The Importance of Trade Credit and its Mysterious Absence from Microfinance: Recommendations for the Microfinance Community
The authors contend that despite the fact that its role is rarely officially recognised by traditional microfinance institutions (MFIs) or their multinational supporters, trade credit has a significant presence among financing options for low-income consumers and microentrepreneurs. Fafchamps’ definition is quoted in this paper, where “trade credit is a form of short term financing that is linked to the purchase of goods”. The authors state that trade credit (being most commonly in the form of supplier credit and consumer credit) exists primarily to promote profits. It fills a financing gap for individuals to purchase consumer goods or for micro-entrepreneurs to purchase supplies.
The authors also state that they can summarise sufficient evidence from specific countries and regions to demonstrate the ubiquitous role of trade credit (although not enough to distinguish the magnitudes of the various types), despite the appearance of very little widespread notice of and no comprehensive studies on the strength of trade credit in microfinance.
The paper sets out to summarise the information about the scope and characteristics of the major types of trade credit and begins to draw some preliminary conclusions about the impact of trade credit on the poor using. The paper concludes with four recommendations targeted at the microfinance community, including MFIs, international donors, NGOs, and companies that serve poor clients:
- pay more attention to trade credit, especially as it pertains to existing clients;
- encourage pro-poor trade credit and credit bureau development;
- protect clients from predatory trade credit through relationship brokering and education; and
- seek opportunities to learn from and partner with trade credit providers, offering microloans to replace buyer credit where appropriate.