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What is the difference between microfinance and microcredit?
Although often used interchangeably, microfinance and microcredit are in fact quite distinct. Microfinance is a much broader concept than microcredit and refers to loans, savings, insurance, money transfers, and other financial products targeted at poor and low-income people. Microcredit refers more specifically to making small loans available to poor people, especially those traditionally excluded from financial services, through programmes designed specifically to meet their particular needs and circumstances. Typically, the characteristic features of microcredit are that:
- Loans are usually relatively short term, less than twelve months in most instances and often even six months or less, and generally for working capital with immediate regular weekly or monthly repayments – they are also disbursed quickly after approval. Loans are usually quite small to begin with; typically they are in the range of $100-500. As borrowers regularly repay their loans and demonstrate their creditworthiness, they become eligible for larger loans.
- The traditional lender’s requirements for physical collateral such as property are usually replaced by a system of collective guarantee (or solidarity) groups whose members are mutually responsible for ensuring that their individual loans are repaid. Alternatively, borrowers may be requested to find one or two personal guarantors – often these are respected local community leaders.
- Loan application and disbursement procedures are designed to be helpful to low income borrowers – they are simple to understand, locally provided and quickly accessible with minimal paperwork.
