A Bank Account or Beyond, Financial Justice

Line Of Credit!

Why Micro-Credit Lacks A Whole Range of Products after 30+ Years!

In Banking, a line of credit is one of the most popular and useful product, from time immemorial. The logic is rather a simple one. Once a business gets going, there are multiple factors that affect and influence dynamic need for business capital. Your business may need seasonal capital, may have your clients delaying the payment occasionally, prices of the goods you purchase may fluctuate needing more or less capital, you may get a really big order that needs immediate financing, you may get a large payment that you may be able to pay off your working capital debt, etc.

Most small businesses also get influenced by the capital needed for the household. You may have to pay school fee for your children, so cut down on stock buying, you may have a health emergency, or payment to a relative or family member for her/ his sickness, a roof repair, a wedding in the family - all of which is likely to influence how much capital you can have or need for your businesses. This is NO BRAINIER, as Americans would say it.

So, why has microcredit sector not introduced and used line of credit more widely for its clients? Opening of a savings bank account, as many central banks and even world bank suggests and counts as 'financial inclusion' sounds like a joke at best, and financial exclusion (i dare say, injustice) as worst. How can we really expect micro and small business people to achieve their full potential without a range of appropriate financia products? That too a simple 'line of credit' that is so intuitive!?

We examine empirically three economic mechanisms that may explain why profits increase by more when using a credit line, compared to when using a term loan. We rule out that the effect on profits is simply driven by the credit line clients being able to borrow larger amounts. Instead, the data suggest that the effect of the credit line on profits is mainly driven by the additional flexibility in repayments and borrowing. This flexibility allows the traders to react to variable market conditions. In addition, we find suggestive evidence that the credit line flexibility allows some traders to adopt more profitable business practices.

(Quoted from Credit Lines in Microcredit: Short-Term Evidence from a Randomized Controlled Trial in India (Arag ́on, Karaivanov, and Krishnaswamy, 2020)

Very few micro finance institutions or banks offer this product. and if, when they do, the cost of borrowing continues to be high, higher than regular banking clients that can show their balance sheets and qualify for a line of credit product without having to put up separate collateral that most micro businesses would almost never be able to manage.

Self-Help Group movement in India, and the NABARD (National bank of Agriculture and Rural Development) have been experimenting with quasi 'line of credit product' for over a decade, loaning to the group (and not individual members). The product (Cash-Credit Loan Accounts for SHGs, and Current Accounts for Producer Groups) seems to be very popular among the groups, even as credit limits remain rather modest in most cases.

BRI (Bank Rakyat Indonesia) offers a whole range of loan products, including working capital (line of credit) product.

 Working Capital Loan Loan facility to finance your business operations, including raw material procurement, production process, receivables and inventories.

It is really high time, especially when Central Banks have started claiming that they are the custodians of financial inclusion agenda the world over (see AFI's charter, which is an association of central banks), that they actually deliver on what they are claiming. Opening of a bank account can not absolve them of their mandate and responsibilities to offer a whole range of financial products, to millions of households who often don't and can't make distinctions between the ever changing need for capital for both running their micro businesses and running their lives.

We need to start looking at microfinance and financial inclusion from financial justice perspective to make any real difference in people's lives, at scale and re-imagine our entire financial system.

#FinancialJustice