What’s the difference between microfinance and microcredit?Microfinance is defined as the practice of providing financial services – such as loans as low as $100, savings and insurance – to very poor families, to help them grow tiny businesses or engage in other productive economic activities. This process enables the working poor to become more self-sufficient and in turn, improve the lives of family members, communities and whole societies. Microfinance used to be known only as “microcredit,” or just the part of financial services that refers to loans. Microcredit came to prominence in the 1980s, though early experiments date back 30 years ago in Brazil, Bangladesh and a few other countries. This innovation empowered the poor in a new way by providing them with access to financial services that were formal and secure. Microcredit also solved the problems of earlier kinds of development lending – by insisting on repayment, by charging interest rates that could cover the costs of delivering credit, and by focusing on clients whose alternative source of credit was informal and insecure. Microcredit is loaned to a microentrepreneur by a bank or other institution and can be offered, often without collateral, to a group or an individual. - Group lending, also known as solidarity group lending or village banking, is a mechanism that allows a number of individuals to gain access to microcredit by providing collateral or guaranteeing a loan through a group repayment pledge. The incentive to repay is based upon peer pressure; if one person in the group defaults, the other group members make up the payment amount.
- Individual lending focuses on providing microcredit to one client and does not require other people to provide collateral or guarantee a loan.
One type of microcredit is a working capital loan which is most often used by a client to purchase additional inventory for their business, such as bags of grain for a grain seller or soft drinks for a beverage vendor. Over time, the microfinance industry recognized that the poor who lack access to traditional formal financial services required a variety of financial products to meet their needs, not just microcredit. So microcredit evolved into microfinance. Microfinance includes a broader range of services, such as loans, savings, insurance and transfer services (remittances) targeted at low-income clients. A variety of institutions can provide these services, including NGOs, credit unions, cooperatives, private commercial banks, non-bank financial institutions (some that have transformed from NGOs into regulated institutions) and parts of state-owned banks. Microfinance continues to evolve, and the goal of industry leaders is to develop a fully inclusive financial services industry – one that supports full participation of the low-income levels of the population, allowing them to access a complete range of products and services to grow their businesses and improve their lives. Return to main About Us page.
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