Definition
Microcredit is a type of financial service offered typically to individuals or small businesses who lack access to traditional banking and related services. It involves providing small loans to these underserved populations, often in developing countries, to support entrepreneurship and alleviate poverty. These loans are usually accompanied by training and other forms of support to help borrowers successfully manage and grow their businesses.
Key Takeaways
- Microcredit refers to the lending of small loans to entrepreneurs or individuals who lack collateral, steady employment, or a verifiable credit history. These loans, while small in size, can play a vital role in helping people start or grow a small business, manage household expenses or even fund education.
- The interest rates on microcredit loans can be comparatively higher than those of traditional bank loans due to the high risk involved and the costs of administering a large number of small loans. However, many microcredit organizations aim to keep interest rates as low as possible to promote financial inclusion.
- Microcredit is a fundamental tool in the fight against poverty, offering a way for disadvantaged and low-income individuals to escape poverty by providing them with the financial resources they need to become self-sufficient. It has gained significant traction in developing nations where access to traditional banking systems is limited.
Importance
Microcredit is a critical concept in finance as it provides small loans to individuals who lack collateral, steady employment, or a verifiable credit history – essentially providing financial assistance to those unable to access conventional banking services.
This is of considerable importance in fostering entrepreneurship and economic growth, particularly in underdeveloped or developing regions.
By lending small amounts of money, microcredit enables financially underserved people to start small businesses, thereby stimulating economic activity, reducing poverty, and promoting socio-economic development.
Thus, microcredit stands as a pivotal financial innovation that contributes to the empowerment of individuals, particularly women in impoverished societies, amplifying financial inclusion, and fostering overall socio-economic advancement.
Explanation
Microcredit is a financial innovation designed primarily to support entrepreneurship, particularly in developing countries, where access to conventional banking services and credit is restricted. The fundamental purpose of microcredit is to empower the financially less privileged, especially women and those living in impoverished regions, by providing them with self-employment opportunities.
It provides these individuals with much-needed small loans, or “microloans,” which can be used to start or expand small businesses. Microcredit’s agenda is predominantly social as it aims to alleviate poverty and promote economic development at the grassroots level.
Microcredit is used for a variety of income-generating activities. These can range from small-scale farming to opening a small grocery store, sewing, handicrafts, and many other enterprises.
People can obtain the necessary capital to purchase equipment, stock inventory, and cover other business-related expenses, which would otherwise be inaccessible to them due to their low financial standing. By fostering entrepreneurship, microcredit not only assists in poverty reduction but also encourages self-sufficiency and helps in building local economies.
Examples of Microcredit
Grameen Bank in Bangladesh: This is perhaps the most well-known example of microcredit in action. Founded by Muhammad Yunus in 1980, Grameen Bank targets the rural poor in Bangladesh who are unable to access traditional bank loans due to lack of collateral. The bank primarily loans to women who constitute nearly 97% of its customers. The loans are small, known as “micro-loans”, and are used to start or expand small businesses.
Kiva, a US-based non-profit organization: Kiva allows individuals to lend as little as $25 to help create opportunities around the world. It partners with microfinance institutions to provide loans to people without access to traditional banking systems. The loans are used for a variety of purposes – for instance, to start or grow a business, go to school, or to fund necessities like clean water or solar energy.
BRAC in Bangladesh: This is an international development organization that was created in Bangladesh but now operates in multiple countries around the world. BRAC provides very small loans, or microcredit, to individuals and small businesses in order to tackle poverty by providing financial services to the poor who are traditionally neglected by commercial banks. BRAC’s microfinance program aims not only to support income generation activities but also emphasizes raising awareness about social issues and empowering women.
Microcredit FAQ
What is Microcredit?
Microcredit is a type of lending service where small loans are given to entrepreneurs or businesses that lack access to traditional banking and related services, typically in developing countries. The concept of microcredit is based on the principle that even small amounts of credit can help end the cycle of poverty.
How does Microcredit work?
Microcredit providers give small loans to individuals, usually ranging from $50 to a few thousand dollars. These providers work on a principle of trust, so they do not always require collateral. The borrowers can use this loan to start or expand small businesses, and they repay the loan over a given period of time.
What is the purpose of Microcredit?
The primary purpose of Microcredit is to provide an opportunity to lower-income individuals or businesses to help them become self-sufficient. These small loans give them a chance to start or grow a business and potentially escape poverty.
Who are the typical borrowers of Microcredit?
Typical borrowers of Microcredit are those from underprivileged areas who do not have access to conventional banking services or cannot meet the lending criteria of traditional banks. This often includes women in developing countries, who use the loans to start small enterprises.
What are the benefits of Microcredit?
Microcredit can provide a number of benefits. These include promoting entrepreneurship and economic development, combating poverty, empowering women, and promoting social development in impoverished regions.
Related Entrepreneurship Terms
- Microfinance
- Microloan
- Microenterprise
- Loan Repayment
- Interest Rate
Sources for More Information
- World Bank – They provide a wealth of information on microcredit as well as other finance or economic terms.
- International Monetary Fund (IMF) – It’s one of the most valuable resources for global economic issues, including microcredit and microlending.
- Kiva – This is a non-profit organization that allows people to lend money to low-income entrepreneurs and students in over 80 countries, making it a good source to understand microcredit in practical terms.
- CGAP (Consultative Group to Assist the Poor) – It’s a global partnership of organizations seeking to improve financial inclusion, providing detailed resources that include microcredit.
