The Impact of Microcredit: a Concrete Help or a Mere Utopia? Analysis of this Poverty-Alleviating Model through its Different Stages of Development.

 Poverty is multi-dimensional, and by providing access to financial services, 
microcredit plays an important role in the fight against the many aspects of poverty. 
Moreover, women have become the centre focus of many microcredit institutions and 
agencies worldwide. The reasoning behind this is the observation that loans to women 
tend to more often benefit the whole family than do loans to men. It has also been 
observed that giving women the control and the responsibility of small loans raises their 
socio-economic status, which is seen as a positive change to many of the current 
relationships of gender and class. However, there is an ongoing debate regarding 
whether microcredit loans have the power to truly change established political and 
economic relationships. Improving the ability of microcredit and of microfinance to 
reach the poorest is one of the core themes of many institutions and agencies. 
 
Through this course, we can also better understand, more in general, what people 
can actually do in order  to improve the world we live in; a world dominated by 
paradoxes and pervaded by different realities: the reality of the rich, of those who fight 
to find and keep a job and of those to which life seems to have already given 
everything; the reality of actors, of politicians, of kings and queens, but also of ordinary 
people; the reality of those who live in small villages, in big cities, on secluded islands.                               
But there is another reality that we often tend to ignore: the reality of poor people, of 
immigrants, of the inhabitants of the Third World, of those who find it difficult even to 
survive.  
Many opportunities can be offered to these people, in order to allow them to achieve a 
better standard of living. Just one of this opportunities is MICROCREDIT.                                                   
 
In this work, I will analyse the different aspects of this topic and investigate its 
development through time to see whether it has been able and will be able to change 
things, and to try to give an answer to the question: is microcredit a mere utopia or it 
can be considered as a concrete help? 
 
It is certain that microcredit has been changing people's lives and revitalizing 
communities since the beginning of trade. From the Microcredit Summit it emerges that 
microcredit initiatives are programmes that extend small loans to very poor people for 
self-employment projects that generate income, allowing them to care for themselves 
and their families. 
 
Microcredit and also microfinance have changed the lives of people in the 
world's poorest and also richest countries. Access to even modest financial services can 
bring people enormous power. With access to a range of financial tools, families can 
invest according to their own priorities (school fees, health care, business, nutrition or 
housing). 
 
 
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In 2005 the Census Bureau released its annual report on poverty, claiming that it 
has risen by more than 1.1 million people from 2003 to 2005. There are now more than 
1.2 billion poor people in the world. (According to World Bank data). 
The number of people without health insurance also rose, from 45 million in 2003 to 
more than 50 million in 2005.  
Moreover, studies have shown that of the 4 billion people who live on less than $1400 a 
year, only a fraction have access to basic financial services. 
 
Nevertheless, recent research has revealed the extent to which individuals 
around the poverty line are vulnerable to shocks such as illness of a wage earner, 
weather and theft. These make huge demands on the limited financial resources of the 
family unit, and the absence of effective financial services can drive a family so much 
deeper into poverty that it can take years to recover. 
 
It is estimated that the number of people who suffer serious and permanent 
malnutrition are around 800 million. These are men, women and children who, due to 
lack of food, have suffered irreversible damage to their health and are condemned to die 
in a brief period of time or to vegetate in serious stages of disability (blindness, 
insufficient development of cerebral abilities, etc.) 
This is a manifestation of the so-called “vicious poverty circle”: low per capita 
production, low per capita consumption, low per capita investment, since everything 
that is produced is necessarily consumed, and even then is not enough.  Consequently, 
little or zero growth of the per capita product, and so on; microcredit is designed to 
break this chain. 
 
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After briefly defining the concept of microcredit, I will explain in Chapter 1 how 
it is provided and used in reality, the typologies of microcredit, the differences between 
microcredit and microfinance and how the concept has evolved through time; following 
this, I will describe the figure of Muhammad Yunus (the founder of microcredit and the 
winner of this year's Nobel Peace Prize) and his Grameen bank, to conclude with the 
International Year of Microcredit.  
In Chapter 2 I will focus on the methodologies of microcredit, in particular group 
lending and individual lending and I will explain in Chapter 3 what the informal and the 
formal economies are (I will state the kinds of guarantees required, the role of 
governments and of financial regulators).  
In Chapter 4 I will discuss an Italian experience in the world of microcredit and I will 
conclude in Chapter 5 with the strengths, the weaknesses, the achievements and the 
criticism of microcredit, to end up with my personal reflections.   
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CHAPTER 1: An Overview of Microcredit    
 
 
1.1 – The Concept of Microcredit 
 
 
Microcredit is the extension of very small loans to unemployed, poor 
entrepreneurs and others living in poverty who are not bankable. These 
individuals lack collateral, steady employment and a verifiable credit 
history and therefore cannot meet even the most minimum qualifications 
to gain access to traditional credit. 
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In the last few years, “microcredit” has become a well-known term, first in the 
sector of international cooperation and development and later in developed countries, as 
a support of the emergence and development of a new microentrepreneurship. 
 
It is a particular form of credit, characterized by small amounts, without 
collateral. These characteristics have enabled this financial innovation to become 
disseminated across the poor undeveloped countries (where it has successfully enabled 
extremely impoverished people, mostly women, to engage in self-employment projects 
that allow them to generate an income and, in many cases, begin to build wealth and 
exit poverty), and contribute to the emergence of microbusinesses in developed 
countries. 
 
The phenomenon of microcredit uses an approach that implies and measures the 
efficiency of finance not in terms of individual benefits or profits but in terms of social 
usefulness and well-being.   
It is a part of microfinance, which is the provision of financial services to the very poor; 
in addition to loans, it includes savings, microinsurance and other financial innovations.  
 
Mention is made of “ethical finances” because in economy, “ethical behaviour” 
refers to everything that promotes human development and an equitable distribution of 
resources across the population.  
Microcredit is increasingly gaining credibility in the mainstream of finance industry and 
many traditional large finance organizations are contemplating microcredit projects as a 
source of future growth. 
 
                                                 
2
 www.flacso.or.cr, Facultad Latinoamericana de Ciencias Sociales 
en.wikipedia.org, the free encyclopedia 
www.fullcredit.org, the toolkit for enterprise 
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But why microcredit? Because poverty and lack of opportunity weakens 
people’s energies, lowers their confidence and disempowers them. Enterprise for many 
can provide the best or only way to improve their situation economically, socially and 
personally. However many people will not be able to consider setting up a business 
without support, especially financial support, and yet will be financially excluded from 
traditional means of finance.  
 
Microcredit has launched a challenge to the formal financial system, which 
denies any possibility of development to a large part of the world’s population, opening 
a door to the future where economic growth and human development become accessible 
to all and, as a consequence, the inequalities  present in our planet will be reduced. 
 
 
 
1.2 – The defining Criteria 
 
Much of the current interest in microcredit stems from the Microcredit Summit 
(2-4 February 1997), and the activities that went into organizing the event. Definitions 
differ, of course, from country to country, but some of the defining criteria used include: 
  
 ξ  size - loans are micro, or very small in size  
 ξ  target users - microentrepreneurs and low-income households  
 ξ  utilization - the use of funds - for income generation, and enterprise 
development, but also for community use (health/education) etc.  
 ξ  terms and conditions - most terms and conditions for microcredit loans are 
flexible and easy to understand, and suited to the local conditions of the 
community.
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1.3 – The “Clients of Microcredit” 
 
The clients of microcredit are generally poor and low-income people. They may 
be female heads of households, pensioners, artisans or small farmers. The client group 
for a given financial organization depends on that organization’s mission and goals.
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3
 “So, what is “Microcredit??”, by Hari Srinivas, Coordinator of the Virtual Library of Microcredit, 
available from www.gdrc.org, the Global Development Research Centre 
4
 www.grameenfoundation.or  
www.yearofmicrocredit.org, International Year of Microcredit 2005, Building inclusive Financial Sectors 
to Achieve the Millennium Development Goal 
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Financial services can help these people because anyone who has access to savings, 
credit, insurance and other financial services is better able to deal with everyday 
demands.
 
 
 
So, microcredit helps poor and low-income clients deal with their basic needs. 
For example, with access to microinsurance, poor people can cope with sudden 
expenses associated with serious illness or loss of assets.  
Merely having access to formal savings accounts has also proved to be an incentive to 
save. Clients who join and stay in microfinance programmes have better economic 
conditions than non-clients.
 
 
 
Thanks to this innovation, poor people can actually start and run a successful 
business. Many poor people have skills that can quickly become an income-producing 
activity. With small sums of money, they are able to purchase the inventory, supplies 
and tools necessary to start or expand microbusinesses which range from weaving, 
sewing, grinding grain, reselling produce, and growing and selling vegetables, to 
catching and selling fishing, wholesaling dried fish, raising chickens to sell eggs, and 
breeding livestock.  
 
Microcredit also helps the rural poor start technology microbusinesses, such as 
selling cell phone time to other villagers, which also provides valuable means of 
communications and access to vital information. These small ventures can grow into 
community businesses.  
 
 
 
1.4 – The Three C’s of Credit 
 
Three variables are considered in order to give access to credit: 
 
Character: meaning how a person has handled past debt obligations. From credit history 
and personal background, honesty and reliability of the borrower to pay credit debts is 
determined.  
 
Capacity: meaning how much debt a borrower can comfortably handle. Income streams 
are analyzed and any legal obligations looked into, which could interfere in repayment.  
 
Capital: meaning current available assets of the borrower, such as property, savings or 
investments which could be used to repay debt if income should be unavailable.
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5
 www.grameen-info.org, source: The Virtual Library on Microcredit 
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