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The Basics of Microcredit

Over the last several years the term microcredit has become a real buzzword: you hear it mentioned in blogs and websites, newspapers and magazines, in college campuses and on the street. But what is microcredit? Where does it come from and how does it work?

Microcredit is defined as the extension of small loans to those lacking collateral, without verifiable credit histories, and generally unable to access traditional credit or financial services. Microcredit as a development strategy is popularly traced back to a project known as the Grameen Bank, started in Bangladesh in 1976 by the professor Muhammad Yunus. In Bangladesh, Yunus saw a large impoverished population only able to access credit through loan sharks charging exorbitant interest rates. With the Grameen Bank he addressed this inequity, offering fair credit to people shut out of the traditional banking system. The results of the project were shockingly good. With newfound access to sources of capital, self-employment in the region soared, and quality of life began to improve as people found themselves able to break free from the vicious cycle of low income, low savings, and low investment.

These initial successes of microcredit captivated the imaginations of development agencies around the world, ultimately provoking a paradigmatic shift in the way aid was to be delivered. No longer were massive injections of cash at the top of the pyramid accepted as the best way to create growth at the bottom. The Grameen Bank introduced a new model in which aid money is introduced directly at the bottom, loaned out dollar by dollar to the people who need it most.

Nowadays, the strategy of microcredit is fairly status quo in development. The United Nations trumpeted 2005 as the International Year of Microcredit. From world leaders to Hollywood stars, it is the most popular term used to discuss the fight to end poverty. Even traditional banks, to which microcredit was originally intended as an alternative, seem to have come around. Today, many of the largest banking conglomerates are important donors, and lenders, for microfinance NGOs in developing countries.

And while the buzz remains strong, the Year of Microcredit has come and gone, and all over the world the gap between the haves and the have-nots continues to widen. The challenge then, for all of us, is not to rest on our collective laurels, but rather to continue pushing microcredit to defy the status quo it has forged. The challenge is to continue injecting mainstream development thought with the enthusiasm, creativity, and innovation necessary to truly improve standards of living for the world's many poor.

Here at The Working World:La Base, we think we've found a good working formula. We are combining traditional microcredit values with a progressive approach focused on supporting the growth of cooperative businesses. Lending to democratic workplaces enables us to extend a hand directly to productive factories, attacking the sweatshop economy in a way that traditional microcredit does not. The result is a forward-looking form of microcredit encouraging job creation and democratic growth within local industry and manufacturing sectors. To read more about our philosophy and approach, click here.


Or to find out more about microcredit:

http://www.grameen-info.org/
http://www.kiva.org/
http://www.yearofmicrocredit.org/


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