Basics of Microcredit

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Microcredit provides business loans to individuals with very small businesses, called microenterprises. Many people are not reaching their full income potential merely because they do not have access to credit. Microcredit seeks to provide access to financial capital to people who otherwise would not have the opportunity.

Microcredit Basics

Microcredit loans are intended for those who cannot qualify for loans from traditional financial institutions. The loan terms are designed to help those who only need a small amount of capital to facilitate their microenterprise. 

Often, microcredit is organized around “solidarity groups” or “village banks.” These groups are comprised of individuals in a community who want microcredit loans. The purpose of such groups is to create a feeling of community, provide a network for support and discussion, and back up one another’s loans. Since microcredit loans do not require traditional collateral, the members of the group act as insurance for each other’s loans—if one person defaults on a loan, the group members pay it back. Generally, before anyone in the solidarity group or village bank can get an additional loan, all members of the group must have their initial loan paid off. 

Some organizations that offer microcredit also offer other financial services, such as savings plans, insurance, and business training classes. Like microcredit loans, these services are designed to help microenterprise owners achieve growth and success in their business. 

History and Impact 

The founding of microcredit is generally attributed to Muhammad Yunus, an economics professor from Bangladesh. In 1976, Yunus visited a local village seeking fundamental solutions to poverty. He met a woman named Sufyia who made and sold chairs to support her family. She relied on high-interest-rate loans from village moneylenders to buy the materials. Because of the severe terms of her loans, she had no way to improve her situation. Recognizing that Sufyia’s situation was not unique, Yunus lent 856 taka—about 27 U.S. dollars—to 42 microenterprise owners. Not only did the loan recipients pay back their loans promptly, but they were able to earn more income and grow their businesses. Of this first experience, Yunus remarked, “If I could make so many people so happy with such a tiny amount of money, why not do more of it?” 

Do more of it he did, thus beginning the international revolution of microcredit. In 1983, Yunus founded Grameen Bank in order to offer microcredit on a wider scale. Today, Grameen Bank serves over 2 million borrowers in more than 80,000 villages. In 2006, the impressive global impact of microcredit earned Yunus and Grameen Bank the Nobel Peace Prize. 

Of Yunus’ microcredit work, Elder M. Russell Ballard said, “It impressed me that Muhammad Yunus must have been prompted by the Spirit when he organized a very unusual bank in Bangladesh, which some have said was the beginning of microfinance. . . . Surely the Spirit of the Lord guided this noble effort” ("Becoming Self-Reliant—Spiritually and Physically," Ensign , Mar 2009, 53).

Impact 

Since the founding of microcredit, thousands of microcredit organizations have sprung up around the globe. In 2007, over 100 million of the poorest families received access to microcredit. As it spreads across the world, microcredit looks to be a powerful force in helping individuals “work their way out of poverty with dignity.”

President Gordon B. Hinckley spoke of the promise of microcredit. He said that such loans “can spell an actual change in [the loan recipients’] future. When given such credit these people become entrepreneurs, taking pride in what they are doing and lifting themselves out of the bondage that has shackled their forebears for generations. From a bread shop in Ghana to a woodworking business in Honduras, we are making it possible for people to learn skills they never dreamed of acquiring and to raise their standard of living to a level of which they previously had little hope” (“President Hinckley Speaks to Press, Legislators, Diplomats,” Ensign , June 2000, 72).

Accessing Microcredit

Microcredit is accessible in many countries of the world. For individuals seeking to earn income through a microenterprise, a microcredit loan or other microfinance services may provide opportunities for growth and success. If you are interested in receiving a microcredit loan, seek reputable organizations in your community that offer microcredit services. Before engaging in financial interactions with any lender, be sure to evaluate the institution by comparing its services and rates to other institutions and talking to people who have dealt with the organization before.  

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