Traditionally microcredit has been the extension of very small loans (microloans) to those on low incomes to encourage entrepreneurship. If someone hasn’t had steady employment or a verifiable credit history it can be difficult for them to meet the requirements necessary to access credit through banks and other traditional lending institutions. With few options remaining they may rely on local money lenders, but they do so at exorbitant interest rates, and virtually all of their financial gains are passed directly to the money lender and they are unable to reap the rewards of their own hard work.
Microcredit is generally considered to have originated in 1976 with the Grameen Bank in Bangladesh for which its founder Muhammad Yunus was awarded the Nobel Peace Prize in 2006. He launched an action-research project to examine the possibility of designing a credit delivery system to provide banking services targeted to the rural poor. It was so successful it spread rapidly to hundreds of villages and now serves more than 4 million borrowers. The initial success of Grameen Bank also stimulated the establishment of several other microcredit programs.
In the past few years, microcredit has gained recognition as an effective way to bring very poor families low-cost financial services. The United Nations declared 2005 the International Year of Microcredit, recognising it as an instrument for socioeconomic development.
