Microloans, or microcredit, are very small loans to poor individuals as a way to spur entrepreneurship and a means to earn an income. Microloans typically do not require collateral or a credit history. While microloans have been in existence since the 19th century, primarily in the form of community-based initiatives, the modern version of microcredit began with Grameen Bank and other organizations in Bangladesh and South America. Such initiatives were used to fight poverty and lead to economic development. Several different models are used to extend loans to the poor. One of the best known is group-lending (or solidarity lending), where a group of some 10 individuals receive a loan and agree to cross-guarantee each others repayment of the loan. This model has been successful in lowering costs associated with loan operations, monitoring and repayment. Microloans are also extended to individuals. Repayment rates, overall, are typically in the 95% range. In recent years, however, a debate has been raging about interest rates that are charged on these microloans, which can range from mid-20% to 80%. Another criticism of microcredit that has recently surfaced concerns the use of microloans — whether they are used to finance businesses or for consumer purchases or to pay down debt.
Too Much Microcredit? A Survey of the Evidence on Over-Indebtedness. CGAP examines conceptual issues and empirical evidences on overindebtedness (2012).
Microfinance: Is it time to write off group loans? (2011). Microfinance institutions across the world are moving from group lending to individual lending. Yet, there is not much rigorous evidence on the borrower impact of both types of microcredit.
Does Microcredit Really Help the Poor? The author argues that “(i)t is strongly believed that Microcredit will make self-employment and small enterprise possible for the poor, a requisite condition to jump out the poverty line.
The Challenge of Understanding Pricing of Micro-loans. The author (Chuck Waterfield) uses the example of Compartamos, a Mexican MFI, to explain interest rate calculation and pricing system of microloans.
Understanding India’s Microcredit Crisis. In 2010, India experienced a significant microcredit crisis that has been portrayed as a replay of America’s sub-prime debacle; linked to exuberant loan disbursements.