Microcredit 101

The microfinance movement addresses a basic yet devastating glitch in the formal banking system: The poor cannot access capital through traditional banks because they do not have the collateral to secure their loans, and banks do not want to take on the risks and costs of making small, uncollaterized loans that typify microcredit. The poor can use the microloans to start or grow a small business and earn income, and thus rise out of poverty. The central objective of the Grameen Bank has been to “reverse the age-old vicious circle of “low income, low savings, and low investment,” into virtuous circle of “low income, injection of credit, investment, more income, more savings, more investment, more income.”9 “(Microcredit) is based on the premise that the poor have skills which remain unutilized or underutilized. It is definitely not the lack of skills which make poor people poor____charity is not the answer to poverty. It only helps poverty to continue. Unleashing of energy and creativity in each human being is the answer to poverty.”10

Microfinanciers have created innovative contractual practices and organizational forms that reduce these risks and costs, such as lending to groups of women, called credit groups, rather than just to one person. Some microcredit organizations provide their clients with more than loans, offering education, training, health care, and other social services. Typically, these organizations are not-for-profit or are owned by customers or investors who are more concerned about the economic and social development of the poor than they are with profits. Among the largest of the social purpose MFIs are Opportunity International, FINCA, ACCION, Oikocredit, and Grameen Bank. In contrast, the commercial banks that make microloans typically provide only financial services. Indonesia’s Bank Rakyat, Ecuador’s Bank Pichincha, and Brazil’s Unibanco all directly target poor customers. Some large commercial banks, such as India’s ICICI, do not lend directly to individual microcredit clients, but instead work through small microfinance organizations.

Proponents of microcredit often argue that lending to women not only empowers them, but also has a larger impact on family welfare, and therefore many nonprofit microfinance organizations target women as their primary customers. At Grameen Bank, for example, 97 percent of clients are women, because “women have longer vision [and] want to change their lives much more intensively,” says Yunus.11 He notes that women are more likely to spend the money they earn on their children, for school, and for better food, whereas men are more likely to spend it on alcohol and cigarettes: “When men make money they tend to spend it on themselves, but when women make money they bring benefits to the whole family.”12

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