The micro-credit story in brief

Microcredit is a concept that evolved as early as the 18th century but gained momentum only after the establishment of the Grameen Bank in Bangladesh by Prof. Muhammad Yunus in 1976. By lending amounts as small as $5 to women involved in making bamboo stools in Jobra village out of his own resources, Prof Yunus proved that micro loans can effectively tackle and reduce poverty. Over the years Grameen bank has disbursed several such small loans and assisted poor entrepreneurs to afford low cost credit to improve their small scale business units. Now microcredit programs have spread across the globe and are regarded as the best way to alleviate poverty.

What is micro-credit?

Microcredit is a financial innovation that refers to various kinds of small loans and financial services meant for low income households. The borrowers of microcredit usually lack collateral, steady employment and verifiable credit history and hence fail to qualify for regular bank loans. Microcredit steps in to bridge the gap and brings affordable loans within access of even to those left out of the main steam credit system through banks and other financial institutions.

How are 'micro-loans' used?

Micro-loans are meant to spur entrepreneurship and are mostly used to start or run a micro-enterprise like livestock rearing, tailoring, grocery store etc. These income generating activities enable poor households to become self reliant and hence gets them out of poverty. Often these small loans are also used for one time payments like education expenses, medical bills, or lifecycle events such as weddings and funerals.

No-collateral! How is the payment secured or guaranteed?

The micro-credit industry currently has a repayment rate of 95-98% worldwide. This astounding success in repayment is attributed to the strong social cohesion prevalent in the developing world where the role of microcredit is significant. The dynamic social structures and inter-dependecies that exist in these communities encourage borrowers to repay the loans promptly, besides supporting each other. Members of self-help groups or joint liability groups to whom loans are extended, contribute to a common group fund which is also used to make repayments on behalf of individuals unable to make an occasional repayment on time due to financial pressures.

How Microcredit works

Microfinance Institutions borrow from banks.
Loan disbursed to borrowers through field partner or a Microfinance Institution (MFI)
Cost of bank loan + Cost of MFI operation + profit margin = Cost of loan to borrower

External links

Wikipedia - Microcredit
Wikipedia - Microfinance
Grameen Bank - What is Microcredit?
Microfinance Gateway - What is Microfinance?