Social credit, generically considered, encompasses other recently introduced initiatives as well as secured loans. The most important initiative is the micro-credit, a financial formula that gives disadvantaged people access to production tools without the need for real or personal collateral.
It is well known that for a financial body to grant a loan, a person has to guarantee repayment by means of real collateral (property, real estate, and jewels, for instance) or by means of the personal guarantee of solvent person who can repay the loan if necessary.
In the case of micro-credits, the collateral is a business project with a view to success and lasting into the future. The collateral is the person who asks for the loan. It is that person’s enthusiasm and will to work. The collateral is the borrower’s word.
This kind of loan against someone’s word or, to be more exact, a loan against a project, implies a revolution in the financial world as we know it.
The history of micro-credits
The origin: Muhammad Yunus
The term micro-credit is gradually becoming popular worldwide, to the point of losing its original meaning.
Micro-credit developed in a very specific spot and under particular circumstances: in Bangladesh during the 70s and 80s. It was invented, introduced and made popular by a very special person, Professor Yunus, through the Grameen Bank.
Thanks to a Fulbright grant, a very young professor from Bangladesh obtained a doctorate in Economic Sciences from Vanderbilt University in 1969 and taught in the USA for a brief period of time. In 1972, Muhammad Yunus returned to Bangladesh to become head of the rural economy department of the University of Chittagong, his native town in the south of the country.
Yunus had always been a profoundly observant man, full of curiosity and interested in improving the lives of the people around him. His work method is amazingly simple: detect problems, try to understand them and think what you can do to solve them.
However, simple things are often the most revolutionary of all. Like bringing students closer to the university campus so they will not lose an incredible amount of time in transport. And sharing the space available in a department so that all the professors will have a place to sit down, even at the cost of reducing the size of the department head’s office. And granting loans for small amounts of money and at a reasonable interest rate so that people who wish to begin a micro-business project and who do not have access to a bank loan will not have to recur to usurious moneylenders.
Muhammad Yunus woke up to crude reality in 1974, when a terrible famine caused thousands of victims. “There are many ways of dying, but dying of hunger is the most unacceptable one of all.” wrote Yunus in his book “Towards a World Without Poverty”. Horrified by the devastation caused by poverty, the university professor decided to go out on the streets and to adopt a worm’s attitude, as he graphically describes in his book. That is, he observed things close up to see them more clearly and when he encountered an obstacle, he went around it to so he could obtain his goal.
Attentive observation at street level and many conversations with dozens of people in precarious circumstances lead him to a conclusion: with very little money, these people could start up small business to make their living. The initial capital they needed was so small that traditional commercial banks would not even consider them as potential customers. Firstly, they had no backers and/or collateral to ensure repayment of the loan. Secondly, lending such small amounts of money was, quite simply, not profitable.
Faithful to his habit of observing, analysing and finding solutions, the first thing Yunus did was to personally guarantee the loans that a bank granted to disadvantaged people. He rapidly was able to empirically verify what he already suspected: over 98 percent of the loans were repaid.
After that, from the end of the 70s and beginning of the 80s, Yunus attacked the problem head on. In a traditionally male chauvinist society with a 75 percent illiteracy rate and millions of people below the poverty line, Yunus was convinced that traditional banking, with its formulas, study committees, approval commissions, guarantees and so on, could not meet the needs of the majority of Bangladesh’s population.
To combat poverty, usury and financial exclusion, Yunus created the Grameen Bank, based on confidence in people, and in women in particular. He also invented an instrument called micro-credit, based on the initiative of the bank’s customers, and on their business and commercial projects. Against the direst predictions, the Grameen Bank proved not only to be supportive, integrating and beneficial to the community, but also economically and financially profitable.
Micro-credits in Western Europe
As we have seen, the micro-credit concept has become popular worldwide and, naturally, it has also reached Western Europe societies. However, its introduction has required some specific measures, since the circumstances in Bangladesh and those in Spain and France, for instance, are very different.
The first different aspect is the total amount of the loans. Whereas in Bangladesh results can be achieved with thirty of forty dollars, in European societies the average amount for micro-credits is higher, around 10,000 Euros. This means that, although the initiative involves many millions of Euros, the number of micro-credits granted is lower.
There are also some differences in the beneficiaries of the micro-credits. Although they are always people in risk of exclusion, in western societies more than half of the beneficiaries of micro-credits are immigrants who are striving to make a living in their adopted countries.
Management support and monitoring
A cultural, religious and even language difference make micro-credit management differ from one country to another, both before and after the micro-credit has been granted.
First, starting up and implementing businesses that have been opened with micro-credits is a complicated affair due to the variety and number of permits and the bureaucracy required by western societies. All this is difficult to manage. Some bodies and institutions that grant micro-credits assist the beneficiaries in overcoming these difficulties and collaborate closely with them to get the business under way.
Likewise, once the micro-credit has been granted and the business is under way, it is both necessary and advisable to monitor its performance and development. The borrowers of micro-credits need support and collaboration in order to be successful. That is the key to business and company survival, so that the loans will have the desired effect of promoting self-employment and of generating wealth.
There is no standard method for introducing micro-credits in Europe. Therefore, while some institutions manage projects from start-up and continue to offer support and collaboration to ensure success, others only deliver the money.