In the context of the EU, Microfinance means the supply of basic financial services to small scale businesses. Often, micro and small enterprises have difficulties to get access to the formal financial sector. Thus, they address their financial needs through a variety of financial relationships, mostly informal. Innovative approaches are required that integrate small enterprises into the financial market, tying up to their habitual practices.
A small entrepreneur in rural Germany, active in the construction sector which is perceived highly risky by banks, without bankable collateral, will not receive any credit by formal banks. Thus, he manages to bridge financial gaps. His liability towards his contractual partners and his ability to be innovative will be his most valuable resources and thus make him creditworthy.
The term “Character Based Lending” (ChaBaL) is used to describe a methodology in the field of Microfinance. It means to include further criteria when appraising the creditworthiness. In contrast to the document-based approach where banks base their decision on balance sheets and profit-and-loss statements, the character based lending approach is taking decision by appraising the character of the applicant, looking at the
- degree of technical knowledge and skills
- entrepreneurial character
- ability to cope with personal crises
- realistic market appraisal
- social network
By using these criteria, clients that might not seem bankable may be eligible if the character based lending approach is applied.
