Microcredit Program, South Korea's Experiment for Helping Low Income Earners

Oct 2009
Seoul, South Korea , October, 14 2009 - South Korea's "business-friendly" government is strengthening support for its low-income citizens by devising its own measure of providing help.

The South Korean government, through pushing for a policy that has both welfare and business-like dimensions, is widening economic opportunities for low-income households, who have once been denied access to capital by formal financial markets.


The so-called Miso Credit Foundation, which means in Korean "Beautiful and Small," as well as "Smile," is the first-ever government-led microcredit lending program in the world.

The Foundation marked an ambitious launch in late September with the president highlighting that it aims at helping working-class people who wish to stand on their own.

"The project is an exemplary case in that it is the first time large business groups provided direct financing support to small- and medium-sized businesses," the president said.

The Foundation is targeting a wide range of beneficiaries, including small-business owners, traditional market business owners, startup businesses, and verified non-profit businesses, according to the FSC.

"We expect about 200 to 250 thousand low-income households will benefit from the Foundation," the FSC said.

In total, the Miso Foundation, renewed from its former form of the so-called Microfinance Foundation, plans to provide up to 2 trillion won (1.72 billion U.S, dollars) over the next 10 years, which exceeds 13 times the amount it spent in the previous system, according to the FSC.

With the Miso loans come interests set below the prime rate, which currently stands at around 5 percent.

To be of more help to its beneficiaries, the foundation also plans to apply zero-percent interest rates during the grace periods.

After being incorporated in October, the Foundation will start off with its work in December, it added.


Although the government took the initiative in launching the Miso Foundation, it plans to leave the remaining task, such as its funding and operation, to private organizations, the FSC said.

With respect to the funding part, the role of business groups and financial institutions is highlighted.

In particular, local business tycoons, called Chaebol, vowed to contribute up to 1 trillion won (856 million U.S. dollars) over the next 10 years, which takes up 50 percent of the total fund.

In a bid to draw more voluntary participation from the business sector, the government said to offer tax incentives, designating donation to the Miso Foundation eligible for 50-percent tax reduction.

The remaining portion worth 1 trillion won (856 million U.S. dollars) is to be funded by financial institutions, which includes700 billion-won (600 million-U.S. dollar) worth of dormant accounts.

The operation part is also left to private bodies, such as non-profit organizations and volunteer workers equipped with necessary expertise and experience, the FSC said.

Once the Foundation begins its operational work, the government plans to back off and focus on supportive jobs, such as giving operational guidelines, consulting and education, the FSC added.


While few would challenge the goodwill of the Miso Foundation, some still argue against its validity and efficacy.

Even with the government's explanation that it stands as a helper, rather than a controller, questions revolve around whether its system, which seems still heavy-handed by the government, could run as efficiently as in other countries and provide real help to low-income citizens in need.

As microcredit lending program originally emerged out of private organizations in its birthplace Bangladesh and many other European countries, the South Korean case becomes quite an extraordinary example in that it was launched and led by the government.

According to lawmakers at the opposition side and local media reports, discord has been already found in the system.

Resorting on business groups' contribution, the Foundation is taking away the money once allocated to other private-sector welfare organizations, opposition Democratic Party lawmaker Lee Sung-nam pointed out during an annual audit.

With constraints in money to be spent for corporate social responsibility purpose, firms, upon the request of the government, may just make shifts in its subjects of donation, the lawmaker said.

The lawmaker also mentioned that firms may feel too much pressured by the government's move and may regard it as a quasi-income tax, despite of its continuous highlights on 'voluntary participation.'

Disputes have already come to the surface among financial firmsas Kookmin Bank and Shinhan Financial Group deciding to go their own ways, establishing separate microcredit lending funds without signing an MOU with the Miso Fund, local dailies said.

How much professionalism we can expect from volunteer workers and non-profit organizations is another question, considering the distinctive characteristic of the microcredit lending program.

To devout market believers, the Foundation is viewed as a clear example of state-run finance, which they say is in breach of market principles, local dailies introduced.

Moral hazard adds to market worries as inappropriate, insufficient screening on those who apply for loans may lead to massive defaults.

Amid lingering controversy, six business conglomerates on Oct. 13 settled an MOU to donate 1 trillion won (856 million U.S. dollars) over the next ten-year period, solidifying their previous promise.

As President Lee said, the Miso Foundation has its own value in that large business groups for the first time provided direct financing support to small- and medium-sized businesses.

It is also laudable that the government attempted to take the risk of combining finance with welfare, local media said.

"The Foundation was designed in a way that could best balance between welfare, which has long been considered as the state job, and finance, which belongs to the private sector," an operator at the foundation told the press.

"I hope the spirit of love, sharing, gratitude and harmony will spread throughout our society with the launch of this new program," the president said upon announcing its launch.

South Koreans are eyeing whether the president's hope may come true, turning criticism into compliments.

Source : China View

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