Microcredit instituitions and their impact – I

(The following is a 3 part series summarized paper done as part of the Green MBA program at Anaheim University by Ksheera, Hiroko, Dan, Renata and me on the Microcredit instituitions and their impact on the economy and people)

MICROCREDIT programs began in the 1970’s. These were used as a vehicle to promote economic growth, support human development and reduce poverty in developing countries.

The Grameen Bank in Bangladesh first began giving small loans to the poor who were not eligible for credit from other commercial banks. Borrowers were responsible for repayment of these loans over a time period of six months to a year.

The most effective microcredit programs follow this model and are complimented by health and education classes that assist loan recipients in their small businesses, ideally, slowly raising themselves out of poverty and revitalizing economy by providing capital and training. While microcredit programs were initially introduced in developing countries, they have also been adopted in industrialized countries as a tool to fight against social exclusion.

Microcredit is a financial innovation that has been adopted by the traditional banking industry in spite of its shaky beginnings. The UN Microcredit Summit back in 1997 gave the definition of microcredit as a typology of “programs extending small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families”.

In other words, microcredit allows very poor families, who are too poor to qualify for traditional bank loans, with very small loans to help them engage in productive business activities. Typical microcredit customers are low or no income, self-employed home-based entrepreneurs with no access to formal financial institutions. In rural areas, they are usually farmers and street vendors, while in urban areas, they are more diverse such as shopkeepers, service providers, artisans, etc.

This 3 part report analyzes two different microcredit institutions: Kiva and ACCION, and reveals microcredits’ strategies to grow, develop, strengthen and stabilize the financial sector and economy.

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