Microfinance vs Microcredit

Businesses and even individuals would sometimes need assistance in the financing of their enterprises. These are commonly offered by banks and financial institutions through loans and credit.

Not all people can avail themselves of these loans, though, as there are many requirements that they have to accomplish and satisfy. One of these is to provide collateral for the loan which can be assets such as real estate property.

Poor people do not have properties, and when they need financial assistance, they cannot get it from banks but from loan sharks who charge very high interest rates. This led to the development of the concepts of microfinance and microcredit.

Microfinance is the process of extending financial aid and services to people who have low incomes such as consumers and the self-employed who find it hard to avail themselves of these services from banks and other financial institutions. These financial institutions only offer loans or credit to those who have properties that they can use as collateral and those who have a steady income which the poor do not have.

In the 1970s, the Grameen Bank of Bangladesh pioneered modern microfinance which soon spread across the world’s less developed and developing countries. It was meant to prevent the poor from borrowing money from loan sharks who make their lives even harder. It offers not just loans but savings and insurance to the underprivileged of society as well. It is designed to pay for itself and the integration of the financial needs of the poor into a country’s established financial system. It is seen as a tool for economic as well as social development. The loans are usually used to finance small businesses that help them earn an income. This is referred to as microcredit.

Microcredit is one aspect of microfinance, and it is designed to provide credit to poor clients, the proceeds of which are meant to be used as capital for a small business so that they may become self-sufficient and finally get out of their poverty. Through microcredit, poor people can have a chance at acquiring a loan without collateral or a steady income provided that they use it to start a business enterprise that will earn them an income.

Through the years, microcredit has become generally accepted by the financial systems of most countries. It is now being used as a gauge by banks to determine the credibility of borrowers who may have availed themselves of it before going to them.

Microcredit and microfinance are both seen as important factors in a country’s development since a huge percentage of the population is usually poor and needs all the help it can get to make its life better and, in effect, improve the economic status of the country.

Summary:

1.Microfinance is the process of providing financial assistance as well as other services such as insurance and savings to underprivileged people while microcredit is one aspect of microfinance and is the process of extending credit to the poor.
2.Microfinance was developed for people who find it hard to get financial assistance from mainstream institutions while microcredit was developed to provide credit and loans to the same people.

Sharing is caring!