As the name suggests, a microcredit is a comparatively small amount. As a rule, these are three-digit sums, and sometimes money of 1,000 euros or more.
For most entrepreneurs, such a microcredit is enough to get their business going. Since the risk for the lender is often high, the interest rates are also correspondingly: Almost twice as high as compared to conventional installment loans. To mitigate the repayment risk, microcredits are therefore often issued in groups. In this procedure, initially only one person receives the desired sum, while the others serve as guarantors. Only when a loan has been fully repaid, the next gets his money, which in turn guarantees the rest of the circle of people.
Although even low-income people in Germany usually live far above the standard that exists in developing countries, the granting of small loans is still pursued with the same goal. Many people who do not see a future for themselves in the primary labor market and who have a promising business idea, take up such a loan. This shows how important this form of development aid is even in large industrial countries. Even without the high existential pressure that prevails in poorer regions of the world on large parts of the population, microfinance in Germany aims at the same motto: helping people to help themselves. Microcredits in Germany and Europe usually differ slightly from the prevailing practice in India or Bangladesh only in terms of the nature of the award or the conditions.
Rather, the principle of the cooperatives of the 19th century applies, which even then proceeded according to the motto “One for all and all for one”. Such cooperatives have lost nothing of their strength and offer many advantages especially for small businesses. Be it a merger with other companies in the same industry or the regional connection of companies: Through the mutual support, all parties gain in security and the likelihood that the micro-loan is used meaningfully and sustainably, is greater.
The idea of microcredit originates from developing countries. People or groups who start their own business and thus want to secure their existence benefit from the credit model.
The microcredit initially became popular in Bangladesh, where it was intended to enable the poorer sections of the population to start a business. The idea had Muhammad Yanus, with such loans z. B. Slum residents made a social ascent possible. A typical example of a type of microcredit usage was the establishment of a telephone connection. The owner could then make it available to other people from the neighborhood for a fee. Simple one-time business models such as this one could and could help many people in developing countries to improve their situation through the micro-loans, which is why Muhammad Yanus was even awarded the Nobel Peace Prize for his involvement. His concept of small loans proved to be financially successful for company founders. After a short time he founded his own official financial institution: The GN Bank.
A microcredit is not a microcredit! Often there is talk of small loans and mini loans – terms that must often serve as synonyms for the microcredit because of their names. However, these must be clearly distinguished from each other, since the microcredit is intended exclusively for entrepreneurs in the start-up phase. Normal mini and small loans, on the other hand, are loans that are usually given to private individuals and have different terms and conditions. In general, these forms of credit with the actual microcredit have at most the small sum or a short term.
An ordinary loan is not always the best choice when it comes to getting started on the loan for the self-employed and freelancers. Although interest rates are generally well below the microcredit rate, the barriers to getting such a loan are much higher. Also, the long maturities often represent too high a permanent burden for a small business owner. Again and again, people get into a debt trap, from which they can not find out on their own. By contrast, microcredit is ideal to bridge a short-term funding gap. For sole proprietors, a few hundred or even a thousand euros often decide on the survival of the company. In addition, microcredit as development aid is not just a pure financial transaction. In order to be able to really help people, earmarking is usually accompanied by comprehensive consultations aimed at helping new traders build their business. Market-oriented knowledge is taught and entrepreneurial thinking is promoted. Especially women in strongly patriarchal social structures are to be helped with microfinance to more security and independence.
The fact that microcredits can not be a panacea against poverty can already be deduced from the market economy principle, which also attaches to this form of financing. In addition, the conditions of microcredit providers are now significantly different. While microfinance has helped many people, and in some regions has improved the standard of living for whole strata, it is still a capitalist and not a purely benevolent model. Where initially the idea of helping people to help themselves was the focus, more and more institutes are concerned with their own profit prospects.
The main problem is usually the extremely high interest rates that sometimes break a borrower’s neck. The founder of the company can not always pay off his debts and sometimes the security, which is strengthened by the parallel involvement of several borrowers, translates into social pressure, which the insolvent quickly feels. How dramatically such a situation can develop is shown by some sad examples from Andhra-Pradesh in southern India. Here, several women committed suicide after being too behind in repaying their loan. As the demands were extinguished with death, they hoped to protect their families with this step.