In developing nations where the poverty rate is extremely high and economic conditions sometimes unstable, microcredit is the extension of small loans to entrepreneurs to stimulate business growth and provide opportunity for individuals who would have no other means of starting a business.
For example, a loan of even $200 to a woman who wants to start a hair salon in Uzbekistan can provide a lifetime of income an stability to the woman and her family. She then pays back the loan in small installments, and the money can be loaned out again to another entrepreneur somewhere else. Kiva.org is one such organization (a non-profit) that helps connect people willing to loan money with entrepreneurs who need loans.
Such programs have been so successful that more and more people in financial circles are subscribing to the practice, knwoing that eventually it develops more markets for their own mainstream financial services.
Muhammad Yunus and his Grameen Bank of Bangladesh pioneered the idea of microloans, earning him the Nobel Prize for Economics for 2006.
Micro-credit or micro-finance refers to the extension of very small loans by organizations to very small businesses. The recipients of such loans are generally individuals artisans, to enable them to own and directly sell the products they make, rather than making these products on contract for some other businessman or firm. Such loans are often extended by small cooperative banks.
The practice of micro finance was vastly popularised in the world by the work of Professor Muhammed Yunus of Bangladesh, and the Grameen Bank started by him. Grameen Bank, which literally means village bank was started by Professor Yunus to free poor artisans from the clutches of middlemen and moneylenders, who followed a system that ensured that the artisans will never be able to save enough money to buy the raw material required by them to make the goods they manufacture and in this way become independent seller of their goods. Professor Yunus and the organization started by him jointly received the Nobel Price in 2006.
Micro credit or Micro Finance is giving small loans to people who are not in a situation to borrow from regular banks. These loans are given to people for the requirements of their professions without any collateral. The money is lent through the formation of self- help groups who interact with the lender through non- profit organizations or a few representatives sent by the lenders.
The rates of default with loans given by micro credit organizations has been found to be very low as there is a lot of peer pressure within the groups of borrowers that makes each person stick to their schedule of repayment. Even if a single borrower defaults the whole group is affected. Micro finance is an alternative to pawn brokers who charge extremely high rates of interest and usually require collaterals. Organizations like SKS MicroFinance have made this a profitable venture and recently came up with a very successful IPO showing that micro finance makes social as well as economic sense.