A financial system called microcredit has recently proven to be one of the developing world's most potent weapons against poverty. By gaining insight into this program, we can learn more about the steps being taken to combat worldwide issues and find a way to show them our support.
What is Microcredit?
The system of microcredit has recently become one of the strongest tools against poverty in the developing world. By providing financial loans outside the traditional lending scheme, utilizing existing skill sets, and creating support groups within communities, microcredit empowers poor individuals to change their situations. The system succeeds through its sustainability and discourages dependence. Through its practices, the world's poor receive the resources necessary for a better life.
How Does Microcredit Work?
Microcredit originally developed in the 1970s as an alternative to conventional banking. Much of the current interest in the practice, however, stems from the Microcredit Summit of 1997. The summit qualified microcredit by defining it: “programmers extend small loans to very poor people for self-employment project that generate income, allowing them to care for themselves and their families” (Microcredit Summit Campaign, 2006). This system defies traditional lending services by giving loans to those perceived as “un-bankable” because of their lack of credit and/or collateral. While originally seen as a risk, statistics have proven that the poor people have strong repayment records, and with consistent repayment the loans can be recycled for maximum effectiveness. For example, a woman is loaned $50 to buy a chicken so that she can sell eggs. With the profit of the eggs, she pays back her loan and gets another $50 for packing materials so that she can ship her eggs to the next town. With the increased profit, she can repay the second loan, expand her business and begin to break the cycle of poverty. Industry-wide repayment rates are currently higher than 95%, demonstrating the astounding effectiveness of the program.
Additional Benefits of Microcredit
Microcredit brings more than financial assistance to poor communities. Borrowers typically must belong to a Borrowers Group, which offers support, assistance and leadership opportunities within the region. Also, the lending organization often provides additional financial services such as education and savings facilities, so microentrepreneurs learn how to manage and invest their income. Microcredit institutions loan primarily to women, who constitute 70% of the world's poorest people and are generally the primary or sole caretakers of the family. By empowering women, the system pulls entire families out of poverty and gives children a better chance to escape the cycle through positive role models and education. Microcredit focuses not only on money, but on information and values with which to make informed choices.
Example of Microcredit's Success
The story of Marie-Claire, a single mother in Rwanda, perfectly demonstrates the potential success of the microcredit program. Marie-Claire procured a small loan as part of the Village Phone Pilot program in 2005, and bought a phone for her village. The business proved such a success that she was able to repay her loan within 5 months instead of the standard six, and now keeps all income from the phone. With her profits, she has been able to open a restaurant (which generates more income), send her four children to school, buy her own plot of land and build a house. Additionally, as one of Rwanda's growing population of HIV+ citizens, she has been able to buy medicine to extend her life and leads a local group on HIV awareness. The results generated from her small loan have obviously had an incredible effect on her life.
With stories like Marie-Claire's as inspiration, microcredit programs will hopefully continue to grow and prosper. As they do, they will positively impact the world's poor with new and innovative strategies and serve as a lifeline to a better existence.
