Microcredit: A Lifeline for the Poor

Essay by DiptaragUniversity, Master'sC-, February 2007

download word file, 9 pages 4.6

"A small bubble of hope has become a major tool for poverty alleviation."


Financial services have been a pipedream for one-fourth of the population in the world. The central theme of the Millennium Development Goals (MDGs) is reduction of poverty in all forms through total inclusion. Mohammad Yunus, the Nobel Prize winner has unleashed a revolution in lending to the poor - microcredit for macro benefit. As per the Reserve Bank of India, "Micro Credit is defined as 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 living standards."

Many bankers, economists, and governmental officials assume that the informal commercial credit market works efficiently, satisfies demand, and helps the poor. Widespread use of informal finance suggests that it is well suited to most rural conditions (Von Pischke, Adams, and Donald 1983) and provide valuable service at a reasonable cost to borrowers (Gonzalez-Vega 1993).

The role and strength of informal finance agents in small-scale rural economics and their importance to low-income should not be underestimated. The informal sector allows low income access to services at a relatively low cost. It can do so because the informal sector is the natural environment for rural people (Bouman 1989).

A Brief History:

Microfinance emerged in the 1970s, as social innovators began to offer financial services to the working poor, who were previously considered "un-bankable" because of lack of collateral and low creditworthiness. Once given the opportunity, not only did clients of the MFIs expanded their businesses and increased their incomes, but their high repayment rates demonstrated that the poor are capable of transforming their own lives given the chance.

Yunus launched the idea of the Grameen Bank...