How Microcredit Loans help Fight Poverty

The concept of microcredit was developed during the 1970’s by Dr. Muhamaad Yunus, then a Professor of economics in Bangladesh. The simple idea which microcredit is founded on is to lend small amounts of money to the impoverished that the banks would never extend credit to, as a way of promoting self sufficiency. Yunus believes that “charity only perpetuates poverty by taking the initiative away from the poor” and his aim is to eradicate poverty through microfinance.

Grameen Bank which Yunus launched in 1976, is the most influential provider of microcredit, operating in many of the poorest countries. The bank has been used as a model for other providers of microcredit such as Fair Finance in the U.K., Fonkoze in Haiti, BRAC in Afghanistan, and many other providers of microcredit.

Most of the recipients of microcredit are women who proved to be more reliable than men at ensuring the benefits they obtained by using micro loans were ploughed back into the family. As women use the loans to increase their incomes, they become more independent, and proud of their achievements.

Their priorities are their children and then their home, and incomes were used to put roofs on houses, to provide clean drinking water and to ensure adequate sanitation. They invest in small improvements over time, such as growing their own vegetables or keeping their own livestock, both of which provide food and better nutrition than they were used to.

The self sufficiency which microcredit has brought to women in Bangladesh has now influenced social trends. They are able to provide education for their children. Women are refusing to participate in the dowry system and are able to curb the reality of child marriages. One notable change is that as women have more opportunities in the face of poverty they are having smaller families which they are better able to provide for. Instead of governments using social measures to attempt to curb population growth, women are making their own decisions.

Microcredit loans do not require collateral and are issued on a basis of trust. Interest is charged but profits from the Grameen Bank are used to operate it and also go towards the Grameen Foundation which operates across many areas. In Bangladesh the Foundation provides free access to education for slum children in the midst of their long working days, thus offering better opportunities in the future.

Critics of microcredit say it keeps people in poverty due to interest being charged on loans. However figures from Grameen show that each year 5% of recipients move out of official poverty through their own efforts. The loans provide the initial help and kept the poorest from depending on loan sharks and their exorbitant interest rates.

Most tellingly the loans are repaid with only around a 2% default rate, and recipients often borrow again to make further improvements, and larger loans can be taken collectively. Yunus states that most borrowers go on to have savings accounts, something never possible when their wages were pennies.

The average loans made from Grameen Bank range from around $2 to $200. These small amounts extended through microcredit loans empower individuals to rise from poverty, which was the original intent of microcredit finance.

Sources: Grameen. Info

               World Bank

               Yunus org.