Microcredit

This is an article about small loans. For small payments see Micropayment

Microcredit 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. Microcredit is the most important part of the microfinance field, which can comprise all other financial products such as micro-insurance, savings or other.

2005 has been declared International year of Microcredit by United Nations : http://www.un.org/events/microcredit/.

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 $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. Almost 95 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 Aga Khan Agency for Microfinance (AKAM) is another innovative institution; it delivers a wide-variety of services including micro-insurance, small housing loans, savings, education and health accounts, and support for small entrepreneurs seeking to develop businesses related to restored cultural assets. The Agency is part of the Aga Khan Development Network.

The World Bank estimates that 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 gathered 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 Economic and Social Council of the United Nations proclaimed the year 2005 as the International Year of Microcredit.

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:

• Turning a profit on the loan
• Inability to reach the poorest of the poor
• Microcredit dependency
• Durability of poverty reduction

While microcredit dependency is an issue raised by critics of the microcredit system, it also raises the issue of bias in the critics worldview. Most of the developed world is dependant on continual access to credit. Defenders of microcredit argue that there is no reason to expect the poor in developing countries to behave any differently.

In the past few years, savings-led microfinance has gained recognition as an effective way to bring very poor families low-cost financial services. For example, in India the National Bank of Agriculture and Rural Development (NABARD) finances more than 500 banks that on-lend funds to self-help groups (SHGs). SHGs comprise twenty or fewer members, of whom the majority are women from the poorest castes and tribes. Members save small amounts of money, as little as a few rupees a month in a group fund. Members may borrow from the group fund for a variety of purposes ranging from household emergencies to school fees. As SHGs prove capable of managing their funds well, they may borrow from a local bank to invest in small business or farm activities. Banks typically lend up to four rupees for every rupee in the group fund. Groups pay a reasonable 11-12% annual rate of interest. Nearly 1.4 million SHGs comprising approximately 20 million women now borrow from banks, which makes the Indian SHG-Bank Linkage model the largest microfinance program in the world. Similar programs are evolving in Africa and Southeast Asia with the assistance of organizations like Catholic Relief Services, CARE, APMAS and Oxfam.

External links

• The Consultative Group to Assist the Poor (http://www.cgap.org/),a consortium of 28 public and private development agencies working together to expand access to financial services for the poor in developing countries.
• Grameen Foundation USA (http://www.gfusa.org/), replicating the Grameen Bank model around the world
• Grameen Bank (http://www.grameen-info.org/)
• The Aga Khan Agency for Microfinance (http://www.akdn.org/microfinance/index.html)
• Accion International (http://www.accion.org/), a large micro-lending organization working primarily in South America
• Microcredit Summit (http://www.microcreditsummit.org/plus5/)
• The Virtual Library on Microcredit (http://www.gdrc.org/icm/)
• Jason Meade, "An Examination of the Microcredit Movement (http://www.geocities.com/jasonmeade3000/Microcredit.html)," January 15, 2001.
• 1998/28 - International Year of Microcredit, 2005 (http://www.un.org/documents/ecosoc/res/1998/eres1998-28.htm), a resolution by the Economic and Social Council of the United Nations
• The Microfinance Gateway (http://www.microfinancegateway.org/),the most comprehensive source of information on microfinance on the web
• Centre for Micro Finance Research (http://www.ifmr.ac.in/cmfr),researching rigourously the links between access to financial services and participation of the poor in the larger economy.
• Valérie de Briey, "Microfinance en 2005 (http://regards.ires.ucl.ac.be/Archives/RE028.pdf)", March 2005.
• Directory of Development Organizations (http://www.devdir-microfinance.org/), comprehensive listing of development organizations dedicated to good governance, sustainable development and poverty reduction; microfinance is highlighted.
• CARE International (http://www.care.org) CARE - Empowering the vulnerable.
• Journal of Microfinance (http://www.lib.byu.edu/spc/microfinance/), a forum for practitioners in microfinance and microenterprise development to exchange information and ideas
• Namaste-Direct.org (http://www.namaste-direct.org/) a non-profit devoted to providing credit for first-time women borrowers in Guatemala.

es:Microcrédito