microcredit

microcredit, the extension to poor individuals of small loans to be used for income-generating activities that will improve the borrowers' living standards. The loans, which may be as little as $20 for very poor borrowers in some developing countries, typically are for a short term (a year or less), are not secured by collateral, and require repayment in weekly installments. The borrowers, most of whom usually are women, would not qualify for a conventional bank loan.

Because of the high cost, relative to the loan size, of running a microcredit program, interest rates on microcredit loans are high, sometimes as much as 35%; in the case of microcredit loans by commercial institutions, the rates may be even higher. Peer support groups consisting of other borrowers are often a component of microcredit programs, and help ensure that the borrowers repay the loans. Successful microcredit programs typically also focus on improving the education and health care of their borrowers.

The concept of microcredit was developed in 1976 by Muhammad Yunus, a Bangladeshi economist, as a means of alleviating the poverty and improving the lives of the very poorest inhabitants of Bangladesh. The Grameen Bank, formally established in 1983 through Yunus's efforts, expanded microcredit with the help of loans and grants, and is now self-supporting. Microcredit programs and institutions have been created in many other nations in Asia, Africa, and Latin America, and similar programs have been established to aid poorer individuals in developed countries who do not qualify for conventional loans.

Although microcredit programs were originally and are still largely operated by nonprofit organizations, some for-profit companies also focus on microcredit lending. The term microfinance, although often used as a synonym for microcredit, is especially used to describe commercial microlending and also may include other financial services offered on a small scale to the poor, such as bank accounts that do not require minimum balances.

Some critics see microcredit misfocused, because it is too limited to alleviate poverty in general, especially in societies where many causes other than restricted access to credit have resulted in pervasive impoverishment, but it has nonetheless improved the lives of millions of individuals and their families. The development of for-profit microlending, on the other, disturbs nonprofit microcredit lenders because the need for profits shifts microcredit lending to those who are less poor while diminishing the resources available and the willingness to lend to the very poorest.

The Columbia Electronic Encyclopedia, 6th ed. Copyright © 2007, Columbia University Press. All rights reserved.

• • Cite
  • Print