What Is Microcredit?

What Is Microcredit?

Let me tell you directly: microcredit is a straightforward form of microfinance where we provide extremely small loans to individuals, helping them become self-employed or expand a small business. You see, these borrowers are usually low-income folks, often from less developed countries. We also call it microlending or microloan, and that's the basics you need to know.

Key Takeaways

Here's what you should remember about microcredit: it's all about lending tiny amounts to get small businesses off the ground or growing. The people who borrow are typically low-income and from developing regions, with the modern version kicking off in Bangladesh. Most setups use a group borrowing approach, thanks to Muhammad Yunus and his Grameen Bank, which won him a Nobel Prize.

How Microcredit Works

The whole idea behind microcredit is that skilled people in underdeveloped areas, cut off from regular banks and money systems, can join the economy with just a small loan. Think about communities where bartering is the norm, no cash involved. We credit the modern take to Muhammad Yunus and his Grameen Bank model from Bangladesh in 1976. It started with a group of women borrowing $27 to fund their small businesses—they paid it back and kept things running.

In that Bangladesh example, the women couldn't afford materials for bamboo stools to sell, and lending to one alone was too risky. But as a group, they got the funds to start producing, repaying over time from their earnings. That's how it clicks.

Fast Fact on Microloans

Just so you know, microloans can be as tiny as $10 to $100, and they seldom go over $2,000. That's the scale we're dealing with here.

Micro-Loan Terms

Microcredit setups differ from traditional banking—no collateral needed sometimes, or even a written contract. Instead, the borrower's community might guarantee it, pressuring them to repay. As you pay off successfully, you qualify for bigger loans down the line.

Like any lender, micro-financiers charge interest and set repayment schedules. Some make you save part of your income as a backup if you default—repay well, and you've built savings. Often, we pool borrowers for security; they repay together, creating peer pressure to keep everyone on track. If someone's struggling to start their business, they can get help from the group or officer. This builds credit history for future larger loans.

What's interesting is that even though these borrowers are very poor, repayment rates are high—higher than conventional loans sometimes. For instance, Opportunity International hit about 98.9% in 2016.

Critiques of Microcredit

Not everything is perfect with microcredit; there are valid criticisms about misuse. Take South Africa, where it was rolled out in poor communities to boost self-employment, but sometimes the money went to everyday spending instead of business building.

Borrowers can end up in deep debt they can't handle, even with small loans. If they lack steady income or fail to create one with the loan, they might sell possessions or borrow more to cover the old debt. That's a real risk you need to consider.