What is Microcredit?

Microcredit is the term used to identify small loans that are made to individuals and entities that would otherwise not be able to obtain any type of credit. Often referred to as microloans, microcredit is extended to people who have no collateral to pledge for a bank loan, or who are currently unemployed or lack an acceptable credit history. The main function of microcredit is to provide financial services to those that do not qualify for standard sources of credit and assist them in achieving a better quality of life.

One of the ways that microcredit works is within the structure of a wider financial strategy known as microfinance. Essentially, microfinancing often functions with the goal of assisting people to move from poverty conditions to becoming functioning and productive citizens. Within this application, people may be able to obtain poverty loans to supply the necessities of life while seeking to better their situation through training or the creation of some type of self-employment, such as a home business.

Unlike traditional forms of credit, microcredit focuses on the potential present rather than the past track record of the individual. In situations where traditional loans are simply not possible, the extension of microcredit serves as a vote of confidence in the ability of the individual to reverse his or her fortunes and become financially solvent. The basic concept of microcredit has successfully been used to help nations recover from natural disasters by empowering citizens to create new businesses to replace those that either pulled out after the disaster or could no longer function for some reason.

There are examples of the implementation of microcredit strategies dating back to the 18th century. During the 20th century, the Marshall Plan that was implemented at the end of World War II included provisions for the extension of microcredit to help rebuild the infrastructure of nations that were greatly damaged during that war. Microcredit was instituted to assist after the Bangladesh disaster in the early 1970’s. Today, microcredit is utilized in India to provide opportunities for people who are at poverty level and are members of some of the lower castes present in Indian society. In all instances, the goal of microcredit was to create or restore dignity and financial security to people that had no hope of obtaining credit from any other source.

While the combination of microcredit arrangements coupled with flexible micropayment options has long been ignored by traditional banking, this is beginning to change. Because of the emphasis on tapping into the potential of people and assisting them to create employment opportunities where none existed before, microcredit has proven to be a successful strategy that makes a positive impact on the economy of many countries. While microcredit is not yet a principle that is embraced by all financial institutions, the interest in microcredit as a means of stimulating productivity and allowing people to escape poverty through their own efforts is increasing.