Microcredit is defined as lending a small loan portion to individuals in non-developed countries that have unstable employment, no credit and may have little or no collateral. The loan is mainly used for individuals to expand or start a small business, help individuals out of poverty, create more employment opportunities and to empower women to be more independent. Microcredit is a particular area in a much broader category called microfinance. Microfinance is many different financial services that are offered to the poor, with emphasis placed on saving. Most microcredit lenders in the past consisted of non-profit organization, but now many lenders are independently owned banks. Difference between Microcredit and Traditional
Microcredit is different from traditional lending because it is targeted towards those that are poor and under-privileged. Microcredit institutions do not ask for collateral, because this is the one thing that stands in the way between poor borrowers and institutions. Microcredit institutions are particularly in favour of lending to women because women culturally lack power and decision making capabilities without money. Most financial institutions will reach out to the people as opposed to the people coming to them; it is set up in a way that makes it less intimidating and friendlier. The repayment process is also fairly set up in a way that loan repayments are in small portions and can be repaid over an extended period. Though interest is charged on these loans, borrowers have enough time to repay the loan.
Three countries that have a significant amount of microcredit borrowers due to poverty are Ghana, Pakistan and Bangladesh. In Ghana, specifically Nkoranza, there is a high poverty rate due to low productivity and poor markets for agriculture. This is more evident for food crop farmers which are the main borrowers of micro credit in Nkoranza. There are three sectors of microfinance in Ghana which are financial, non-financial and business development or advisory services. However, financial services are the most common form of microfinance throughout Ghana. In Nkoranza there are various institutions that provide microcredit such as traditional banks, informal leaders and rural banks. Also, the government has contributed significantly through setting up various programs to help borrowers such as the Livelihood Employment against Poverty (LEAP), Programme of Action to Mitigate the Social Cost of Adjustment (PAMSCAD) and Microfinance and Small Loan Scheme (MASLOC). Microcredit has significantly contributed to women empowerment in Ghana .Most microcredit institutions target women as borrowers in order to create more independence in women and also a higher status in the family. In a study that was conducted in Nkoranza, 54% of borrowers said that microcredit loans have had a positive effect on income; however, 77% said that they were not able to repay their loans. Microcredit loans have had the most affect in the development of crop and export crops in Nkoranza. Overall, 52% said that microcredit loans have had a positive impact on their lives, especially through the education that the borrowers received about borrowing. Many said that this information would be beneficial in the future to increase profitability. Bangladesh is one of the poorest countries that seek institutions to provide micro credit loans to borrowers in order to better their lives. BRAC is one of the largest institutions in Bangladesh that provides microcredit loans. BRAC’s main target is those that have less than 0.5 acres of land and/or whose occupation is manual labor, however BRAC has many borrowers that are not in their target. Microcredit has been shown to help in the diversification of income sources, provide alternatives to crisis mechanisms and most importantly build the assets and status of women in the family and society. In a study that was conducted in Bangladesh, for...
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