microcredit

microcredit, a means of extending credit, usually in the form of small loans with no collateral, to nontraditional borrowers such as the poor in rural or undeveloped areas. This approach was institutionalized in 1976 by Muhammad Yunus, an American-educated Bangladeshi economist who had observed that a significant percentage of the world’s population has been barred from acquiring the capital necessary to rise out of poverty. Yunus set out to solve this problem through the creation of the Grameen Bank in Bangladesh. The Grameen approach is unique because the small loans are guaranteed by members of the borrower’s community; pressure within the group encourages borrowers to pay back the loans in a timely manner. Grameen’s clients are among the poorest of the poor, many of whom had never possessed any money and relied on a barter economy to meet their daily needs. Using microloans, borrowers are able to purchase livestock or start their own businesses. By 1996 Grameen had extended credit to more than three million borrowers and was the largest bank in Bangladesh, with more than 1,000 branches.

The success of microloans in Bangladesh led to similar programs in other less-developed nations, including Bolivia and Indonesia. Some are sponsored by foundations, religious organizations, or nongovernmental organizations such as Opportunity International and the Foundation for International Community Assistance. In 2008 the Mexican bank Compartamos was criticized for parlaying its microlending program into a profit-making operation, charging high interest rates widely regarded as usurious. An alternative approach to Grameen-style lending is stepped lending, in which a borrower begins with a very small loan, repays it, and qualifies for successive loans at higher values.