Digital and mobile banking are opening new worlds of service for clients and new opportunities to create advantages for institutions. In this third installment of our blog series on banking in emerging markets, we will explore the microcredit trend.
Definition of Microcredit
According to Deutsche Bank, “Microfinance recognizes that the working poor can act in an entrepreneurial manner and are, in principle, creditworthy.” Investopedia concurs by stating that microcredit is, “an extremely small loan given to impoverished people to help them become self-employed.” Skilled individuals in emerging countries who live outside of traditional monetary systems find microcredit a way to gain entry into the economy through the assistance of a small loan. For microcredit borrowers, this sort of loan can be a highly desirable alternative to paying excessive interest rates charged by unofficial money lenders or pawn shops in developing countries.
Why Microcredit Works
In underdeveloped markets, community members will often barter to exchange goods and services that are needed. There is generally no money in these remote areas and little infrastructure. Since barter is the main form of commerce, no money changes hands. Without money, people in these economies cannot purchase items outside of their own microcosms to build their own businesses. Their trade circle is only comprised of their immediate geographies and to those who will barter with them. Without access to money, otherwise enterprising individuals cannot participate in broader markets of commerce.
