Banks contribute to the economy through deposits and loans, but a lack of customer information increases risk. From a public banking perspective, practices like microcredit play an important role in realizing the social responsibility of banking and supporting the economically disadvantaged.
What is the core business of a bank?
The core business of a bank starts with simply attracting deposits from those who have money to spare and lending to those who need it. However, this process isn’t just about moving money around, it’s also about allocating it more efficiently, which in turn increases the stability of the economy as a whole. For example, as savings from individuals flow through banks to businesses, they contribute to productive activity, which in turn creates employment and leads to economic growth, creating a virtuous cycle. Banks also make money from this flow of funds through the interest rate differential between loans and deposits, helping to maintain a stable financial system.
However, there are times when banks fail to fulfill this role. For example, when banks lack information about the customers they are lending to, they are unable to properly assess their ability to repay and face the risk of loan repossession. Not only does this risk adversely affect the bank’s profitability, but it can also negatively impact the stability of the financial system as a whole. As a result, banks are forced to take a cautious approach when approving loans, prioritizing customers with solid collateral or strong credit ratings. However, this conservative approach can lead to the exclusion of some customers from financial markets. In particular, people with low credit ratings or lack of collateral who find it difficult to borrow from the formal financial sector are forced to turn to the informal financial market, or private finance. They are at high risk of paying very high interest rates, which greatly increases their repayment burden and traps them in a vicious cycle.
The public nature of finance and its social role
In this context, a new perspective emerges that emphasizes the public nature of finance. It’s not just about managing the flow of money, it’s about a fundamental right to live a decent life, and it’s an important tool that can have a positive impact on society as a whole. From this perspective, it is argued that financial services should be fairly accessible to all, and that the economically disadvantaged should be guaranteed a minimum level of access to finance.
Of course, there are critics of this view. For example, financially disadvantaged people are more likely to have poor financial management skills and, as a result, struggle to repay loans. For this reason, financial institutions tend to exclude them from lending. However, despite these arguments, examples are emerging that show that the financially excluded can be successfully empowered. Microcredit, in particular, is a prime example of how financial inclusion can work.
Microcredit success stories
One of the most prominent examples of microcredit is Grameen Bank in Bangladesh. Grameen Bank has a program to help the poor, especially women, who are at the bottom of the economic ladder, become self-reliant by providing small loans. What’s innovative about this bank is that instead of giving loans directly to individuals, they have a system that allows groups of five people to apply for a loan together. Under this system, two people get a startup loan first, and if they repay it faithfully over a set period of time, the next two people get a loan, and finally the fifth person gets a loan. This way, Grameen Bank was able to increase the repayment rate and minimize the risk of loan repossession.
As a result of its successful operation, Grameen Bank has a high repayment rate of 99%, and 42% of its borrowers have been lifted above the poverty line. This proves that microcredit is an effective way to help the poor become self-reliant, and it has become an important model for making finance public.
Microcredits and social finance in South Korea
In Korea, various attempts have been made to realize financial openness based on the concept of microcredit. The Social Solidarity Bank is a prime example of this, which not only provides small loans to people in financial need, but also provides management advice and technical support to help them run their businesses successfully. In this way, it goes beyond simple financial support and creates a comprehensive support system that helps people achieve sustainable economic independence.
The work of social solidarity banks shows that finance is not just about managing the flow of money, but is also a tool to create social value and provide fair opportunities for the economically disadvantaged. By providing practical support, they aim to improve borrowers’ chances of success and, in doing so, realize the value of financial openness. If more of these efforts are replicated, the social role of finance will be strengthened, which will ultimately play an important role in moving our society towards a more just and inclusive future.
