Microcredit

This article is specific to small loans, often provided in

a pooled manner.[1] For direct payments to individuals
for specific projects, see Micropatronage. For financial
services to the poor, see Microfinance. For small
payments, see Micropayment.

Microcredit is the extension of very small loans (microloans) to

impoverished borrowers who typically lack collateral, steady
employment, or a verifiable credit history. It is designed to support
Grameen bank in Bargaon, Odisha.
entrepreneurship and alleviate poverty. Many recipients are
illiterate, and therefore unable to complete paperwork required to
get conventional loans. As of 2009 an estimated 74 million people
held microloans that totaled US$38 billion. Grameen Bank reports that repayment success rates are
between 95 and 98 percent.[2]

Microcredit is part of microfinance, which provides a wider range of financial services, especially savings
accounts, to the poor. Modern microcredit is generally considered to have originated with the Grameen
Bank founded in Bangladesh in 1983.[3] Many traditional banks subsequently introduced microcredit
despite initial misgivings. The United Nations declared 2005 the International Year of Microcredit. As of
2012, microcredit is widely used in developing countries and is presented as having "enormous potential as
a tool for poverty alleviation."[4] Microcredit is a tool that can be helpful to possibly reduce feminization of
poverty in developing countries.

However, critics—some in the distant past[5]—argue that microcredit has not had a positive impact on
gender relationships, does not alleviate poverty, has led many borrowers into a debt trap and constitutes a
"privatization of welfare".[6]
The first randomized evaluation of microcredit, conducted by Abhijit Banerjee
and others, showed mixed results: there was no effect on household expenditure, gender equity, education
or health, but the number of new businesses increased by one third compared to a control group.[7] Some of
this increase in the number of businesses can be due to the phenomenon of 'informal intermediation'
documented by Frithjof Arp and collaborators: Philanthropic, low-interest-rate microcredit fosters
unintended entrepreneurship where some borrowers split loans they receive and on-lend to less-
entrepreneurial borrowers.[8]

Contents
History
Comilla model
Modern microcredit
Principles
Economic principles
Group lending
Lending to women
Examples
 Bangladesh
India
United States
Peer-to-peer lending over the Web
Impact of microcredit
Improvement
See also
References
Further reading
External links

History
Ideas relating to microcredit can be found at various times in modern history, such as the Starr-Bowkett
Society. Jonathan Swift inspired the Irish Loan Funds of the 18th and 19th centuries.[9] John Wesley began
a microcredit scheme in 1746. His journal on 17/1/1748 records:

I made a public collection toward a lending stock for the poor. Our rule is, to lend only twenty
shillings at once, which is repaid weekly within three months. I began this about a year and a
half ago: thirty pounds sixteen shillings were then collected; and out of this, no less than two
hundred and fifty-five persons have been relieved in eighteen months.

In the mid-19th century, Individualist anarchist Lysander Spooner wrote about the benefits of numerous
small loans for entrepreneurial activities to the poor as a way to alleviate poverty.[10] At about the same
time, but independently to Spooner, Friedrich Wilhelm Raiffeisen founded the first cooperative lending
banks to support farmers in rural Germany.[11]

Comilla model

In the 1950s, Akhtar Hameed Khan began distributing group-oriented credit in East Pakistan. Khan used
the Comilla Model, in which credit is distributed through community-based initiatives.[3] The project failed
due to the over-involvement of the Pakistani government, and the hierarchies created within communities as
certain members began to exert more control over loans than others.[3]

Modern microcredit

The origins of microcredit in its current practical incarnation can be linked to several organizations founded
in Bangladesh, especially the Grameen Bank. The Grameen Bank, which is generally considered the first
modern microcredit institution, was founded in 1983 by Muhammad Yunus.[3] Yunus began the project in a
small town called Jobra, using his own money to deliver small loans at low-interest rates to the rural poor.
Grameen Bank was followed by organizations such as BRAC in 1972 and ASA in 1978.[12] Microcredit
reached Latin America with the establishment in Bolivia in 1986 of PRODEM, a bank that later
transformed into the for-profit BancoSol.[13] In Chile, BancoEstado Microempresas is the primary
microcredit institution.[14] Microcredit quickly became a popular tool for economic development, with
hundreds of institutions emerging throughout the third world.[3] Though the
Grameen Bank was formed initially as a non-profit organization dependent
upon government subsidies, it later became a corporate entity and was
renamed Grameen II in 2002.[12] Yunus was awarded the Nobel Peace
Prize in 2006 for his work providing microcredit services to the poor.[15]

Principles

Economic principles

Microcredit organizations were initially created as alternatives to the "loan

sharks" known to take advantage of clients.[3] Indeed, many microlenders Nobel laureate Muhammad
began as non-profit organizations and operated with government funds or Yunus, the founder of
private subsidies. By the 1980s, however, the "financial systems approach", Grameen Bank, which is
influenced by neoliberalism and propagated by the Harvard Institute for generally considered the
International Development, became the dominant ideology among first modern microcredit
microcredit organizations. The neoliberal model of microcredit can also be institution
referred to as the institutionist model, which promotes applying market
solutions as a viable way to address social problems.[16] The
commercialization of microcredit officially began in 1984 with the formation of Unit Desa (BRI-UD)
within the Bank Rakyat Indonesia. Unit Desa offered 'kupedes' microloans based on market interest rates.

Yunus has sharply criticized the shift in microcredit organizations from the Grameen Bank model as a non-
profit bank to for-profit institutions:[17]

I never dreamed that one day microcredit would give rise to its own breed of loan sharks ...
There are always people eager to take advantage of the vulnerable. But credit programs that
seek to profit from the suffering of the poor should not be described as "microcredit," and
investors who own such programs should not be allowed to benefit from the trust and respect
that microcredit banks have rightly earned.

Many microcredit organizations now function as independent banks. This has led to their charging higher
interest rates on loans and placing more emphasis on savings programs.[3] Notably, Unit Desa has charged
in excess of 20 percent on small business loans.[18] The application of neoliberal economics to microcredit
has generated much debate among scholars and development practitioners, with some claiming that
microcredit bank directors, such as Muhammad Yunus, apply the practices of loan sharks for their personal
enrichment.[12] Indeed, the academic debate foreshadowed a Wall-street style scandal involving the
Mexican microcredit organization Compartamos.[3]

Even so, the numbers indicate that ethical microlending and investor profit can go hand-in-hand. In the
1990s a rural finance minister in Indonesia showed how Unit Desa could lower its rates by about 8% while
still bringing attractive returns to investors.[18]

Group lending

Though lending to groups has long been a key part of microcredit, microcredit initially began with the
principle of lending to individuals.[12] Despite the use of solidarity circles in 1970s Jobra, Grameen Bank
and other early microcredit institutions initially focused on individual lending.[13] (A solidarity circle is a
group of borrowers that provide mutual encouragement, information, and assistance in times of need,
though loans remain the responsibility of individuals.[19][20])
Indeed, Muhammad Yunus propagated the
notion that every person has the potential to become an entrepreneur. Yunus saw poverty eradication as
being in the hands of the individual. Because of this, he promoted private ownership, and consequently,
neoliberalism. The use of group-lending was motivated by economics of scale, as the costs associated with
monitoring loans and enforcing repayment are significantly lower when credit is distributed to groups rather
than individuals.[13] Many times the loan to one participant in group-lending depends upon the successful
repayment from another member, thus transferring repayment responsibility off of microcredit institutions to
loan recipients.[13]

Lending to women

Lending to women has become an important principle in microcredit, with banks and NGOs such as
BancoSol, WWB, and Pro Mujer catering to women exclusively.[13] Pro Mujer also implemented a new
strategy to combine microcredits with health-care services, since the health of their clients is crucial to the
success of microcredits.[21] Though Grameen Bank initially tried to lend to both men and women at equal
rates, women presently make up ninety-five percent of the bank's clients. Women continue to make up
seventy-five percent of all microcredit recipients worldwide.[13] Exclusive lending to women began in the
1980s when Grameen Bank found that women have higher repayment rates, and tend to accept smaller
loans than men.[3]

Examples

Bangladesh

Grameen Bank in Bangladesh is the oldest and probably best-

known microfinance institution in the world. Grameen Bank
launched their US operations in New York in April 2008.[22] Bank
of America has announced plans to award more than $3.7 million
in grants to nonprofits to use in backing microloan programs.[23]
The Accion U.S. Network, the US subsidiary of the better-known
Accion International, has provided over $450 million in microloans
since 1991, with an over 90% repayment rate.[24] One research
study of the Grameen model shows that poorer individuals are safer Mumbai Headquarters of the National
borrowers because they place more value on the relationship with Bank for Agriculture and Rural
the bank.[25] Even so, efforts to replicate Grameen-style solidarity Development of India, which on-
lending in developed countries have generally not succeeded. For lends funds to banks providing
example, the Calmeadow Foundation tested an analogous peer- microcredit
lending model in three locations in Canada during the 1990s. It
concluded that a variety of factors—including difficulties in
reaching the target market, the high risk profile of clients, their general distaste for the joint liability
requirement, and high overhead costs—made solidarity lending unviable without subsidies.[26]
Microcredits have also been introduced in Israel,[27] Russia, Ukraine and other nations where micro-loans
help small business entrepreneurs overcome cultural barriers in the mainstream business society. The Israel
Free Loan Association (IFLA) has lent more than $100 million in the past two decades to Israeli citizens of
all backgrounds.[28]

India
In India, the National Bank for 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. In Asia borrowers generally pay interest
rates that range from 30% to 70% without commission and fees.[29] 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 IFAD, Opportunity International, Catholic Relief
Services, Compassion International, CARE, APMAS, Oxfam, Tearfund and World Vision.

United States

In the United States, microcredit has generally been defined as loans of less than $50,000 to people—
mostly entrepreneurs—who cannot, for various reasons, borrow from a bank. Most nonprofit microlenders
include services like financial literacy training and business plan consultations, which contribute to the
expense of providing such loans but also, those groups say, to the success of their borrowers.[30] One such
organization in the United States, the Accion U.S. Network is a nonprofit microfinance organization
headquartered in New York, New York. It is the largest and only nationwide nonprofit microfinance
network in the US. The Accion U.S. Network is part of Accion International, a US-based nonprofit
organization operating globally, with the mission of giving people the financial tools they need to create or
grow healthy businesses. The domestic Accion programs started in Brooklyn, New York, and grew from
there to become the first nationwide network microlender.[31] US microcredit programs have helped many
poor but ambitious borrowers to improve their lot. The Aspen Institute's study of 405 microentrepreneurs
indicates that more than half of the loan recipients escaped poverty within five years. On average, their
household assets grew by nearly $16,000 during that period; the group's reliance on public assistance
dropped by more than 60%.[32] Several corporate sponsors including Citi Foundation and Capital One
launched Grameen America in New York. Since then the financial outfit—not bank—has been serving the
poor, mainly women, throughout four of the city's five boroughs (Bronx, Brooklyn, Manhattan, and
Queens) as well as Omaha, Nebraska and Indianapolis, Indiana. In four years, Grameen America has
facilitated loans to over 9,000 borrowers valued over $35 million. It has had, as Grameen CEO Stephen
Vogel notes, "a 99 percent repayment rate".[33]

Peer-to-peer lending over the Web

The principles of microcredit have also been applied in attempting to address several non-poverty-related
issues. Among these, multiple Internet-based organizations have developed platforms that facilitate a
modified form of peer-to-peer lending where a loan is not made in the form of a single, direct loan, but as
the aggregation of a number of smaller loans—often at a negligible interest rate.

Examples of platforms that connect lenders to micro-entrepreneurs via Internet are Kiva, Zidisha, and the
Microloan Foundation. Another internet-based microlender, United Prosperity, uses a variation on the usual
microlending model; with United Prosperity the micro-lender provides a guarantee to a local bank which
then lends back double that amount to the micro-entrepreneur. United Prosperity claims this provides both
greater leverage and allows the micro-entrepreneur to develop a credit history with their local bank for
future loans. In 2009, the US-based nonprofit Zidisha became the first peer-to-peer microlending platform
to link lenders and borrowers directly across international borders without local intermediaries.[34] From
2008 through 2014, Vittana allowed peer-to-peer lending for student loans in developing countries.[35]
Impact of microcredit
The impact of microcredit is a subject of much controversy. Proponents state that it reduces poverty through
higher employment and higher incomes. This is expected to lead to improved nutrition and improved
education of the borrowers' children. Some argue that microcredit empowers women. In the US, UK and
Canada, it is argued that microcredit helps recipients to graduate from welfare programs.[36]

Critics say that microcredit has not increased incomes, but has driven poor households into a debt trap, in
some cases even leading to suicide. They add that the money from loans is often used for durable consumer
goods or consumption instead of being used for productive investments, that it fails to empower women,
and that it has not improved health or education.[37]

The available evidence indicates that in many cases microcredit has facilitated the creation and the growth
of businesses. It has often generated self-employment, but it has not necessarily increased incomes after
interest payments. In some cases it has driven borrowers into debt traps. There is no evidence that
microcredit has empowered women. In short, microcredit has achieved much less than what its proponents
said it would achieve, but its negative impacts have not been as drastic as some critics have argued.
Microcredit is just one factor influencing the success of a small businesses, whose success is influenced to a
much larger extent by how much an economy or a particular market grows.[38]

Unintended consequences of microfinance include informal intermediation: That is, some entrepreneurial
borrowers become informal intermediaries between microfinance initiatives and poorer micro-
entrepreneurs. Those who more easily qualify for microfinance split loans into smaller credit to even poorer
borrowers. Informal intermediation ranges from casual intermediaries at the good or benign end of the
spectrum to 'loan sharks' at the professional and sometimes criminal end of the spectrum.[39]

Improvement
Many scholars and practitioners suggest an integrated package of
services ("a credit-plus" approach) rather than just providing
credits. When access to credit is combined with savings facilities,
non-productive loan facilities, insurance, enterprise development
(production-oriented and management training, marketing support)
and welfare-related services (literacy and health services, gender
and social awareness training), the adverse effects discussed above
can be diminished.[40] Some argue that more experienced
entrepreneurs who are getting loans should be qualified for bigger Many microfinance institutions also
offer savings facilities, such as
loans to ensure the success of the program.[41]
Banco Palma in Brazil, shown here.
One of the principal challenges of microcredit is providing small
loans at an affordable cost. The global average interest and fee rate
is estimated at 37%, with rates reaching as high as 70% in some markets.[42] The reason for the high
interest rates is not primarily cost of capital. Indeed, the local microfinance organizations that receive zero-
interest loan capital from the online microlending platform Kiva charge average interest and fee rates of
35.21%.[43] Rather, the principal reason for the high cost of microcredit loans is the high transaction cost of
traditional microfinance operations relative to loan size.[44] Microcredit practitioners have long argued that
such high interest rates are simply unavoidable. The result is that the traditional approach to microcredit has
made only limited progress in resolving the problem it purports to address: that the world's poorest people
pay the world's highest cost for small business growth capital. The high costs of traditional microcredit
loans limit their effectiveness as a poverty-fighting tool. Borrowers who do not manage to earn a rate of
return at least equal to the interest rate may actually end up poorer as a result of accepting the loans.
According to a recent survey of microfinance borrowers in Ghana published by the Center for Financial
Inclusion, more than one-third of borrowers surveyed reported struggling to repay their loans.[45] In recent
years, microcredit providers have shifted their focus from the objective of increasing the volume of lending
capital available, to address the challenge of providing microfinance loans more affordably. Analyst David
Roodman contends that in mature markets, the average interest and fee rates charged by microfinance
institutions tend to fall over time.[46]

Professor Dean Karlan from Yale University advocates also giving the poor access to savings accounts.[47]

See also
Cooperative banking
Count Me In (charity)
Crowdfunding
Crowd sourcing
Flat rate (finance)
Microcredit for water supply and sanitation
Microgrant
M-Pesa
Project Enterprise
Solidarity lending
The Women's Development Bank
Oikocredit

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owerPaysToKivaFieldPartner) on August 3, 2009. Retrieved October 10, 2009.
44. "How Kiva works - Kiva" (http://www.kiva.org/about/microfinance#interestRatesAreHigh).
45. http://centerforfinancialinclusionblog.files.wordpress.com/2011/11/111108_cfi_over-
indebtedness-in-ghana_jessica-schicks_en_final.pdf
46. Roodman, David. "Due Diligence: An Impertinent Inquiry Into Microfinance." Center for
Global Development, 2011.
47. BBC:Business Weekly (http://www.bbc.co.uk/programmes/p003s71s), 2 August 2009

Further reading
Adams, Dale, Doug Graham and J.D. Von Pischke (eds.). Undermining Rural Development
with Cheap Credit. Westview Press, Boulder, Colorado, 1984.
Bateman, Milford. 'Why Doesn't Microfinance Work? The Destructive Rise of Local
Neoliberalism'. Zed Books, London, 2010.
Drake, Deborah, and Elizabeth Rhyne (eds.). The Commercialization of Microfinance:
Balancing Business and Development. Kumarian Press, 2002.
Rhyne, Elizabeth. Mainstreaming Microfinance: How Lending to the Poor Began, Grew and
Came of Age in Bolivia. Kumarian Press, 2001.
Fuglesang, Andreas and Dale Chandler. Participation as Process – Process as Growth –
What We can Learn from the Grameen Bank. Grameen Trust, Dhaka, 1993.
Gibbons, David. The Grameen Reader. Grameen Bank, Dhaka, 1992.
Harper, Malcolm and Shailendra Vyakarnam. Rural Enterprise: Case Studies from
Developing Countries. ITDG Publishing, 1988.
Hulme, David and Paul Mosley. Finance Against Poverty. Routledge, London, 1996.
Johnson, Susan and Ben Rogaly. Microfinance and Poverty Reduction. Oxfam, Oxford UK,
1997.
Kadaras, James & Elizabeth Rhyne. Characteristics of equity investment in microfinance.
Accion International, 2004.
Khandker, Shahidur R. Fighting Poverty with Microcredit. Bangladesh edition, The
University Press Ltd, Dhaka, 1999.
Ledgerwood, Joanna. Microfinance Handbook. Washington, D.C., World Bank, 1998.
Rutherford, Stuart. ASA: The Biography of an NGO, Empowerment and Credit in Rural
Bangladesh. ASA, Dhaka, 1995.
Small Enterprise Development. Intermediate Technology Publications, London.
Todd, Helen Women at the Center: Grameen Borrowers After One Decade. University Press
Ltd, Dhaka, 1996.
Wood, Geoff D. & I. Sharif (eds.). Who Needs Credit? Poverty and Finance in Bangladesh.
University Press Ltd., Dhaka, 1997.
Yunus Muhammad, Moingeon Bertrand & Laurence Lehmann-Ortega, "Building Social
Business Models: Lessons from the Grameen Experience", April-June, vol 43, n° 2-3, Long
Range Planning, 2010, p. 308-325 (https://web.archive.org/web/20160406133920/http://ww
w.loancalculatorcanada.ca/Article-LRP-Yunus-Moingeon-Lehmann-Ortega-definitif.pdf)"
 Tonelli M. and C. Dalglish, 2012. "Micro-Credit is Necessary but Not Sufficient for
Entrepreneurs in Desperate Poverty", FSR Forum, Vo.14, Issue 4 (p. 16-21). ISSN 1389-
0913
Yunus, Muhammad. Banker to the Poor: Micro-Lending and the Battle Against World
Poverty. Public Affairs, 2003.
Padmanabahn, K.P., Rural Credit, Intermediate Tech. Publ. Ltd., London 1988.
Germidis D. et al.,Financial Systems and Development: what role for the formal and informal
financial sectors?, OECD, Paris 1991.
Robinson, Marguerite S., The microfinance revolution, The World Bank, Washington D.C.,
2001.
Mauri, Arnaldo, (1995): A new approach to institutional lending and loan administration in
rural areas of LDCs, International Review of Economics, ISSN 1865-1704, Vol. 45, no. 4,
pp. 707–716.
Goetz, A.-M.; Sengupta, R. (1996). "Who Takes the Credit? Gender, Power and Control over
Loan Use in Rural Credit Programmes in Bangladesh". World Development. 24: 45–63.
doi:10.1016/0305-750x(95)00124-u (https://doi.org/10.1016%2F0305-750x%2895%290012
4-u).
Johnson, S. 1997. Gender and Micro-finance: guidelines for best practice. Action Aid-UK.
Kabeer, N. 1998. 'Money Can't Buy Me Love'? Re-evaluating Gender, Credit and
Empowerment in Rural Bangladesh. IDS Discussion Paper 363.
Mayoux, L. 1998a. Women's Empowerment and Micro-finance programmes: Approaches,
Evidence and Ways Forward. The Open University Working Paper No 41.
Rahman, A (1999). "Micro-credit Initiatives for Equitable and Sustainable Development:
Who Pays?". World Development. 27 (1): 67–82. doi:10.1016/s0305-750x(98)00105-3 (http
s://doi.org/10.1016%2Fs0305-750x%2898%2900105-3).
CHESTON, S. and KUHN, L. (2002). Empowering Women through Microfinance. Pathways
Out of Poverty: Innovations in Microfinance for the Poorest Families.
Harper, A. ( 1995). Providing women in Baltistan with access to loans – potential and
problems. Lahore, AKRSP Pakistan.
Mutalima, I. K., 2006, Microfinance and Gender Equality: Are We Getting There? (http://weba
rchive.nationalarchives.gov.uk/20100114105356/http%3A//www.microcreditsummit.org/pape
rs/Workshops/28_Mutalima.pdf): Micro Credit Summit, Halifa, Royal Tropical Institute and
Oxfam Novib.

External links
Latest Findings from Randomized Evaluations of Microfinance (http://www.povertyactionlab.
org/publication/latest-findings-randomized-evaluations-microfinance) Access to Finance
Forum by CGAP and Its Partners No. 2, December 2011
Building a Microfinance Institution from Scratch (https://web.archive.org/web/200707161002
13/http://www.usaid.gov/locations/sub-saharan_africa/sudan/ss_microfinance.html)
Institution's objective is to offer financial services on a self-sustaining yet efficient basis to
microentrepreneurs.
Journal of Microfinance (https://scholarsarchive.byu.edu/esr/), a forum for practitioners in
microfinance and microenterprise development to exchange information and ideas
Omidyar-Tufts Microfinance Fund (https://web.archive.org/web/20060430010701/http://www.
tufts.edu/microfinancefund/), a partnership between Pierre Omidyar and Tufts University.
"Microfinance in the U.S." (https://web.archive.org/web/20070815104804/http://thehague.us
embassy.gov/mrs._arnall_microfinance) Helping ensure egalitarian access to needed
financial services.
 The Promise of Microfinance for Poverty Relief in the Developing World (https://web.archive.
org/web/20070812061759/http://www.csa.com/discoveryguides/microfinance/review.php)
Microcredit Regulatory Authority, MRA (http://www.mra.gov.bd/) The central body to monitor
and supervise microfinance operation of NGOs of Bangladesh
Alleviation and poverty and empowerment of the poor, BRAC (http://www.brac.net/)
Bangladesh
The European Union Project "Credit Cooperatives – Russian Federation" (https://web.archiv
e.org/web/20091231170553/http://www.credit-coops.ru/) official web site

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