Microcredit refers to the extension of small or very small loans to poor borrowers, typically micro-enterprises in emerging economies, who would normally not be eligible for bank credit because they lack collateral. Also, most banks would not be interested in granting such small loans, as it would not be profitable. The size of the global micro-finance market was estimated at $87 bn in 2014 (Microfinance barometer 2016) and it is currently growing at around 10-15% per year.

The average interest rate (including fees) on microcredit is variously reported as being between 29% and 35%, but annualised interest rates in certain markets and for certain types of loans exceed 50%. This reflects the fact that microcredit lenders have high operating costs. Interest payments are often collected in person, which is labour-intensive.

Because of these high interest rates, there is an ongoing debate about the impact of micro-finance. The title of the following Quora article summarises the question: Microfinance: Do the micro-loans contribute to the well-being of the people or do they leave them even poorer due to high interest rates? While some argue that "the world's poorest people pay the world's highest cost for small business growth capital" (Wikipedia), others note that "compared to other available forms of financing such as loans from informal money lenders, where interest rates total around 120 % or more, micro-finance interest rates are very reasonable" (Responsability - Microfinance Market Outlook 2016).

The key observation to be made about micro-loans is that they often bring bank money into communities that mostly do local business. Such business does not necessarily require bank money, as local payments can usefully be replaced by local credit/IOU arrangements - and Sikoba will provide a platform for doing exactly that.

A system like Sikoba cannot, of course, completely replace micro-loans. Sometimes an artisan has to buy tools or other goods which must be paid using bank money, for example because they are not available locally. However, the more of his business he transacts using IOUs, the less bank money he will need.

Any businessman, and especially one who is used to paying interest rates of 30% or more for his micro-loan, will easily understand how paying with his own IOU will provide a big boost for his business. In emerging economies, especially in remote areas, business is much more local than what we are used to in Europe and other developed regions. For that reason, networks of artisans and small businesses will have a very strong incentive to try out alternatives to micro-credits, and we believe that Sikoba will be ideally suited for that.