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Microcredit - Term Paper Example

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MICROCREDIT Instructor Institution Date Microcredit According to The Financial Express (2009), microcredit which is also known as microfinance is a financial loan which is given to poor people which acts as capital for beginning a business. The financial loan given through microcredit is usually a small amount of money for small scale ventures and it is essential for funding businesses of the impoverished…
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Download file to see previous pages The description of the ways in which access to credit eradicates poverty is also discussed in this paper basing the argument on empirical studies. Usman, Malik and Shafiq (2011) explain that regular banks are generally meant for people with money and thus microfinance becomes very necessary for the millions of poor people across the world. Microcredit institutions offer the small financial loans in form of microcredit to the poor with a premise that these people have financial skills and talents which can be utilized through financing for their own benefit and the society in general. According to Vasanthakumari (2008, p. 137), microcredit is necessary for the poor because it offers them the chance to utilize their capabilities and hence progress both economically and socially. Because dependency on charity only sustains poverty, microfinance becomes necessary to enable the poor to utilize their creativity and potential which is possible if people’s energy is concentrated on business ventures and self development as described by Sin-Yu and Odhiambo (2011, p. 103). Microcredit is described by Madichie and Nkamnebe (2010, p. 301) as a form of finance that provides small loans to poor people which allows them to have an ability of self employment. According to Ghosh and Wright (2005, p. 298), microcredit targets poor people who need it to begin businesses and as a result it charges low interest rates as compared to the regular banking services. The Muhammad Yunus and Grameen Bank are credited for the introduction of microcredit as an economic innovation which targets poor people with an aim of empowering them and thus lead to a general development of the social systems. As a result of this innovation, Muhammad Yunus and Grameen Bank received a Nobel Peace Prize in 2006 because microfinance led to the empowerment of poor entrepreneurs, farmers and the unemployed. Durrani, Usman, Malik and Ahmad (2011, p. 138) illustrate that microcredit targets people in the unstable income bracket due to unemployment. Because poor people fail to meet the minimum financial qualification of regular banks before they acquire credit services, microfinance plays a significant in the economic progress of the poor. Poorer People Need Microcredit Lack of credit is attributed to the inability of the poor to progress economically and become wealthy as said by Haque and Harbin (2009, p. 4). Microcredit is therefore the best financial solution to the increased poverty especially in developing nations. The credit market within regular banks is full of imperfections and therefore microcredit acts to combat the problems related to the acquisition of credit from banks such as high collateral requirement. Sharma (2005, p. 288) explains that the difficulty of acquiring a loan from formal credit markets makes poor people to resolve into borrowing money from informal credit markets where they are vulnerable to exploitation. In the informal credit market, moneylenders give loans to the poor who have limited options and exploit them through charging exaggerated interest rates. In the developing economies, money lenders provide alternative credit services to the poor because the regular banks require very high financial qualifications for loans which the poor cannot attain. The role of microfinance in the eradication of poverty is therefore evident through the ...Download file to see next pagesRead More
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