Microcredit is the extension of very small loans (microloans) to very poor people for entrepreneurial projects that help them to care for themselves and their families.

Of the 4 billion people who live on less than $1400 a year, only a fraction have access to basic financial services. They may be female heads of households, pensioners, artisans or small farmers. These individuals are considered “unbankable”. They lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit.

Microcredit is a part of microfinance, which is the provision of financial services to the very poor. In addition to loans, it includes savings, microinsurance and other financial innovations. Loans are made through microfinance institutions (MFIs).

A microfinance institution (MFI) is an organization -- credit union, down-scaled commercial bank, financial NGO, or credit cooperative – that provides microfinance services targeted to clients who are poorer and more vulnerable than traditional bank clients.

"The World Bank estimates that there are now over 7000 microfinance institutions, serving some 16 million poor people in developing countries. The total cash turnover of MFIs world-wide is estimated at US$2.5 billion and the potential for new growth is outstanding." - Data Snapshots on Microfinance - The Virtual Library on Microcredit

In many developing countries, the self-employed comprise more than 50 percent of the labor force. Access to small amounts of credit—with reasonable interest rates—allows poor people to move from initial, perhaps tiny, income-generating activities to small microenterprises.

In most cases, microcredit programs offer a combination of services and resources to their clients, including savings facilities, training, networking, and peer support. In this way, microcredit allows families to work to end their own poverty—with dignity. Microcredit programs around the world use a variety of models and the results are impressive: poor people achieve strong repayment records—often higher than those of conventional borrowers. Repayment rates are high because, through a system of peer support and pressure used in many microcredit models, borrowers are responsible for each other’s success and ensure that every member of their group is able to pay back her loans.

Microfinance is one part of a multi-faceted strategy for battling an immense problem.

Mohammad Yunus, who through his work with the Grameen Bank won a Nobel Prize for his vision of microfinance for the poor, has this to say: "(Microcredit) is based on the premise that the poor have skills which remain unutilized or underutilized. It is definitely not the lack of skills which make poor people poor....charity is not the answer to poverty. It only helps poverty to continue. It creates dependency and takes away the individual's initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty." Expanding Microcredit Outreach to Reach the Millennium Development Goals, International Seminar on Attacking Poverty with Microcredit, Dhaka, Bangladesh, January, 2003.

Loans to women tend to benefit the whole family more than loans to men. Studies have shown that women recipients of small loans gain a higher socio-economic status within the family and community, and their repayment record is better than men’s too.

"Women have become more assertive and confident. In regions where women's mobility is strictly regulated, women have become more visible and are better able to negotiate the public sphere. Women own assets, including land and housing, and play a stronger role in decision-making. In some programs that have been active over many years, there are even reports of declining levels of violence against women." Consultative Group to Aid the Poor (CGAP):

"1.2 billion people are living on less than a dollar a day. Women are often responsible for the upbringing of the world’s children and the poverty of the women generally results in the physical and social underdevelopment of their children. Experience shows that women are a good credit risk, and that women invest their income toward the well being of their families. At the same time, women themselves benefit from the higher social status they achieve within the home when they are able to provide income." Microcredit Summit Campaign: (microcreditsummit.org)

Microfinance loans worldwide are generating repayment rates of 97% (UNCDF: Basic Facts About Microfinance). Kiva.org reports a repayment rate of 99.61%.