Academic journal article Academy of Banking Studies Journal

Micro Credit: A Different Approach to Traditional Banking: Empowering the Poor

Academic journal article Academy of Banking Studies Journal

Micro Credit: A Different Approach to Traditional Banking: Empowering the Poor

Article excerpt


Micro Credit was unheard of until Dr. Muhammad Yunus, an American educated economics professor, began his Micro Credit Scheme as a poverty busting tool. Dr. Yunus had a deep conviction from the beginning that it was a tool that could serve to alleviate poverty. Micro Credit is the concept of extending loans to those who live on income in some cases as low as a $1 per day or less. The loan is usually offered without any of the collateral usually required by traditional banks. Loan sizes vary from country to country, but typically range from $25 to $250.

Grameen Bank, the Micro Credit established by Dr. Yunus, extends this credit without collateral under the premise that the borrower will use the money to develop or expand his/her small business. Inspired by Grameen Bank's success, many Micro Credit institutions have evolved extending credit of up to $1000 or more. Dr. Yunus further believes that by targeting women for such loans, their families and the villages in which they live, can escape the extreme depths that poverty has saddled them with. Unique in Dr. Yunus' assumption is the fact that Micro Credit loans, which improve the economic status of the borrower, also results oftentimes in better education and healthcare for the whole family. Dr. Yunus has found that 99 percent of borrowers repay their loans. Ninety-seven percent of the borrowers from Grameen Bank are female.

It is often difficult to establish Micro Credit in many countries because of traditional banking regulation. Governments in developing countries must show a firm commitment in their support of Micro Credit for it to be an effective tool in alleviating poverty. Micro Finance is a means to help the underprivileged in our society.


Micro Credit programs have their beginning roots in the late 1980's. The table below represents a sampling of the countries in which this concept has been utilized.

It is difficult to be critical in any way of a concept whose goals are so lofty. Considering the fact that one-fifth of humanity or 1.3 billion people live in "absolute poverty" (Rubinstein, 1998), any dent in such a large number is worthy. If one-fifth of the world lives in absolute poverty, the next fifth cannot be that much better off. Yunus (1994) estimated that borrowers from these microcredit loans could cross the poverty line in ten to fifteen cycles of such loans. The awarding of the Nobel Peace Prize to Muhammad Yunus in 2006 also serves notice as to the value placed on the concept by world leaders in this field. In addition to its main goal of alleviating poverty, there are many more promises of value: empowerment of women; increased health care benefits; and a multitude of spillover effects both economic and social.

Since the early 1990's there have been several research efforts to prove the benefits or identify the limitations of microcredit loans. Impact assessments of this program are difficult and costly. Their conclusions, depending on a host of definitions and interpretations, are subject to varying opinions. After reviewing numerous published articles, the authors of this paper found that while the reported gains may sometimes be marginal, and there is the potential for downside, virtually no one in the review was found suggesting microcredit loans be discontinued. The story of the man, who was questioned why by another gentleman, for picking up and throwing back in the ocean the sea urchin when there were thousands on shore comes to mind. His reply was "at least I saved that one" aptly applies for microcredit loans and its benefits. Although not totally unanimous on whether or not microcredits increase incomes and therefore contribute to the fight against poverty, most agree that they help reduce the vulnerability of the borrowers. In other words, microcredit programs do assure that the situation of their poor members does not deteriorate any further (Develtere & Huybrechts, 2005). …

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