Understanding Microcredit: How Does It Help The Borrowers? 

Microcredit is a kind of microfinance. Moreover, it serves as a micro-debt to help borrowers get started on a small entrepreneurial journey.  

The banks and the financial institutions in the Less Developed Countries. The borrowers generally belong to the lower-income groups.   

The borrowers often lack collateral or credit history. Thus, the borrowers generally gather repay the loans to the lender as a team or a group.  

People also call microcredit by other terms, such as microloans or microcredits.  

What Is Microcredit And What Are Its Functionalities? 

The makers of Microcredit developed the model with skilled people in developing and underdeveloped countries in mind.  

Moreover, the microcredit system aims to benefit people living in developing and underdeveloped countries. 

These people generally live outside the conventional banking system. Thus, they can not borrow money from the banks.  

This allows them to enter the market with the help of a small loan. Moreover, such microcredit is often conducted using the barter system to avoid the use of actual currency. 

1. What Is The History Of Microcredit? 

The current Chief Advisor to the Bangladesh Government, Muhammad Yunus, is given credit for coming up with the microcredit system. 

Moreover, he developed the system in Bangladesh in 1976. A group of women borrowed $27 to fund the group’s business. 

The women successfully repaid the loan and sustained the business. However, the group of women lacked the necessary credit to purchase the material.  

They were aiming to make bamboo stools (moras) and then sell them in the market. Hence, it was very risky for only one individual to take the money and then repay it. 

However, borrowing in groups allowed them to invest in the raw materials properly. Furthermore, this distributed the risk factor among all the borrowing individuals. 

Thus, the women eventually repaid the microcredit loan and were able to sustain the business. 

Microcredit remains structurally and fundamentally different from the conventional banking system.  

Thus, microcredit does not really require things like collateral or other terms and conditions. The system often does not require a written agreement. 

In most cases, the lender expats a member of the borrower’s community to repay the debt.  

When borrowers successfully repay their debt, they become eligible to take out larger loans.  

2. How Does Microcredit Work? 

Micro-financers also charge interest rates similar to those of conventional lenders. Some lenders require borrowers to set aside part of their income as insurance against default. 

Moreover, some lenders require borrowers to submit a portion of their income as security against default. 

Hence, borrowers save some extra money when they successfully repay the full amount.  

Most of the borrowers do not have collateral. Thus, microlenders provide loans to many people. 

This, moreover, acts as a buffer.  

When the loan recipients take the loan together, they tend to create peer pressure among the other members of the group.  

Thus, all members together force the defaulter. Further, when one person is unable to pay the amount, the rest often fill in the gap on that person’s behalf. 

When an individual struggles to repay the loan, they should seek help from the group officer and the other members.  

Hence, the recipients create a valued credit history while simply repaying the loan that was given to them.  

Generally, the repayment rates on the microloans tend to be a lot higher than the conventional types of lending processes.  

The reports from the Microfinancing Institute Opportunity Internal suggested that the repayment rates were around 98% in 2016. 

3. How Micro Credits Help Small Businesses? 

The Cambridge Dictionary simply defines microfinancing as “an activity of providing financial services, such as small loans, to poor people or businesses that cannot use traditional banking services, usually in developing countries.” 

Thus, microfinance is a lot more than just a financial lending service. Moreover, microfinanciers choose and distribute loans to the beneficiaries whom they have selected. 

Further, they implement all the regulations of microfinancing while lending group of people. Microfinancing has typically gained a lot of popularity in Asia and Africa. 

The concept of microfinancing has gained immense popularity among women of lower in lower-income 

Generally, women from marginalized of rural places, remote from urban cities, lack a bank account. They mostly do not have the required documents to open a bank account.  

This financial instability often makes it impossible for them to get a loan. Thus, microcredit breaks all the barriers and provides people with the tools to get things done.  

How Do The Financers Select The Beneficiaries For Microcredit? 

Thus, the lenders often lend loans with and without interest to the selected beneficiaries only. The co-ordinators dedicatedly select candidates with good records from the past. 

The lenders generally tend to choose the right set of entrepreneurs who have a clear vision about what they want to do. 

The businesses generally conduct interviews with potential borrowers. Hence, this acts as a crucial part of the selection process. 

The borrower should meet certain criteria, such as a permanent address, a phone number, and clean credit records from the past. 

What Are The Challenges And Criticisms Of Microcredit? 

Microfinancing has always acted as a great tool to elevate poverty. However, microfinancing is not really independent of criticism.  

Microfinancing can often be misused at times. Several surveys found cases were in parts of Africa and Asia where the borrowers were borrowing money for their consumption of using it for growth and business. 

 The borrowers become eligible for larger amounts once they repay their debt. However, sometimes the borrowers take a massive amount and are unable to repay  

Hence, some of the borrowers had to sell their personal properties to repay the loan. As a result, it has acted like more of a curse than any boon. 

Frequently Asked Questions 

Here are some of the most commonly asked questions about Microcredit  

1. What Do You Mean By Microcredit? 

Microcredit is a system through which lenders lend money to a group of individuals trying to establish a business. Generally, microcredit has gained a lot of popularity in less developed countries. 

2. What Is An Example Of A Microcredit? 

There are multiple examples of microcredit. Some of them are the Gramin Bank from Bangladesh and the Bandhan Bank from India.  

The Gramin Bank of Muhammad Yunus started the concept of the Gramin Bank.  

3. Who Typically Uses Microcredit? 

Microcredit has gained a lot of popularity among women from rural parts of Asia and Africa who are willing to start their own business. 

Women from rural parts generally lack the required documentation and money that make them eligible for conventional loans. Thus, they tend to go for microfinancing.