Term paper
On

Microcredit

ECO -242 Principles of Macroeconomics

Prepared for Janifar Alam
Lecturer
School of business

Prepared By
Group 1
Sec: B
Semester: Summer-2013

31th July 2013
To
Janifar Alam
Lecturer
School of business
University of Information Technology and Science (UITS)

Subject: Submitted the Term paper of ECO-242
Dear Madam
It is indeed a great pleasure for us to be able to hand over the result of our hardship of the group Term paper on Microcredit.This report is the result of the knowledge. This has been acquired from the respective course.

We tried our level best for preparing this report. The information of this report is mainly based on our knowledge and Internet information.

We fervently hope that you will find this plan worth reading. Please feel free for any query or clarification that you would like us explain. Hope you will appreciate our hard work and excuse the minor errors.

Thanking you for your cooperation.

Sincerely
Group 1

Name&ID Signetures Rahat a jan 12310577

Jinia Afrin 12410291

Abdia Sultana 12310290

Jahidul Islam 12310377

Obaidur Rahman 123210572

Acknowledgement

First of all we want to give thanks to almighty Allah for giving us the opportunity to complete this assignment then us world take our grateful thank to our honorable parents.

After that we would like to express our gratitude to our teacher Janifar Alam Lecturer School of business, in UITS. Her advice helped us a lot to prepare a complete assignment and she never hesitate to give us variable time while preparing the assignment, whenever we needed.

We also want to give thanks to all of them, who have give lot of variable suggestion and moral support to us.

Group 1

EXCUTIVE SUMMARY Microcredit is the extension of very small loan to improverished borrowers who typically lack collateral steady employment and a verifiable credit history.it is designed not only to support entrepreneurship an d alleviate proverty,but also in many class to empower women and uplift entire communities by extension.
Miccocredit is a division of microfinance which is the provision of wider range of financian services,especially saving accounts, to the poor.Modern microcredit is generally considered to have originated with the Grameen Bank founded in Bangladesh in 1983.The United Nations declared 2005 the International Year of microcredit.
Critics argrue, however, that microcredit has not had a positive impact on gender relationships, does not alleviate proverty, has led many borrowers into a debt trap and constitutes a “Privatization of welfare”

Table of Contents
Introduction 6
An example of microcredit 8
History 8
Principles 10
Impact of microcredit 11
Income and poverty 11
Debt traps, suicides and group pressure 12
Empowerment of women 13
Other impacts 13
Why is MC important? 14
Suggestions to improve microcredit 14
References 16

Introduction Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment and a verifiable credit history.It is designed not only to support entrepreneurship and alleviate poverty, but also in many cases to empower women and uplift entire communities by extension. In many communities worldwide, in developed and developing nations alike, women lack the highly stable employment histories that traditional lenders tend to require. This reality might result from factors such as leaving the paid workforce to care for children and elderly relatives. As of 2009 an estimated 74 million men and women held microloans that totalled US$38 billion. Grameen Bank reports that repayment success rates are between 95 and 98 per cent.
Microcredit is a division of microfinance, which is the provision of a wider range of financial services, especially savings accounts, to the poor. Modern microcredit is generally considered to have originated with the Grameen Bank founded in Bangladesh in 1983.
Many traditional banks subsequently introduced microcredit despite initial misgivings. The United Nations declared 2005 the International Year of Microcredit. As of 2012, microcredit is widely used in developing countries and is presented as having "enormous potential as a tool for poverty alleviation.
Critics argue, however, that microcredit has not had a positive impact on gender relationships, does not alleviate poverty, has led many borrowers into a debt trap and constitutes a "privatization of welfare". The first randomized evaluation of microcredit, conducted by Esther Duflo and others, showed mixed results: there was no effect on household expenditure, gender equity, education or health, but the number of new businesses increased by one third compared to a control group. Professor Dean Karlan from Yale University says that whilst microcredit generates benefits it isn't the panacea that it has been purported to be. He advocates also giving the poor access to savings accounts.

An example of microcredit
February 16, 2007, Karnachi is 32 years old. She has two children, Kumar and Pratap, who are 10 and 8 years old respectively.She set up her micro-company by painting pictures in the street.Very soon, she rent a new market space, near a temple. With a 2000 roupies loan (about 35euros), awarded by IMED, Karnachi bought more equipment, such as tins of paint and tracing paper.Thanks to this new selling place and her management abilities, Karnachi has now regular wages. She also took on her husband.The average profits have increased by 100 roupies a day, (about 1,8euros) but should rise quickly, thanks to her husband contribution.Today, she has no more financial problems, and hopes for a good prospect for her children.Karnachi never imagined that such a change was the direct consequence of her business ability. History * Early beginning Ideas relating to microcredit can be found at various times in modern history. Jonathan Swift inspired the Irish Loan Funds of the 18th and 19th centuries. In the mid-19th century, Individualist anarchist Lysander Spooner wrote about the benefits of numerous small loans for entrepreneurial activities to the poor as a way to alleviate poverty. At about the same time, but independently to Spooner, Friedrich Wilhelm Raiffeisen founded the first cooperative lending banks to support farmers in rural Germany. In the 1950s, Akhtar Hameed Khan began distributing group-oriented credit in East Pakistan. Khan used the Comilla Model, in which credit is distributed through community-based initiatives.The project failed due to the over- involvement of the Pakistani government, and the hierarchies created within communities as certain members began to exert more control over loans than others. * Modern microcredit Nobel laureate Muhammad Yunus, the founder of Grameen Bank, which is generally considered the first modern microcredit institution.The origins of microcredit in its current practical incarnation can be linked to several organizations founded in Bangladesh, especially the Grameen Bank.The Grameen Bank, which is generally considered the first modern microcredit institution, was founded in 1976 by Muhammad Yunus.
Yunus began the project in a small town called Jobra, using his own money to deliver small loans at low-interest rates to the rural poor. Grameen Bank was followed by organizations such as BRAC in 1972 and ASA in 1978. Microcredit reached Latin America with the establishment of PRODEM in Bolivia in 1986; a bank that later transformed into the for-profit BancoSol.
Microcredit quickly became a popular tool for economic development, with hundreds of institutions emerging throughout the third world.Though the
Grameen Bank was formed initially as a non-profit organization dependent upon government subsidies, it later became a corporate entity and was renamed
Grameen II in 2002.Muhammad Yunus was awarded the Nobel Peace Prize in 2006 for his work providing microcredit services to the poor.

Advantages and disadvantages of microcredit

One of the main advantages of micro-credit is not needed endorsements; grant depends on trust, which means it can reach who could not get through other funding. In addition, rates of return are quite high, and when small amounts convenience in payment of fees, so that the grant does get the benefit of it and if the credits are paid to say that things are going well for whom receives.
Financing conditions also may be better than other loans, and there are also many products and options based on each group.
The main disadvantage is that, like any other debt, has certain fees and must be paid as determined. But logically this is because it is not a gift, and in fact should not be considered a disadvantage. So really its main disadvantage is that it is small amount loans, if required a greater amount of money should not be required of a microcredit but of a larger product. The processing may be complex, or not.

Principles * Economic principles of microcredit Microcredit is ideally based on a unique set of principles that are readily distinguished from trends in the wider credit market.Microcredit organizations were initially created as alternatives to the "loan-sharks" known to take advantage of clients.Indeed, many microlenders began as non-profit organizations and operated with government funds or private subsidies.By the 1980s, however the ‘financial systems approach,’ influenced by neoliberalism and propagated by the Harvard Institute for International Development, became the dominant ideology among microcredit organizations.The commercialization of microcredit officially began in 1984 with the formation of Unit Desa (BRI-UD) within the Bank Rakyat Indonesia. Unit Desa offered ‘kupedes’ microloans based on market interest rates. Ironically, many microcredit organizations now function as independent banks. This has led to their charging higher interest rates on loans and placing more emphasis on savings programs. N0otably, Unit Desa has charged in excess of 20% on small business loans.The application of neoliberal economics to microcredit has generated much debate among scholars and development practitioners, with some claiming that microcredit bank directors, such as Muhammad Yunus, apply the practices of loan \sharks for their personal enrichment.Indeed, the academic debate foreshadowed a Wall-street style scandal involving the Mexican microcredit organization Compartamos.
Even so, the numbers indicte that ethical microlending and investor profit can go hand-in-hand. In the 1990s a rural finance minister in Indonesia showed how Unit Desa could lower its rates by about 8% while still bringing attractive returns to investors. Today, smaller investment firms are adopting the microlending movement's original ideals. For instance, whereas small coffee farmers in Honduras are typically charged an 18% bank rate, a private investment firm in the US has room to 1) offer more ethical loan terms and 2) offer an attractive return to investors. * Group lending Microfinance meeting in Tzaneen, South Africa. Group-lending is a key part of microcredit.Though lending to groups has long been a key part of microcredit , micro-credit initially began with the principle of lending to individuals.Despite the use of solidarity circles in 1970s Jobra, Grameen Bank and other early microcredit institutions initially focused on individual lending.Indeed, Muhammad Yunus propagated the notion that every person has the potential to become an entrepreneur.

The use of group-lending was motivated by economics of scale, as the costs associated with monitoring loans and enforcing repayment are significantly lower when credit is distributed to groups rather than individuals.Many times the loan to one participant in group-lending depends upon the successful repayment from another member, thus transferring repayment responsibility off of microcredit institutions to loan recipients. * Lending to women Lending to women has become an important principle in microcredit, with banks and NGOs such as BancoSol, WWB, and Pro Mujer catering to women exclusively.Though Grameen Bank initially tried to lend to both men and women at equal rates, women presently make up ninety-five percent of the bank’s clients. Women continue to make up seventy-five percent of all microcredit recipients worldwide. Exclusive lending to women began in the 1980s when Grameen Bank found that women have higher repayment rates, and tend to accept smaller loans than men. Subsequently, many microcredit institutions have used the goal of empowering women to justify their disproportionate loans to women.

Impact of microcredit
The impact of microcredit is a subject of much controversy. Proponents state that it reduces poverty through higher employment and higher incomes. This is expected to lead to improved nutrition and improved education of the borrowers' children. Some argue that microcredit empowers women. In the US and Canada, it is argued that microcredit helps recipients to graduate from welfare programs.
Income and poverty
Microlending aims at increasing income through productive activities such as goat herding, as shown here in Rwanda on a cooperative funded through microlending.
The first randomized evaluation of the impact of introducing microcredit in a new market has been undertaken by Abhijit Banerjee of the M.I.T. Poverty Action Lab in slums in Hyderabad, India, in 2008. It compared two groups of randomly selected slums. In the treatment group banks opened branches that provided microcredits, while in the control group this was not the case. The study showed that fifteen to 18 months after lending began.
Tazul Islam argues that the Grameen Bank does not reach the poorest, since the clients of the bank tend to be clustered around the poverty line of predominantly moderately poor or vulnerable non-poor.Of the poor who join Grameen bank’s microcredit program, a high percentage often drop out after only a few loan cycles.
Debt traps, suicides and group pressure
Microcredit such as on debt traps and the use of microcredits for consumption.There has been much criticism of the high interest rates charged to borrowers. The real average portfolio yield cited by the sample of 704 microfinance institutions that voluntarily submitted reports to the MicroBanking Bulletin in 2006 was 22.3% annually. However, annual rates charged to clients are higher, as they also include local inflation and the bad debt expenses of the microfinance institution. Interest rates charged by the Mexican Banco Compartamos on their micro-loans reached 86% per year while it sold stocks in the stock market in 2007.
In India microfinance institutions have been criticized for creating small-debt traps for the poor in Andhra Pradesh with high interest rates and coercive methods of recovery. Villagers often did not know the interest that they were being charged and were not aware of the consequences of taking multiple loans as they take the second loan to clear the first loan. In 2010 aggressive lending by microcredit institutions has been blamed for over 80 suicides in Andhra Pradesh. Bangladesh's former Finance and Planning Minister M. Saifur Rahman charged in 2005 that some microfinance institutions use excessive interest rates. A 2008 study in Bangladesh showed that some loan recipients sink into a cycle of debt, using a microloan from one organization to meet interest obligations from another. Field officers who are in a position of power locally and are remunerated based on repayment rates sometimes use coercive and even violent tactics to collect instalments on the microloans.
Some microfinance institutions lend only to groups of women. This practice puts loan recipients under pressure, because all women are liable for the loans of the other women in the group and each member can only obtain a new loan if each member has repaid the previous loan.
Muhammad Yunus argues that microfinance institutions that charge more than 15% above their long-term operating costs should face penalties.

Empowerment of women
Microcredit has been directed at women because it was believed that, compared to men, they are better clients of microfinance institutions and that women's access to microcredit has more desirable development outcomes, since women tend to spend more money on basic needs compared to men. Microcredit has also been promoted as a tool to empower women. Early studies tended to confirm this positive picture. The President of Grameen Foundation USA suggested in 2005, based on a review of various studies, that "there is strong evidence that female clients are empowered". It also found that "even in cases when women take but do not use the loan themselves, they and their families benefit more than if the loan had gone directly to their husbands".
However, a 2008 study of microcredit programs in Bangladesh found that women often act merely as collection agents for their husbands and sons, such that the men spend the money themselves while women are saddled with the credit risk.[25] The bigger the size of the loan, the more women lose control. For example, a study in Bangladesh showed that women have 100% control over loans that are smaller than 1000 Taka but only 46% of control if the loan is bigger than 4,000 Taka. The first randomized evaluation of the introduction of microcredit, carried out in Hyderabad in India, found no impact on women's decision-making.
Other impacts
Tazul Islam asserts a positive influence of microcredit on the level of education, health and nutrition. In the US, microcredit has created jobs directly and indirectly, as 60% of borrowers were able to hire others. Business owners in the US were able to improve their housing situation after their income improved due to business expansion facilitated by microloans, 70% indicating their housing has improved. Ultimately, many of the small business owners that use social funding are able to graduate from government funding. According to reports every domestic microcredit loan creates 2.4 jobs. These entrepreneurs provide wages that are, on average, 25% higher than minimum wage.

Why is MC important? * Four billion poor people need access to financial services * Social justice * Only philanthropy is not enough * Women suffering the most * Development of informal sector farmers, tailors… * Need to remove poverty in EM * ↑ Demand $50 billion per year for MC * ↑ 15-30% growth annually * Moral responsibility of businesses

Suggestions to improve microcredit

Many microfinance institutions also offer savings facilities, such as Banco Palma in Brazil shown here.Many scholars and practitioners suggest an integrated package of services (‘a credit-plus’ approach) rather than just providing credits. When access to credit is combined with savings facilities, non-productive loan facilities, insurance, enterprise development (production-oriented and management training, marketing support) and welfare-related services (literacy and health services, gender and social awareness training), the adverse effects discussed above can be diminished.Some argue that more experienced entrepreneurs who are getting loans should be qualified for bigger loans to ensure the success of the program.

Conclusion The purpose of this Independent study project was to explore the relationship between state indicators of women’s oppression and the success or failure of microcredit lending. I reviewed the literature pertaining to microcredit lending, gendered rights environments, and gendered economics to build a theory of how gendered rights environments affect microcredit performance. I argued that the success of microcredit lending is contingent on the rights environment within the state is operating. To test my hypothesis, I developed a data set that included several indicators of my independent and dependent variables. According to regression analyses of the data, I found that my hypothesis that gendered rights environments would have an affect on the success of microcredit institutions was not supported. The fact that my hypothesis was not supported is as significant and interesting as if my hypothesis was supported. The actual results were contrary to what the bulk of the literature suggested. Since this linkage has never been analyzed before, my results are especially exciting. My data suggests that the implicitly assumed relationship between specifically gendered human rights and bottom up development plans in associated literature is not supported, and more research is necessary to fully understand this relationship. Researchers might also look at the effect that microcredit lending has on women’s rights environments, to see if microcredit lending does have a positive empowering power as microcredit institutions suggest. My results also have more practical applications for microcredit institutions, states, and other grassroots development institutions. The major policy implication for microcredit institutions is that the gendered rights environment should not be a reason to invest or not invest in a community because it will not have an effect on the success of the institution. Microcredit institutions do not have to be weary of setting up a program in a location with poor women’s rights. Based on this data, countries that are trying to promote economic development or women’s empowerment would be able to invite microcredit institutions to start programs in their state regardless of their current human rights policies. This data may also be transferred to other grassroots development agencies that are skeptical of starting a development program in a state where there are women’s human rights are violated. The environment for women does not matter in the context of microcredit lending, according to my analysis.
According to my review of the literature, there was an implicit linkage between women’s oppression and the success of microcredit lending, but this linkage had never been empirically analyzed. In order to test this relationship, I created a data set (see Appendix 1) that integrated data from the Cingranelli and Richards Human Rights Dataset with information about the member institutions in the Opportunity International Microcredit Institution Network, and analyzed that data using regression analyses. My hypothesis that women’s rights and success of microcredit institutions was not supported, but my results have important implications for current and further research, as well as applications for microcredit lending.

References 1. Microfinance Information Exchange, Inc. (2009-12-01). "MicroBanking Bulletin Issue #19, December, 2009, pp. 49". Microfinance Information Exchange, Inc.. 2. Jason Cons and Kasia Paprocki of the Goldin Institute, "The Limits of Microcredit—A Bangladeshi Case", Food First Backgrounder (Institute for Food and Development Policy), Winter 2008, volume 14, number 4. 3. Gina Neff:Microcredit, microresults The Left Business Observer #74, October 1996 4. Banerjee, Abhijit; Esther Duflo, Rachel Glennester, Cynthia Kinnan. "The miracle of microfinance? Evidence from a randomized evaluation". Retrieved 17 April 2012. 5. BBC:Business Weekly, 2 August 2009 6. Aidan Hollis (University of Calgary); Arthur Sweetman (University of Victoria) (March 1997). "Complementarity, Competition and Institutional Development: The Irish Loan Funds through Three Centuries". Retrieved 30 January 2012. 7. Spooner, Lysander (1846). "Poverty: Its illegal causes and legal cure.". Boston. Retrieved 30 January 2012. 8. Deutscher Raiffeisenverband:The Raiffeisen organization: Beginnings, tasks, current developments, March 2011 9. Bateman, Milford (2010). Why Doesn't Microfinance Work?. Zed Books. 10. Drake, Deborah (2002). The Commercialization of Microfinance. Kumarian. 11. Armendariz, Beatriz (2005). The Economics of Microfinance. Cambridge, Mass: The MIT Press. 12. Nobel Prize.org:The Nobel Peace Prize 2006:Muhammad Yunus, Grameen Bank, retrieved on 13 February 2012 13. Vrajlal Sapovadia:Micro Finance: The Pillars of a Tool to Socio-Economic Development, Development Gateway, 2006 14. Nimal A. Fernando:Understanding and Dealing with High Interest Rate on Microcredit, Asian Development Bank, May 2006, p. 1 15. University of Michigan, Urban and Regional Planning Economic Development Handbook: Microcredit strategies for assisting neighborhood businesses, 22 March 2005, retrieved on 13 February 2012 16. "Bank of America Issues Grants for Microloans". Wall Street Journal. October 6, 2010. Retrieved 30 January 2012. 17. Cheryl Frankiewicz. "Calmeadow Metrofund: A Canadian Experiment in Sustainable Microfinance", Calmeadow Foundation, April 2001. 18. Svivatomehet.org.il (Hebrew) 19. "Zidisha Set to "Expand" in Peer-to-Peer Microfinance", Microfinance Focus, Feb 2010 20. Rao. L. (2010). Vittana Applies The Kiva Model To Help Finance Education In Developing Countries. Retrieved March 9, 2011, from http://techcrunch.com/2010/03/15/vittana-applies-the-kiva-model-to-help-finance-education-in-developing-countries/