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Microcredit Definition How It Works Loan Terms

Microcredit Definition How It Works Loan Terms

Microcredit is a form of microfinance that provides small loans to individuals to help them start or grow a small business. It is also called "microlending" or "microloan." These borrowers are typically low-income individuals from less developed countries. It originated in Bangladesh and relies on a group borrowing model developed by Muhammad Yunus and his Grameen Bank.

The concept of microcredit allows skilled individuals in underdeveloped countries to enter the economy through small loans. These individuals may live in barter systems where no currency is exchanged. The Grameen Bank model, started in Bangladesh in 1976, allowed a group of women to borrow $27 and sustain their own small businesses.

Microloans range from as small as $10 to $100, rarely exceeding $2,000. Unlike traditional banking, microcredit arrangements do not always require collateral or a written agreement. Repayment is often guaranteed by the borrower’s community.

Micro-financiers charge interest on loans and establish repayment plans with regular intervals. Sometimes, recipients are required to set aside a portion of their income in a savings account. Microlenders often pool borrowers together to ensure repayment through peer pressure.

Despite being poor, microloan borrowers have high repayment rates. In 2016, Opportunity International reported repayment rates of approximately 98.9%.

Critics argue that microcredit can be misused. In some cases, funds have been used for consumption spending instead of business or employment activities. Additionally, borrowers may accumulate debt they cannot repay, leading to the sale of personal property and seeking new financing to cover previous microcredit.

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