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What Can E-Services Learn from Microcredit Schemes?

Microcredit schemes lend money to people whom normal banks won't lend to because they're too poor. However, the default rate on loans from microcredit schemes can be lower than the default rate on loans from normal banks. In this article, Miranda Mowbray explores why this might be and then suggests how to promote the same dependability in the context of e-services.
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This paper is intended for people setting up or running e-service organizations—that is, ecosystems that bring together several Web-based services provided by different e-service providers and that offer these services to e-service customers. There are different models of how such an organization could be structured:

  • A portal, a space for providers and customers to find each other, possibly including ratings systems

  • A broker, independent of the providers, which would seek the right provider to fit a customer's request

  • A composite service provider, combining provided services into new services to sell to customers

  • A community, characterized by rich communication between ecosystem members and involvement of ecosystem members in decision-making for the organization

  • A combination of some or all of these

In this article, I consider which structures are likely to promote dependability of the ecosystem. It turns out that the community model looks promising, although this is not the whole answer.

To make e-services work at all, a certain level of dependability is necessary in the people and enterprises involved in the e-service organization.

The consumers of e-services depend on the providers to provide the e-service advertised with sufficient quality and timeliness. The providers depend on the consumers to pay up. Providers of composite e-services also depend on the providers of component parts.

Research on dependability in e-services has tended to focus on the software rather than on the people and enterprises involved. It is important to have dependable software, but even software that is 100 percent dependable (if such a thing exists) will not protect an e-service provider from a consumer whose payment bounces. In this article, I will draw from an unusual source (unusual in the context of e-service research, at least) to suggest how to structure e-service organizations to promote dependability. My source of inspiration is microcredit schemes.

Microcredit schemes lend money to people whom normal banks won't lend to because they're too poor. However, the default rate on loans from microcredit schemes can be lower than the default rate on loans from normal banks. Their structure appears to promote financial dependability.

In the first section of this article, I briefly describe some features of microcredit schemes. The second section puts forward some hypotheses on why the default rate in these schemes might be low. In the third part, I examine these hypotheses in the context of e-services. Some factors of microcredit schemes are not relevant to e-services, but others suggest ways of structuring e-service organizations that might lead to greater dependability in the behavior of the people and organizations involved. In the final section, I discuss whether e-service technology could help microcredit schemes.

Some Features of Microcredit Schemes

Credit unions, groups of people living in the same local area mutually responsible for a loan, have existed since Victorian times in the United Kingdom. However, the first microcredit scheme (in which these loans are for the purpose of setting up a small business), the Grameen Bank, was started in the 1970s by Mohammed Yunus. This section discusses some features relevant to this paper.

Microcredit schemes lend small amounts of money, over time periods typically of three months to a year, to people who are too poor to obtain credit from normal banks. They are based in local communities, although they may be part of a larger network of microcredit organizations in different local communities. They are administered by people who live locally. The most successful schemes encourage widespread participation in organizational decision making.

Microcredit schemes have been successful in both rural and urban communities, and in both rich and poor countries. (Default rates for microcredit schemes in developed countries are higher, but these schemes can still be self-sustaining.) However, microcredit schemes appear not to work so well in dispersed African villages.

To qualify for the loan, a borrower must produce a plan for a small business that she will set up or extend using the loan and that will produce profits to pay back the loan. The loan typically pays just for tools and a first batch of raw materials. Proceeds from the sale of the first batch of products buy the raw materials for the next, resulting in a contribution toward loan repayment and a profit for the borrower.

The credit is "stepped": Larger or longer-term loans are available to borrowers who have given evidence of their financial dependability within the microcredit scheme by repaying an initial loan.

Some microcredit schemes do not give loans to a single individual but instead require a group of borrowers, each with their own business plan, to apply together for a loan and to support each other. (The Grameen Bank lends to groups of five borrowers who are mutually responsible for the loan—if one defaults, all five are cut off.)

Other microcredit schemes are not so formally structured that they require groups of people to support each other, but they encourage this to happen informally. For example, when someone applies for a loan, the scheme may ask her neighbors if she is financially trustworthy. If the neighbors say that she is and she later defaults on the loan, the microcredit organizers will reprimand the neighbors for giving bad advice. A borrower with temporary problems, therefore, can ask her neighbors to help her out so that they avoid losing face.

Many microcredit organizations encourage informal support by holding regular meetings of borrowers, to discuss common problems, to pool their expertise, and to forge solidarity. Some microcredit organizations also offer business training and support in addition to loans.

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