Microcredit

MICROCREDIT IS THE PROVISION of small loans, usually to poor and vulnerable groups, especially women. In developing countries, loans are usually no more than a few hundred dollars, while in developed countries much larger sums are involved (a common limit is $25,000). These loans are designed to encourage the production and consumption by the poor or nearpoor through the establishment and maintenance of entrepreneurial activities allowing the borrower, or group of borrowers, to become economically self-sufficient as well as create employment opportunities for the larger community. Loans are provided by nongovernmental organizations (NGOs) and government or commercial banks. In developing countries, the loans are unusual in that no collateral is required and flexible repayment plans are used. In developed countries, microcredit loans are also made under concessionary terms and are often provided in conjunction with financial training. While recipients often include the poor, requirements generally center on the inability to obtain financing, especially under concessionary terms, from typical business financing channels.

Group-based lending programs and variations of microcredit programs have been in existence for at least 400 years and have existed throughout various cultures. They have served as a means for the distribution of loan funds to members in need. They include less formal institutions, such as the Rotating Savings and Credit Association, in which a group of men or women contributes to a collective fund, which is then distributed to members at regular intervals as needed. A more formal example was the local, independent, and charitably constituted microcredit operations that proliferated throughout Ireland in the 18th and 19th centuries, providing, at one time, up to 500,000 loans annually.

The first modern microcredit institution is attributed to Muhammad Yunus and the Grameen Bank of Bangladesh. Established in 1983, reaching over two million individuals, and lending an estimated $2.1 billion, the Grameen Bank has become the current model of microcredit practiced and promoted throughout the world as a development tool for poverty reduction. As pointed out by scholars, Grameen Banks have a multifaceted lending strategy based on the goals of promoting and facilitating social development through programs that they conduct and, most importantly, alleviating poverty. The latter is obtained by ensuring that clients are in the lower half of the socioeconomic hierarchy; hence loan amounts are limited and recruitment efforts are focused on poor, often female borrowers.

A flexible credit system adaptable to the needs of specific clients is employed, including small weekly payments, generally two percent of the loan amount, spread over the one-year life of the loan. Successful repeat borrowers are allowed to increase their credit limits. Most importantly borrowers are organized into small groups and group solidarity and peer pressure are employed as a means to ensure proper spending and repayment. These borrower groups also accept the responsibility of repaying the loan of a member who [Page 711]defaults. The development of strong social ties within these lending groups is a primary reason for the success of Grameen Banks.

Thanks to this success, the use of microcredit as a tool for the elimination of poverty has recently become a focus of the international community. The World Summit for Social Development, held in Copenhagen, Denmark, in 1995, identified the need to increase access to credit for small rural and urban producers as well as particularly vulnerable groups such as the landless poor and women.

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