Main Page | See live article | Alphabetical index

Microcredit

Microcredit, also referred to as microfinance, is the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans. In developing countries especially, microcredit enables very poor people to engage in self-employment projects that generate income.

History

The concept of microcredit was first developed by Muhammad Yunus, a U.S.-educated professor of economics who first got into the business of fighting poverty during a 1974 famine in his homeland of Bangladesh, one of the poorest countries in the world. Yunus discovered that very small loans could make a significant difference in a poor person's ability to survive. His first loan consisted of $27 from his own pocket which he lent to a woman who made bamboo furniture, which she sold to support herself and her family. However, traditional banks were not interested in making tiny loans to poor people, who were considered poor repayment risks.

In 1976, Yunus founded the Grameen Bank to make loans to poor Bangladeshis. Since then the Grameen Bank has issued more than than $3 billion in loans to some 2.4 million borrowers. To ensure repayment, the bank uses a system of "solidarity groups": small informal groups which apply together for loans and whose members act as co-guarantors of repayment and support one another's efforts at economic self-advancement. As it has grown, the Grameen Bank has also developed other systems of alternate credit that serve the poor. In addition to microcredit, it offers housing loans and well as financing for fisheries and irrigation projects, venture capital, textiles, and other activities, along with other banking services such as savings.

The success of the Grameen model has inspired similar efforts throughout the developing world and even in industrialized nations including the United States. Many, but not all, microcredit projects also emulate its emphasis on lending specifically to women. More than 94 percent of Grameen loans have gone to women, who suffer disproportionately from poverty and who are more likely than men to devote their earnings to serving the needs of the entire family.

The World Bank estimates at there are now more than 7,000 microfinance institutions, serving some 16 million poor people in developing countries. In November 2002, more than 2000 delegates from 100 countries gather at a Microcredit Summit in New York City, with the goal of reaching 100 million of the world's poorest families, with credit for self-employment and other financial and business services by the year 2005. Support for these goals has come from prominent world leaders and major financial institutions.

The microcredit movement does have critics, who say that some lending programs charge excessive interest rates. Also, there is concern that funding for microcredit programs will be diverted from other needed programs such as health, water projects and education. Credit programs may enable poor people to improve their situation, but they do not eliminate the need for other basic social and infrastructure services.

Some other problems that have been reported with microcredit:

External links