Microcredit Basics

Microcredit provides business loans to individuals with very small businesses, called microenterprises. Many people are not reaching their full income potential merely because they do not have access to credit. Microcredit seeks to provide access to financial capital to people who otherwise would not have the opportunity.

Microcredit loans are intended for those who cannot qualify for loans from traditional financial institutions. The loan terms are designed to help those who only need a small amount of capital to facilitate their microenterprise.

Often, microcredit is organized around "solidarity groups" or "village banks." These groups are comprised of individuals in a community who want microcredit loans. The purpose of such groups is to create a feeling of community, provide a network for support and discussion, and back up one another's loans. Since microcredit loans do not require traditional collateral, the members of the group act as insurance for each other's loans-if one person defaults on a loan, the group members pay it back. Generally, before anyone in the solidarity group or village bank can get an additional loan, all members of the group must have their initial loan paid off.

Some organizations that offer microcredit also offer other financial services, such as savings plans, insurance, and business training classes. Like microcredit loans, these services are designed to help microenterprise owners achieve growth and success in their business.

History and Impact

The founding of microcredit is generally attributed to Muhammad Yunus, an economics professor from Bangladesh. In 1976, Yunus visited a local village seeking fundamental solutions to poverty. He met a woman named Sufyia who made and sold chairs to support her family. She relied on high-interest-rate loans from village moneylenders to buy the materials. Because of the severe terms of her loans, she had no way to improve her situation. Recognizing that Sufyia's situation was not unique, Yunus lent 856 taka-about 27 U.S. dollars-to 42 microenterprise owners. Not only did the loan recipients pay back their loans promptly, but they were able to earn more income and grow their businesses. Of this first experience, Yunus remarked, "If I could make so many people so happy with such a tiny amount of money, why not do more of it?"

Do more of it he did, thus beginning the international revolution of microcredit. In 1983, Yunus founded Grameen Bank in order to offer microcredit on a wider scale. Today, Grameen Bank serves over 2 million borrowers in more than 80,000 villages. In 2006, the impressive global impact of microcredit earned Yunus and Grameen Bank the Nobel Peace Prize.

Microcredit Impact

Since the founding of microcredit, thousands of microcredit organizations have sprung up around the globe. In 2007, over 100 million of the poorest families received access to microcredit. As it spreads across the world, microcredit looks to be a powerful force in helping individuals "work their way out of poverty with dignity."

Credit: LDS Employment Resource Services