Micro-credit And Its Effect On Developing Economies

Jill Washington

4 May 2017

Micro-credit or micro-finance refers to nothing but small or micro loans lent to the poorer section of the society. The amount can either be given to individuals or a group of people to help them fund any sort of a business. Micro-credit is a way of providing very poor people with the required amount of capital to get self-employed. It is expected to alleviate poverty. Another of its principle is to lend to women because conventional loans don’t always reach them. Impoverished and illiterate women are often unable to do the required paperwork for the traditional loans which is why microcredit is considered ideal for them.

The Beginnings of Micro-Finance

In developed nations such as the US and UK, even the lower-income individuals have capability to borrow money at reasonable rates, and it can be considered good credit, as long as they don’t default or otherwise languish in debt.  However in poorer nations with essentially destitute populations, this is not the case.  There was no finance system to speak of for the very poor.

The present concept of Microcredit is said to have first developed with Grameen Bank, a modern micro-finance institution in Bangladesh in the year 1983. Muhammad Yunus, the founder of Grameen Bank started this project in a town, Jobra lending his own money to the locals there. He later won the Nobel Peace Prize for his work in this field in 2006. The year 2005 was declared the International Year of Microcredit by the United Nations.

According to available data, 38 billion US Dollars are held by around 74 million people as micro-loans as of 2009. And Grameen Bank reports that the success rates of repayment lie between 95 to 98 percent.

Impact of Micro-Finance Systems

The arguments put forward with regards the impact of the micro-credit system on developing economies are rather controversial. Proponents of the idea state that this system does reduce poverty by increasing incomes and employment. And in the process results in better health and education conditions of the entire community involved. They say it also leads to female empowerment, one of its chief goals. On the other hand, the opponents argue that the micro-finance system has led the poor people into a vicious debt cycle. The money lent is often used up in buying personal durable goods instead of proper business investment.

Microfinance in South Sudan
In South Sudan, micro-financing has helped spur businesses such as this one.

It’s well known that micro-finance did indeed generate employment and new business. However, it did not necessarily increase the wages of the people after paying the interests, as claimed by the proponents. Neither did it have such negative effects as stated by the opponents. The micro-loan system has often been directed towards women for their upliftment. But, based on two rigorous research work carried out in India and Manila, the micro-credit system has been found to have no credible effect on women empowerment. While this system has evidently led to more hiring in the US, it has also been blamed for suicides of people driven into debt in Andhra Pradesh (India). However, one major problem is that the micro-finance system is rarely studied objectively. Lack of adequate data or rigorous research or use of improper methodologies often results in data which is not truly representative of the present situation.