The Importance of Trade Credit and its Mysterious Absence from Microfinance: Recommendations for the Microfinance Community

This paper argues that trade credit has a significant presence among financing options for low-income consumers and micro-entrepreneurs, despite the fact that its role is rarely officially recognized by traditional microfinance institutions (MFIs) or their multi-national supporters. The paper states that:

• The presence of trade credit can be viewed as both positive and negative, depending on the level of power granted to the low-income population through competition or oversight;
• It is important for the microfinance community to recognize the ubiquitous nature of trade credit and its strengths and weaknesses so that it can intervene to leverage or control it for the benefit of its clients.

The paper:

• Summarizes existing information about the scope and characteristics of the major types of trade credit consumer credit, supplier credit, and buyer credit;
• Draws preliminary conclusions about the impact of trade credit on the poor using existing research as well as interviews with microfinance practitioners and experts.

The paper concludes by identifying the following four recommendations for the microfinance community, including MFIs, international donors, non-government organizations (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;
• Seek opportunities to learn from and partner with trade credit providers, offering micro-loans to replace buyer credit, where appropriate.