Emerging Market Trends: Microcredit

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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.

First Use of Microcredit

It is commonly believed that microcredit originated in Bangladesh when a $27 loan was given to women who started small businesses, re-paid their loans and sustained their businesses. These women did not have access to money in their local bartering economies to purchase the materials they needed to make the bamboo stools that they would sell. Microcredit financing gave them the financial resources to procure materials and begin production. Both borrowers and lenders had an understanding that the borrower would repay the loan over time as they brought in revenue.

Where Microcredit Works

Microcredit is an attractive source of capital for lower-income customers living in emerging markets. McKenzie identifies some of the emerging markets as China, Brazil, India, Indonesia, Russia and areas of Africa and South America. Microcredit is also popular with Millennials in traditional markets who haven’t yet established a credit rating and access to capital via traditional banking channels. Microcredit is a way to limit risk while simultaneously serving the smaller needs of the up and coming demographic. In doing so, microcredit also creates a marketing opportunity. Banking institutions can now begin relationships with a new generation and create customers for life.

Assessing Credit Worthiness

According to Marguerite S. Berger, one of the biggest challenges associated with microcredit is assessing the creditworthiness of loan applicants. These individuals do not have traditional credit ratings. They may not even have employment or regular income. There is a tremendous variety of personal and small assets that can be seized and liquidated if the loan is not repaid. So the secret to successful microlending is figuring out how to determine creditworthiness and how to manage the risk associated with this new group of loan seekers.

Accessing Microcredit Loans

Since mobile phones are more prevalent and bank branches are rare in emerging markets, access to loan and credit applications tends to occur via the digital realms. Fast and simple loan application processes are essential due to limited phone screen real estate. After entering relevant data and the borrower resolves any edits, lenders must be sure to apply creditworthiness standards fairly, rapidly and uniformly to all applicants to manage risk.

Digital Workflow Expedites Loans

As lenders in emerging markets build out their digital infrastructures, they are starting to turn to BPM software solutions. Online digital capture forms ensure processes begin as soon as borrowers click submit. Moreover, digital workflows also help consistently apply standardized criteria to loans. Automated loan and credit approval processes are as rapid as they are practical, satisfying the customer’s desire for access to capital and the institution’s need for risk management. Rapid and thorough loan processing leads to the acceptance of highly rated borrowers. This allows the lender to secure the best-qualified borrowers and grow their business.

Case Studies

ProcessMaker has successfully implemented a workflow for a number of institutions in emerging markets. We invite you to read success stories of United Bank for Africa, Mcredit Vietnam, Banregio SA, and others to learn how institutions in emerging markets are successfully tackling credit and loan application processes using business process management.