Micro-Credit – Enabling Financial Self Sufficiency

Micro-Credit refers to the practice of provisioning of small capital loans to individuals who are unable to find a loan through the common credit channels such as commercial banks. While conventional banking relies on the principle of “the more you have – the more you can borrow”, micro-credit, especially NGO based micro-credit, best works on the principle “the less you have – the more important it is for you to get a loan”. By this principle alone, micro-credit can be seen as a tool in reducing poverty.

While the concept of micro-credit in modern history has been around since forever, its present history can largely be traced back to 1970s Bangladesh. The previously common forms of micro-credit include pawn shops, and friend-family lending. In 1974 the concept was put into action slightly differently by Professor Muhammad Yunus, when on a personal scale he lent out USD27 to a group of forty two families, whom he did not know, but who were in dire need after the nation had been struck by a famine. This was the birth of what later evolved into an NGO, the Grameen Bank (Bank of the Rural), that today reaches out to over 80% of the population of Bangladesh; an organized, large-scale micro-credit NGO institution.

While the world is now slowly understanding, there was a time when majority believed that an individual or family is poor because they do not have the capacity to perform. The flaw lies in that the theory fails to consider the environmental and systematic factors that are more often than not responsible for creating poverty. As an example, a natural disaster such as a Tsunami could render many devoid of the natural resources they rely on for their profession. Such individuals may have a way to adapt themselves to their new found surroundings, but it may require a small capital that a commercial lender is unable to provide due to (a) the capital/cost ratio is not sufficient enough for the lender to make a profit on; and (b) the borrower may not have enough collateral or equity built in to be an attractive borrower. So, in addition to the individual’s grief over the loss of livelihood, he or she is not able to chart a future course of recovery. Such an individual would get trapped in the vicious circle of poverty. It is this spiraling effect that micro-credit could prevent.

Micro-Credit works where commercial banks don’t. By definition, micro-credit works with small loans and to those who are the most impoverished and in need for such loans. The premise of the micro-credit scheme is humanity itself. Every individual has an enterprising capacity – a spirit within them that strives to improve their lives. And given the tools, individuals have a natural tendency to strive for the better. Micro-Credit is now recognized over the world as an effective mechanism in dealing with poverty and creating financially self sufficient individuals and families. The United Nations General Assembly Resolution 52/194 was passed in 1997 recognizing the benefits of micro-credit programs, and the United Nations declared 2005 as the year of Micro-credit.

New Life, through its community owned association structures known as Affinity Association of Self Help Groups (AASHG), plays an active role in promoting and providing micro-credit. New Life works through its partner organization “Rang De” in matching borrowers and lenders. We encourage you to review New Life’s Micro-Credit project to gain an insight into how New Life is bringing the Micro-Credit solution to impoverished members of the society in India. (link: http://www.newlifemfi.org/projectdet.php?id=Nw== )

Saurabh Ladha