Microfinance and Microcredit are terms that are often confused and many tend to use it almost interchangeably. Though it is true that both are similar in nature and tend to perform similar functions, Microcredit is obviously a small part or subset of Microfinance. This article will clarify the meanings of the two words and the key differences so as to remove any confusion in the minds of the reader.
Both Microfinance and Microcredit are terms used to refer to activities that help those living under the poverty line or the unemployed to fulfill their personal needs and to help them utilize their skills to eke out a living. These activities also help fund social programs in many countries.
Microcredit is also sometimes called as banking for the poor. It is an innovative approach to empower very poor people around the world to pull them out of the mires of poverty and to gain self confidence through self employment. It is actually microfinance institutions that provide microcredit services. The concept of microfinance originated in Bangladesh where an individual, Mohammad Yunus, who later went on to win the Nobel Peace Prize in 2008, developed the idea that was implemented with the help of Grameen Bank. It involved providing very small loans, usually less than $100 to those steeped in poverty to engage in self employment activities and start generating an income for a living.
Microfinance is a broader term than microcredit and covers financial services that provide a greater scope of success for the poor. The financial services include savings, insurance, housing loans and remittance transfers. Microfinance also includes imparting entrepreneurial skills and training, along with tips and advice on many matters for a better living such as health and sanitation, nutrition, importance of educating children and improving living conditions.
Most of the poor people have traditional skills that can be harnessed if innovative ideas are used and training is imparted to them to use these skills in producing items that can be sold to generate income. Microfinance has been greatly successful in helping poorest of the poor who did not even have collateral to avail traditional loans and credits from banks to have microcredit and stand on their feet.
To give an example, a poor woman used to dry fish caught by her husband in Philippines and sold them in the market where it was liked. With a very small loan her husband could catch more fish and she employed 20 women from her locality and today 20 families are benefiting from this activity. This is the principle behind microfinance, to help the community at a larger level.
With tiny amounts of loans, poor people are able to purchase the necessary tools and supplies and start their business that could be anything from weaving, sewing, grinding grain, growing and selling vegetables, re-selling, catching and selling fish, poultry and many other similar activities. Of course microcredit looks after financial needs but microfinance, in the form of imparting necessary entrepreneurial skills and the required training becomes an integral part of all such projects.