Teaching Microcredit: overcome Eurocentric perspective in development education
1. Credit = Trust
Credit and Trust
Authors: Péter Futó, Márton Gosztonyi, Mehdi Hasan
Trust in society. The word ‘credit’ originated from the Latin word ‘credit’: it means ‘(he/she/it) believes’. Credit is a relationship between two parties, where one party (the lender) believes the statement of the other party (the borrower) that the money that has been lent, will be repaid. As the original meaning suggests, trust plays vital role in lending, whether it is secured with a contract or not, whether the parties are real persons, or companies, banks, Governments or other institutions. Trust is an important ingredient of interpersonal relationships. Trust enables human relationships to be effective. Trust is the subject of research among experts of psychology, sociology, management, economics, and political science. Experts agree that trust as a factor has a direct effect on people or groups involved in any kind of transaction or commitment. When the level of trust is high, a group is expected to experience better co-operation and higher performance.
Social capital and social networks. The network of friends, colleagues, neighbors, and other personal contacts – including the relationship between members of the same club or religious congregation - is called social network. Sociologists doing research on human communities work under the hypothesis that social networks have value. Social capital refers to the value of social networks in a community, of the willingness of its members to do things for each other in trust and cooperation, of the readiness of a community to satisfy human needs.
Some examples of social capital. Social capital can be found in friendship networks, neighborhoods, churches, schools, bridge clubs, civic associations, and even pubs. If a group of neighbors informally keep an eye on one another's homes, that's social capital in action. When members of a tightly knit community finance each other’s small businesses without formal contracts, or when they trade in diamonds without testing each gem for purity, that's also social capital in action.
The level of trust in various European countries. Sociologists have conducted numerous surveys between 1995 and 2002 about the topic of trust, by collecting the responses of tens of thousands of respondents across Europe. They have found that the Scandinavian countries have the highest levels of trust on the continent. In contrast, the Hungarian society has much lower trust index than the Western European societies. Surveys repeated in Hungary have shown that the trust index in Hungary has strongly decreased in this period. The percentage of people agreeing with the statements "no one cares about anyone else", or "the safest is when you do not trust anyone" has significantly increased.
Impacts of social capital. The benefits of trust, reciprocity and cooperation within a particular social network are measurable. Economists consider social capital and trust as investments that can increase cooperation and economic efficiency of a society. In recent decades, many studies have shown that economic growth can be accelerated not only by tangible investments financed by fiscal capital, but also by developing the social capital of a smaller or bigger community. Numerous studies have shown that people's well being, trust in each other, or the subjective sense of happiness are significant economic factors. Social capital and trust primarily differ from other forms of capital (e.g. money): social capital is not owned by an individual, but rather owned by a collectivity of individuals.
The mission of social microcredit. Social microcredit is a financial service, giving very small loans (microloans) for entrepreneurial projects to impoverished borrowers who typically lack collateral, steady employment and a verifiable credit history. (A credit history is a record of a borrower's responsible repayment of debts.) Social microcredit offers financial services to those who are not served by the traditional financial sector. The small amount of cash income earned by the poor is consumed by survival expenditures on housing, food, clothing and energy and little is left over for investment purposes. Thus, without access to financial capital, poor households face barriers to starting and expanding their small businesses. It is the mission of microcredit programs to help the poor in their entrepreneurial ambitions.
What guarantees that borrowers will repay microcredit? In lending agreements, borrowers may offer a specific property to the lender, in order to secure the repayment of a loan. The property functioning as a guarantee is called collateral: for example it may be a house, a car or a piece of jewelry. If the borrower cannot repay the loan, this property becomes the property of the lender. The real innovation of the social microcredit model is that it is based on trust and social capital as opposed to collateral of the formal banking systems. Social microcredit institutions operate without collateral, which means that if borrowers do not repay the loan, they do not risk losing any property. Social microcredit creditors have limited information about borrowers, which means that in some cases creditors give loans to persons with limited creditworthiness. On the other hand, in social microcredit schemes very often, a group of borrowers accept responsibility for each other that that the loans will be repaid. In such cases the collective responsibility of the group, the level of trust among group members, serves as collateral, a guarantee on the loan. In any case, some guarantees are needed, in order to ensure that microfinance institutions recover their investment, run in a sustainable manner, and involve more clients. On the other hand, people do not borrow if they fear that the lender will use extreme measures– such as public shame or physical violence – to collect bad debts.
Trust in microcredit arrangements. Interactions within borrowing groups, between clients and loan officers and between clients and institutions are governed partly by formal contracts, partly by good control mechanisms and partly by trust. Trust has a major role to play in the context of social microcredit, where many borrowers are poor, illiterate and vulnerable.
Trust in micro-deposit arrangements. The term “microfinance” includes not only microcredit services, but also the collection of small deposits and some insurance services as well. The opposite of microcredit is micro-deposit: in such arrangements households deposit their savings at microfinance institutions. Poor households place a great importance on having a safe place to save money, in many cases much more so, than receiving loans. In many models of microfinance saving is a pre-condition of microcredit: borrowing members must previously save very small amounts regularly, in order to receive credit subsequently. However, members of households do not deposit money at microfinance organizations, if they have worries regarding the prudent practices of that organisation.
Trust in micro-insurance arrangements. Many micro-loans could not be repaid, because the borrower fell ill, or some animal (e.g. cow) has been purchased with the help of the loan, but the animal has perished at an early stage of the project. In order to avoid non-repayment due to such causes, micro-insurance was introduced in many microfinance organisations. Micro-insurance relies also on trust to a large extent, e.g. farmers do not insure their animals if they do not trust the insurance company to pay out their legitimate claims.
Discussion points:
- To whom would you lend money?
- Are poor people entitled to credit?
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Benigni e il Direttore di Banca - Tu mi Turbi (ITA)
