relaxation of the banks' credit monopoly should primarily offer the banks more freedom to create these pro-grammes, but it should not enable a new market in problem lending to develop, which would also be open to com-mercial micro-credit providers.
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Microlending in industrialisierten Gesellschaften / Udo Reifner