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Microcredit is the branch of microfinance which involves
the extension of small loans to poor, unemployed farmers and rural dwellers as well as others living in poverty in urban centers
who have no access to credit due to a lack of collateral, steady employment and/or a solid credit history.
Microcredit allows for the rural poor to escape poverty by
investing in farms and small businesses. Furthemore, it helps smooth consumption and reduces individual's
vulnerablitity to weather and economic shocks. With little access to formal credit, poor entrepreneurs often follow suboptimal
risk management and consumption strategies and rely on costly informal credit sources. Governments and international agencies recognized
this unfortunate reality and consequently established banks along with lending programmes specifically targeted
to the rural poor to ameliorate their situations.
Originated in developing countries, microcredit has been widely successful
in enabling extremely impoverished people (especially women) to employ themselves through projects that allow them to generate
an income and begin to accumulate wealth to exit poverty.
Microcredit is very innovative and departs from traditional
rural banking in three main ways:
- it aims at a more marginalized group of borrowers than credit
institutions typically do;
- it generally includes non-credit services; and
- it employs a group lending approach.
Due to its widespread success, microcredit is gaining more and more credibility
in the finance industry and many large, established financial institutions are considering adopting microcredit projects as
a source of future growth.
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