Banks contribute to economic stability and create social value. In this blog post, we will examine the public interest in finance and how microcredit helps people achieve economic self-reliance.
What Is the Core Function of a Bank?
A bank’s primary function begins with attracting deposits from people with surplus funds and lending to those who need capital. However, this process is not merely a transfer of funds; it plays a crucial role in enhancing the stability of the entire economy by allocating funds more efficiently. For example, when funds saved by individuals flow through banks to businesses, they contribute to productive activities, creating a virtuous cycle that generates employment and leads to economic growth. Furthermore, within this flow of funds, banks generate profits through the interest rate differential between loans and deposits, thereby contributing to the maintenance of a stable financial system.
However, there are instances where banks fail to fully fulfill this role. For instance, when there is insufficient information about a customer seeking a loan, banks may fail to properly assess their repayment capacity, exposing themselves to the risk of loan defaults. Such risks not only adversely affect the bank’s profitability but can also negatively impact the stability of the entire financial system. Consequently, banks are forced to adopt a cautious approach when approving loans, prioritizing customers with solid collateral or high credit ratings. However, this conservative approach can result in the exclusion of certain customers from the financial market. In particular, people who find it difficult to obtain loans from the formal financial sector due to low credit scores or a lack of collateral often end up relying on the informal financial market, or private lending. These individuals face a significantly increased repayment burden due to very high interest rates, and are at high risk of falling into a vicious cycle.
The Public Nature and Social Role of Finance
In this context, a new perspective emphasizing the public nature of finance has emerged. It argues that finance goes beyond simply managing the flow of money; it is a fundamental right necessary for leading a dignified life and an important means of positively impacting society as a whole. From this perspective, the argument that financial services must be accessible to everyone on an equitable basis—and that even the economically vulnerable must be guaranteed a minimum level of access to financial services—is gaining traction.
Of course, there are also critical viewpoints on this matter. For instance, it is argued that people facing economic hardship often lack financial management skills, making it highly likely they will struggle to repay loans. For this reason, financial institutions tend to exclude them from lending. However, despite these arguments, there are emerging examples demonstrating that even financially excluded groups can be provided with successful opportunities for self-reliance. In particular, a prime example demonstrating the feasibility of financial public good is “microcredit.”
Success Stories of Microcredit
A representative example of microcredit is Bangladesh’s “Grameen Bank.” Grameen Bank operates a program that provides small loans to the poorest segments of society, particularly women, to help them achieve self-reliance. What makes this bank innovative is that, instead of providing loans directly to individuals, it introduced a system where groups of five people apply for a joint loan. Under this system, the first two members receive startup capital; if they repay the loan faithfully within the specified period, the next two members receive a loan, and finally, the fifth member receives a loan. Through this approach, Grameen Bank was able to increase the repayment rate and minimize the risk of loan default.
As a result of Grameen Bank’s successful operations, it achieved a high repayment rate of 99%, and 42% of borrowers managed to rise above the poverty line. This serves as proof that microcredit is an effective means of helping the poor become self-reliant, and it has established itself as an important model for realizing the public nature of finance.
Microcredit and Social Finance
Based on the concept of microcredit, various efforts are underway to realize the public nature of finance. “Social Solidarity Banks” are a prime example of this; they not only provide small loans to economically disadvantaged individuals but also offer management consulting and technical support to help them successfully run their businesses. Through this, they are building a comprehensive support system that goes beyond simple financial assistance to foster sustainable economic self-reliance.
The activities of social solidarity banks demonstrate that finance is more than just the management of capital flows; it is a tool capable of creating social value and providing fair opportunities even to the economically disadvantaged. Through tangible support, these institutions aim to increase borrowers’ chances of success and thereby realize the value of financial public good. If such efforts spread further, the social role of finance will be strengthened, ultimately playing a crucial role in steering our society toward a more just and inclusive future.
