Chapter 3: Microcredit:
INTRODUCTION
This Unit starts with defining Micro credit and elaborately deals with early beginning of micro credit and
modern micro credit system. To explain further, the Unit takes grameen bank model of micro credit as a
case study. It also deals with economic principles of micro credit and self-help movement.
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OBJECTIVES
After studying this Unit, you would be able to
Define micro credit
Trace the early beginnings of micro credit
Discuss modern micro credit system with grameen bank as an example
Explain the economic principles of micro credit system; and
Examine the micro credit and self-help group movement.
The word "microcredit" became a tool for development only after 1980. Now it has become a buzz-word
among the development practitioners. Today it is common to see people use the term "microcredit" to
mean agricultural credit, rural credit, co-operative credit and consumer credit. The Reserve Bank defines
Microcredit as a provision of thrift, credit and other financial services and products of very small amount
to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and
improve their living standards. Microcredit Institutions are those institutions which provide these
facilities.
Though the definition of microcredit varies from country to country and situation to situation, it is
important to keep some basic terms in mind. These include:
Sixe of the loans i.e. micro or very small in size
Target users – micro-entrepreneurs and low-income households
Utilization - the use of funds for income generation, and enterprise development, but also for
community use (health/education) etc. and
Terms and conditions - most terms and conditions for microcredit loans are flexible and easy to
understand, and suited to the local conditions of the community.
Keeping the above terms in mind, Microcredit can be defined as the extension of very small loans
(microloans) to those in poverty. These loans are designed to spur entrepreneurship in individuals who
lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the
Chapter 3: Microcredit:
most minimal qualifications to gain access to traditional credit. Microcredit is a part of microfinance,
which is the provision of a wider range of financial services to the very poor.
ECONOMIC PRINCIPLES OF MICROCREDIT
Key Principles of Microcredit
Microcredit is a financial service that provides small loans to poor and low-income people to help them
start or expand small businesses. It promotes self-employment, trust, and socio-economic
empowerment.
1. Trust-Based Lending
Microcredit emphasizes trust instead of physical collateral.
Borrowers are trusted to repay loans based on their character and community reputation.
It helps people start businesses and survive during difficult times.
2. Individual Responsibility
Early microcredit institutions like Grameen Bank promoted individual lending.
The idea, introduced by Muhammad Yunus, is that every person has entrepreneurial potential.
Focus is on self-reliance and personal accountability.
3. Group Lending (Solidarity Lending)
Loans are given to small groups instead of individuals.
Members guarantee each other’s loans.
Repayment of one member may depend on others.
Reduces monitoring costs and increases repayment through peer pressure.
4. Self-Help Groups (SHGs)
Small groups of people with similar social and economic backgrounds.
Members save regularly and create a common fund.
Loans are given from this pooled savings.
Peer pressure replaces traditional collateral.
Encourages financial discipline and cooperation.
Chapter 3: Microcredit:
5. Lending to Women
Many microcredit institutions focus mainly on women.
Women have shown higher repayment rates and better use of small loans.
Institutions like BancoSol, Women's World Banking, and Pro Mujer focus on women clients.
Lending to women promotes economic independence and empowerment.
6. Social and Economic Empowerment
Microcredit is not only about profit.
It aims to reduce poverty.
Encourages entrepreneurship.
Improves living standards.
Promotes financial inclusion.
Grameen Credit Bank
Grameen Credit is a microfinance approach developed by Muhammad Yunus through Grameen Bank. It
is based on the belief that poor people are not poor due to lack of skills, but because of unfair
institutions and policies that deny them opportunities.
Grameen Credit rejects charity and dependency. Instead, it promotes credit as a human right and
encourages self-employment and income generation.
Main Features
No collateral required – Loans are based on trust, not legal contracts.
Focus on the poor, especially women – Targets low-income families.
Group lending system – Borrowers form small groups to ensure repayment through mutual
support.
Income-generating loans – Loans are mainly for self-employment and housing, not
consumption.
Doorstep banking – Bank services go to the people.
Regular repayment system – Loans are repaid in weekly or bi-weekly installments.
Chapter 3: Microcredit:
Continuous lending – New loans are given after successful repayment.
Savings programs – Includes compulsory and voluntary savings.
Sustainability focus – Interest rates are kept near market rates to ensure long-term operation.
Social development emphasis – Promotes education, leadership, technology use, and
environmental awareness.
Conclusion
Grameen Credit is a trust-based, group-oriented, and empowerment-driven microfinance model that
aims to reduce poverty by enabling the poor to use their skills and creativity for sustainable income
generation.