Role of microcredit in poverty alleviation

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Micro-finance relates to small loans issued to small businesses mainly in developing countries.
The loans are usually issued by specialized financial institutions and non-governmental
organizations, they are awarded for the promotion of development.

Microcredit is a concept that was created by the Bangladesh based Grameen Bank, and the
impoverished locals in that country have been taking advantage of the loans via
self-employment projects.

Individuals and groups that previously had nowhere to turn where access to finance is
concerned, suddenly found themselves with the ability to generate an income to the extent of
building wealth and exit poverty.

The conventional banking industry soon took notice of the power and relevance of microloan
facilities, and view borrowers involved with the concept as a pre-bankable market. Hence,
microcredit experienced a boost in credibility as regards the mainstream finance industry, with
some bankers contemplating microcredit projects as a source of future growth.

Micro loans are a tool of development and are often cited as successful examples in the context
of the management concept of Base of the Pyramid.

The United Nations considers microfinance to be an important tool for achieving the millennium
goals of reducing poverty. Since 2006, the internet opened up the possibility of micro credit
being awarded directly to borrowers in developing countries.

Microcredit is founded on a set of principles, which are dissimilar from those related with other
forms of general financing or credit. Microcredit underlines the need to build
micro-entrepreneur's capacity, and the generation of employment opportunities among other
things.

The annual percentage rate of some micro-loans is well above the conventional loans, often
over 20% p. a, this is justified by the higher costs and the need for intensive counseling.

The funds for microcredit often emanate from savings deposits of the local population, and also
from international investors, while for some organizations, the funds come from donations.

The poverty reducing impact of microfinance is well documented, and the poor small businesses
which typically can not provide collateral security are well served by this financing option.
Without which they normally remain in the informal sector and depend on credit intermediaries
or loan sharks with generally higher interest rates.

The concept of microcredit has been implemented as a way of dealing with many non-poverty
related matters. Internet based peer-to-peer lending also sprouted with which smaller loans
often at a negligible interest rate changes hands, and a good example is the Kiva loans website.
This goes to demonstrate the power of the internet platform in alleviating poverty.