Microcredit

Microcredit is often defined as small loans, or microloans, for people around the world in
extreme poverty to help spur entrepreneurship. The difficulty of microcredit is extremely
important in the world’s economy. Poverty alleviation and economic development are the first
goals of microcredit programs, which is why they began in the developing countries of Asia
and Latin America. Economist Muhammad Yunus and his Grameen Bank in Bangladesh are
credited with pioneering this financial innovation (Smith, Thurman, 2007). After acquiring a
loan, impoverished people become involved in self-employment projects that help them start a
business, begin generating income, and, in many cases, leave poverty. Microcredit offers loans
to poor people without requesting any financial history from them. These loans help to
enhance the quality of life of individuals and communities through commitment. In recent years,
the idea of giving small loans to poor people has become the darling of the development
world, providing a way to propel even the poorest people into better lives.

For a variety of reasons, the poor require microcredit in particular. To start, the MFIs that
provide the loans do not demand real estate or other assets as security. This means that the
poor, who are primarily landless and lacking in assets that could be used as collateral, can
access credit services. As a result, microcredit offers a means for the poor to acquire the
capital they so desperately need, which they would otherwise be denied owing to their
poverty situation.

The impoverished frequently experience severe consumption fluctuations, which lead to

uncertainty and debt. By lowering consumption fluctuation and hence resulting in consumption
smoothing, microcredit programs protect the poor from this. According to research on
Bangladeshi households that benefited from microcredit initiatives, consumption decreased by
47% throughout the year (Morduch 1998). Microcredits give the poor a more stable way of
life by regulating consumption, which raises the level of poverty.

Microcredit initiatives prepare the disadvantaged for access to commercial sources of working finance.
They achieve this by providing the impoverished with access to small sums of capital. According to
Snow (1999), the person would not be able to get these small sums from commercial lenders who are
risk averse. The MFIs then provide training for business owners, giving them the skills they need to grow
their operations to the point where they are qualified to apply for lending facilities from commercial
banks.

Microcredit institutions are often thought of as a path out of poverty, but occasionally they
have the opposite effect, driving the client even further into it. When microcredit loans are
used for useless purposes, this happens. In some situations, microcredit schemes have a
negative impact on the clients who are poor. Poor traders in developing nations use the loans
they receive from FDIs to fund similar types of commercial ventures.

The idea that access to finance can enable people to engage in productive activities and
thereby exit from poverty underlies the success of microcredit in assisting people to do so.
Microcredit has been crucial in helping small businesses get off the ground. Even though micro-
credit institutions have had great success raising the standard of living for the poor, they still
have room for improvement. The majority of critics reject MFIs' emphasis on profit because, if
they do, they will become identical to other conventional financial institutions. While it is
appropriate for MFIs to avoid placing a strong emphasis on profitability, they nonetheless
need to have the resources to support themselves.
Many people claim that because microcredit gives the poor a path out of poverty, it is one of
the most significant and effective tools in the fight against poverty. According to this study,
microcredit is a key driver of development since it encourages the use of labour and capital
resources in underdeveloped nations. Most of these resources would go underutilized without
the microcredit.

It is clear that microcredit initiatives may boost earnings and aid families in escaping poverty.
Microcredit also has other effects, such as boosting the rate of school enrolment among
children from low-income families. In order to attain the ultimate aim of eradicating poverty
around the globe, governments and donors alike should strive toward improving MFIs.
Microcredit has a lot of promise for both community and individual development.

Reference: IvyPanda. (2020, January 12). Microcredit: A Tool for Poverty Alleviation.
Link: https://ivypanda.com/essays/microcredit-a-tool-for-poverty-alleviation/