Definitions adopted by the Virtual Library on Microcredit
Please check the Bibliography section for full text references. Additions to this list are welcome!
- Ability to Pay:
A fuzzy concept that does not correspond in social science
usage to what we would infer from common sense. Whether or not someone
commands enough resources to contract a transaction (cash or credit) is not
what is usually meant by the phrase. Ability to pay is a subjective judgment
predicated on some assumption as to what people ought to pay. Thus, the
low-income clients are said to have a lower ability to pay than middle-income
earners, irrespective of whether or not they buy the good/service. It is
unclear whether the exponents of the ability-to- pay concept would agree that
making credit available increases such ability. See willingness to pay. [Varley, 1995]
- A variant of the ability-to-pay argument requiring value judgments about the
distribution of income. If something is "unaffordable" to poor people this
might mean they should not purchase it even if they choose to! The argument is
that it will
reduce the income they have available to spend on other goods and services
the evaluator considers socially more valuable. Thus, poor people "should
not" smoke nor drink nor buy entertainment with subsidies provided by the
government to compensate for income inequalities. Implicit is the idea that
the donor/benefactor should make pricing decisions that correct for an
inequitable distribution of income. This in turn implies that when prices
are less than costs, someone must ante up a subsidy to cover the
difference.the amount a consumer will pay for a particular quantity of a good
or service. In consumer demand theory, willingness to pay automatically
implies ability to pay. In contemporary social science writing, "ability to
pay" is sometimes contrasted with willingness to pay. The implicit
assumption here is that even though people are willing and actually do pay a
certain amount, they lack the ability to pay because they should have spent
this money on something else. Buying the good (e.g., water) results in a
loss of consumption of some other good or service and places the purchasers
further below some socially defined minimum-consumption standard [Varley, 1995].
- Community-based finance institution:
- The term "Community-based finance institution" (CBFI) has been formulated to define organizations which enable low-income groups to participate fully and democratically in the development process and which have their roots in the community. Frequently, these organizations are referred to as co-operatives, but some community-based organizations are in fact not co-operatives but groups with a similar structure and objectives [UN-ESCAP (1991)].
- Community Economic Development:
- Community Economic Development is a process by which communities can initiate and generate their own solutions to their common economic problems and thereby build long-term community capacity and foster the integration of economic, social and environmental objectives.
[Based on the Ross/McRobie Report , 1987 from SFU's Community Economic Development Centre.]
- A co-operative, as defined by the International Labour Organization is an association of persons, usually of limited means, who have voluntarily joined together to achieve a common economic end through the formation of a democratically controlled business organization, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking [UN-ESCAP (1991)].
- Credit Union:
- In the financial sector, co-operatives which enable savings to be made and loans to be taken are generally known as "credit unions" which are registered under the legislation dealing with co-operatives in each country. The basic credit union is composed of a group of people having a "common bond" who may be resident in the same neighbourhood or employed at the same place of work, or it can be a religious or ethnic grouping. The principal reason for the emphasis on a common bond is that the social pressure of the group is considered a very important condition as security for loans It is a form of collateral which is not available in conventional finance [UN-ESCAP (1991)].
- The quality of money that makes one individual specimen
indistinguishable from another. Anything used as money (gold, shells, bank
notes) must have this quality. The fungibility of money makes it difficult
for lenders to ensure that borrowers use the loan funds in the way lenders
wish; one way they try to get round "misuse of funds" is to lend in kind.
Often a person will borrow money for one stated purpose, but the effect of
the loan is to finance another activity. Say, for example, that I intend to
improve my house using savings but someone offers me a home improvement loan
on attractive terms. The effect of the loan is not to increase quality of
the housing stock, as the lender intended, but to enable me to undertake some
other activity I could not otherwise have financed buying a motorcycle,
taking a holiday, or perhaps partying every night. Microfinance lenders such
as donors and NGOs tend to dislike this because (a) they don't think poor
people should use their limited incomes on such things, and (b) it reduces
the funds available for lending to other potential clients or beneficiaries [Varley, 1995].
- Informal Credit Markets
- Informal Finance System:
- "Informal" refers to types of institutions. Most community-based financial institutions are formal organizations, although they are not normally targeted for a particular purpose. While every group exhibits some degree of formality, the term "informal" is used principally to describe traditional systems of savings and loans [UN-ESCAP (1991)].
- Informal Economy:
- The term "informal economy" became current in the 1970s as a label for economic activities which take place outside the framework of corporate public and private sector establishments. Such economic activities are characterized by the ILO as having the following features: small size of operations, reliance on family labour and local resources, low capital endowments, labour-intensive technology, limited barriers to entry, high degree competition, unskilled work forces and acquisition of skills outside the formal education system. Informal businesses usually do not comply with established regulations governing labour practices, taxes and licensing [UN-ESCAP (1991)].
- Microenterprise (and related terms):
- A microenterprise is generally a sole proprietorship that has fewer
than five employees, has not had access to the commercial banking
sector, and can initially utilize a loan of under $15,000. Most of the
microenterprises have fewer than three employees, and the majority are
operated by the owner alone.
A microenterprise development program is generally run by a non-profit
organization that provides any combination of credit, technical
assistance, training and other business and personal assistance
services to microentrepreneurs.
A microloan is a very small loan to a microenterprise. Most microloan
are under $10,000, with an average loan size of $5,640. Loan terms
range from one year to 4.75 years. Programs charge market rates of
interest, from eight to 16 percent. Loans are generally secured by
non-traditional collateral, flexible collateral requirements or group
guarantees.["Enabling Entrepreneurship: Microenterprise
Development in the United States", by Peggy Clark and Amy J. Kays.
Aspen Institute,November 1995].
- Non-conventional finance:
- The United Nations has defined non-conventional finance as any financing approach which, by modifying loan terms, guarantees, collateral and/or eligibility requirements, permits low-income households to qualify for and afford housing loans for which they would otherwise be ineligible owing to their limited financial and socio-economic circumstances. UNCHS (Habitat) has added that, in this context, the term "non-conventional" refers to financial mechanisms and not necessarily to institutions. Established institutions, such as building societies, savings and loan associations and housing banks, are likely to have conventional terms for loans. Institutions which are normally or primarily associated with housing finance, such as CBFIs, also have conventional loan terms although many do have various non-conventional techniques. It must also be noted that what is seen as conventional in one country can be non-conventional in another [UN-ESCAP (1991)].
- Self-sufficiency occurs when a microcredit programme can cover all of its operating expenses (including loan losses and the cost of capital) entirely with internally-generated sources of income.
- Sustainability is the ability of a microcredit programme to maintain its operations and continue to provide service to its customers or clients. A Programme is sustainable when a combination of external grants, loans, and internally generated revenues are sufficient to cover all programme expenses over the long term [OECD, 1996].
- Willingness to Pay:
- The amount a consumer will pay for a particular quantity
of a good or service. In consumer demand theory, willingness to pay
automatically implies ability to pay. In contemporary social science
writing, "ability to pay" is sometimes contrasted with willingness to pay.
The implicit assumption here is that even though people are willing and
actually do pay a certain amount, they lack the ability to pay because they
should have spent this money on something else. Buying the good (e.g.,
water) results in a loss of consumption of some other good or service and
places the purchasers further below some socially defined minimum-
consumption standard [Varley, 1995].
Also see "A Glossary of Loan Terms"
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