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How Does Microcredit Work -- Is Microcredit Only Meant to Give Credit to the Poor

how does microcredit work

Microcredit? What on Earth is Microcredit

Microcredit's story begins in the mid nineteen seventies in South Asia.

All over the world, there exist universities. These universities normally teach approximately the same syllabus no matter where they are situated. Bangladesh is no exception to this rule.

Thirty years ago a Bangladeshi academic was teaching economics on a campus surrounded by poverty. This is not so unusual a situation -- university campuses the world over are often located in areas in which the population living around has no connection to the colleges themselves.

This man's name was Muhammad Yunus. Like many economists, Yunus assumed that the answer to poverty issues lay in economic theory. While there may have been some truth to this assumption, nevertheless, he could not help feel the stark contrast between his own life, teaching about economics to middle-class Bangladeshis, and the incredible economic degradation of the local population living nearby. Perhaps, he thought, I will simply go and ask these people what they think they need.

Credit -- The Answer Was Credit

Credit is a part of most people's lives. What is often not realized, however, is that this is also true for the very poor. Of course, if you think about it, this should be obvious: the less you have the more you need to borrow -- the more you need credit .

Credit, however, is hard to get the more you need it. This is true in the United States, and it is true in non-industrialized regions also. If you do not have a job, if you have no credit history, if no one will co-sign a loan for you vouching for your credit worthiness, then you cannot get credit.

We hear talk of a "credit crunch", but the truth is, for millions of Americans, and for billions upon billions of the world's poor, this credit crunch is a permanent denial of access to credit.

Credit and Economics: The Poor Also Need Credit

In point of fact, as Yunus discovered, there exists an informal credit system, run outside the normal system of credit-granting institutions -- in other words, everywhere in the world, there exist moneylenders.

Credit gleaned from moneylenders, however, comes with extremely high interest-rates. In other words, as Westerners who cannot get credit from credit institutions know, when the alternative is self-regulated moneylending services, interest can be high.

The poor, however, often have an interest in starting up a business. Perhaps they want to buy seed so they can sell corn or wheat, perhaps they want to buy a weaving loom, so that they can sell cloth -- the poor know

that there is money to be made from business; this knowledge is written into our DNA -- the simplest community a thousand years ago relied on exchange of goods and services, trade and commerce.

What is Microcredit ?

When Muhammad Yunus realized that there was a whole sea of would-be entrepreneurs among the poor of his country, people who could be running thriving businesses but who could not start their startups due to a lack of capital, he endeavoured to find ways of getting this startup capital to people who needed it.

He discovered quickly that credit-lending institutions in Bangladesh were run exactly as they are in the West -- no credit history, no credit.

So he finally established a bank that would take on risky propositions, and lend out a few hundred dollars at a time to individuals to start small businesses.

This was christened the Grameen Bank.

Of course, by "risky propositions" was meant people who have no collateral, no alternative source of income -- in a sense it was high-risk venture capitalism investment. except that the purpose was not to make a profit but to provide a philanthropic need, and that these "high-risk" ventures were not high-risk in real terms, because the amount lent was usually far less than a thousand dollars.

It turned out that this venture was not high-risk at all -- when a credit institution assesses a person's credit-worthiness, they look at past credit history, collateral, work record, etc. but one thing that cannot be measured among middle-class or even poor Westerners (who inevitably always have access to welfare of some sort if things do not work out, meagre as welfare often is of course. ), is their personal psychology.

The poor of the rest of the world, it turns out, share common, predictable traits -- to be more accurate, poor women share these traits. In short, poor women in regions where alternatives are essentially non-existent, will normally grab any chance they can get to lift their own children out of the poverty trap. In other words, mother's who borrowed money (and micro credit facilities lend overwhelmingly to mothers), knew that, if they defaulted, this one opportunity help their children would evaporate: to get future credit you had to grab this chance to establish a good credit history, by paying back the microcredit you had been granted.

The result has been a ninety percent payback rate.

Microcredit -- A Miracle and a Godsend

Even if you live in the United States, microcredit might be for you.

If you have lost your job, been foreclosed, or fallen on hard times, there exist micro-credit institutions in America.

Category: Payday loans

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