MICROCREDIT

Definition of 'Microcredit'

1. An extremely small loan given to impoverished people to help them become self employed. 

2. A small financial loan made to poverty-stricken individuals seeking to start their own business. This type of loan typically does not exceed a couple hundred dollars, so an impoverished individual can not solely depend on this type of loan to fund their business. Also called micro loan.

3. Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment and a verifiable credit history. It is designed not only to support entrepreneurship and alleviate poverty, but also in many cases to empower women and uplift entire communities by extension.

4. Microcredit; noun; programmes extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families.

5. microcredit, also called micro banking or micro finance,  a means of extending credit, usually in the form of small loans with no collateral, to nontraditional borrowers such as the poor in rural or undeveloped areas. 

Definitions differ, of course, from country to country. Some of the defining criteria used include-

size - loans are micro, or very small in size

target users - micro-entrepreneurs and low-income households

utilization - the use of funds - for income generation, and enterprise development, but also for community use (health/education) etc.

terms and conditions - most terms and conditions for microcredit loans are flexible and easy to understand, and suited to the local conditions of the community.

Modern microcredit

Microcredit was institutionalized in 1976 by Muhammad Yunus, an American-educated Bangladeshi economist who had observed that a significant percentage of the world’s population has been barred from acquiring the capital necessary to rise out of poverty. Yunus set out to solve this problem through the creation of the Grameen Bank in Bangladesh. The Grameen approach is unique because the small loans are guaranteed by members of the borrower’s community; pressure within the group encourages borrowers to pay back the loans in a timely manner. Grameen’s clients are among the poorest of the poor, many of whom had never possessed any money and relied on a barter economy to meet their daily needs. Using microloans, borrowers are able to purchase livestock or start their own businesses. By 1996 Grameen had extended credit to more than three million borrowers and was the largest bank in Bangladesh, with more than 1,000 branches.

The success of microloans in Bangladesh led to similar programs in other less-developed nations, including Bolivia and Indonesia. Some are sponsored by foundations, religious organizations, or nongovernmental organizations such as Opportunity International and the Foundation for International Community Assistance. In 2008 the Mexican bank Compartamos was criticized for parlaying its microlending program into a profit-making operation, charging high interest rates widely regarded as usurious. An alternative approach to Grameen-style lending is stepped lending, in which a borrower begins with a very small loan, repays it, and qualifies for successive loans at higher values.

Lending to women

Lending to women has become an important principle in microcredit, with banks and NGOs such as BancoSol, WWB, and Pro Mujer catering to women exclusively. Pro Mujer also implemented a new strategy to combine microcredits with health-care services, since the health of their clients is crucial to the success of microcredits. Though Grameen Bank initially tried to lend to both men and women at equal rates, women presently make up ninety-five percent of the bank’s clients. Women continue to make up seventy-five percent of all microcredit recipients worldwide. Exclusive lending to women began in the 1980s when Grameen Bank found that women have higher repayment rates, and tend to accept smaller loans than men. Subsequently, many microcredit institutions have used the goal of empowering women to justify their disproportionate loans to women.

Impact

The impact of microcredit is a subject of much controversy. Proponents state that it reduces poverty through higher employment and higher incomes. This is expected to lead to improved nutrition and improved education of the borrowers' children. Some argue that microcredit empowers women. In the US and Canada, it is argued that microcredit helps recipients to graduate from welfare programs.

Critics say that microcredit has not increased incomes, but has driven poor households into a debt trap, in some cases even leading to suicide. They add that the money from loans is often used for durable consumer goods or consumption instead of being used for productive investments, that it fails to empower women, and that it has not improved health or education.

The available evidence indicates that in many cases microcredit has facilitated the creation and the growth of businesses. It has often generated self-employment, but it has not necessarily increased incomes after interest payments. In some cases it has driven borrowers into debt traps. There is no evidence that microcredit has empowered women. In short, microcredit has achieved much less than what its proponents said it would achieve, but its negative impacts have not been as drastic as some critics have argued. Microcredit is just one factor influencing the success of a small businesses, whose success is influenced to a much larger extent by how much an economy or a particular market grows.

To know microcredit in details visit: http://en.wikipedia.org/wiki/Microcredit

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