*Role of Microcredit in Sustainable Rural Development DOI: http://dx.doi.org/10.5772/intechopen.102588*

areas. The 12% of the agricultural area is operated by small farmers having less than 2 acres and 75% of family farms cultivate 75% worlds' agricultural land [18]. Small farming leads to low adoption of modern technologies in agriculture. Low adoption of modern technologies is a constraint to improve productivity mainly caused by the low level of income of small farmers, low awareness, and low assets [19]. The small and family farms are mostly low adopters of modern technologies due to their limited knowledge, the limited desire for adoption, and low level of assets. Agricultural is commonly a profession of illiterate people. They are following the traditional farming practices and have no attention toward the adoption of different modern technologies. Deteriorating quality of water and land is also a growing problem of agriculture. The monoculture cropping system is commonly practiced in rural areas due to the limited availability of land. To attain a high level of yield, the small farmers try to apply more fertilizer, pesticides, and chemical inputs which degrades the health of the soil and also negatively affects the environment. It lowers agricultural productivity and affects the quality of life of the farmers [20].


#### **Table 1.**

*Challenges of rural areas and their possible local and national impacts.*

#### *3.4.2 Lack of access to financial services*

One important constraint discussed by many scholars is no or low access to financial services. Rural people with marginal demand for credit are often ignored by conventional financial institutions. Lack of access to financial services hampers the development of rural areas in many ways. Small (subsistence) farmers are resource scarce. Scarcity of financial resources causes problems in the adoption and use of modern technologies, seeds, and good quality inputs. Lack of financial capital also leads to the delayed application of inputs. This all results in low productivity>low income>low living standards. Therefore, subsistence farmers in many regions of the world are trapped in this cycle of low productivity and poverty (**Table 1**).

Though many of the problems in rural areas have an immediate impact on the local population. However, in long run, these negative impacts spread to the national level. Low productivity caused by natural hazards or financial constraints leads to national food insecurity. Lack of access to basic utilities in rural areas harms the human development of any country. Poor road, energy, and communication infrastructure cause low national output, obliviousness, environmental impacts, and inequality in the country.

Much of the challenges faced by the rural population stem from limited or no access to financial sources. Rural people are often neglected by the conventional lending institutions, especially, the small farmers. Small farmers have limited and consistent demand for credit, however, conventional banks often do not seem interested to fulfill their needs due to several reasons, such as low or no collateral, risk of recovery, high costs of operation, etc. In the background of all these financial challenges to the rural population, recently the world has embraced microcredit as an important strategic tool to combat challenges in rural areas. There has been increasing interest of policymakers, researchers, and government in the effectiveness of microcredit.

### **4. Microcredit and its history**

Microcredit and microfinance are used interchangeably. Microcredit can be described as any credit or loan given by the bank or lending institutions for use by small enterprises such as smallholder farmers. Though the roots of modern microfinance are found in rural Bangladesh, however microcredit has existed in the world in a different form for centuries. The stems of informal lending and borrowing extend back for thousands of years in Asia. The term microcredit is new, and the term was invented by Muhammad Younas in the mid-1970s. The concept is to provide small loans to people with lower/weaker socioeconomic backgrounds. Though the concept of lending to people with lower socioeconomic background goes back to the period of the 1700s in Ireland. However, modern microfinance emerged in rural Bangladesh in the mid-1970s. Microcredit emerged with the establishment of Grameen Bank and BRAC (Bangladesh Rehabilitation Assistance Committee) in the 1970s with new models of lending. Muhammad Younas a Nobel Laureate played a key role in shaping the vision of the Grameen Banking model. He was looking for a practical solution to poverty in the rural areas of Bangladesh. The first-ever examples of microcredit originated from the group of 42 women who were making stools in Jorba village in Bangladesh. The women were earning very little profits of \$0.02 on each bamboo stool because of the early repayment to suppliers. Muhammad Younas was shocked to find that the entire borrowing needs of 42 women which is equivalent to \$ 27. He

#### *Role of Microcredit in Sustainable Rural Development DOI: http://dx.doi.org/10.5772/intechopen.102588*

thought if women were provided with a loan, they could meet their business needs, sustain their business and get out of the poverty trap. The 42 women were lent \$27 from his resources as an experiment and allowed them to sell their bamboo stools at reasonable prices and come out of this debt cycle. The experiment later led to the establishment of Grameen Bank. Later in 1983, Muhammad Younas decided to open a Grameen Bank in Bangladesh to realize his microcredit model.

The Grameen Bank Known as "Village Bank" came to existence and today works in more than eighty thousand villages across Bangladesh and serves more than six million active borrowers. Inspiring with the success of Grameen Bank, many new microfinance institutes came into existence around the world, many of them are started by several NGOs and funded by subsidies and grants from private and public sources. They signify/reveal that poor people could be relied on repaying their loans, even without collateral and microfinance is potentially a very feasible business. The Grameen Bank and its founder Muhammad Younas were awarded the Noble Prize in the Year 2006 for developing this development model and with time the model spread around the world with an estimated reach of 175 million people (Microcredit Summit Campaign). Since 2006, microcredit become a popular tool of economic development throughout the third world. Now the microcredit is widely propagated in many countries of the world.

The model of microcredit was adopted by many countries in the world for example in Pakistan there are specialized microfinance institutions, such as microfinance banks and microfinance institutions which provide loans to poor people. Several NGOs such as the Agha Khan Foundation, Akhuwat, etc. have also been involved in providing microloans to meet the credit needs of poor people. In the Philippines, to increase the income level of the poor government developed Microfinance Development Program (MDP) which provides easier access to credit. Evaluation report of MDP by Asian Development Bank (ADB) mentioned some important achievements, e.g., outreach increased from 1.3 million active borrowers in 2004 to 2.1 million buys 2008, increased loans to microenterprises created new jobs, and income of the households was increased. In India, a microcredit system called NABARD (National Bank for Agriculture and Rural Development) was developed by getting inspired by the Grameen bank model of Bangladesh. On the same lines, the self-employed women Association (SEWA) was developed in 1974 for microfinancing to rural and women. In Europe Microfinance has been growing steadily, a survey of 2015 revealed that there were 747,265 active borrowers with a gross microloan portfolio outstqand8ng of 2.5 billion euros. Similarly, microfinance has been widely developed and adopted in the African region where poverty is dominant. Many Institutions at different levels are providing microloans. Many microfinance programs have been initiated with the cooperation of the International Finance Corporation (IFC) across the African region. An extensive network of microfinance institutions is present in many developing countries. **Table 2** presents the microfinance network in three different countries of the world.

With the growing interest in microcredit as a major tool for poverty alleviation, the focus has been moved away from the NGOs models toward the sustainable microfinance industry by providing the microloans at the lowest prices and also making a reasonable return to the commercial investors. In such a way, many microcredit investment firms exist today. Many big banks also entered into the microfinancing industry such as Credit Suisse, Citigroup, and Deutsche. By the end of 2008, the US\$15 billion of foreign investment had been channeled into microcredit institutions from private and commercial sources. Nowadays, microcredit has been the subject of

#### Bangladesh

#### A. **Member-owned specialized institution**

Grameen Bank

#### B. **Non-Governmental Organizations**

BRAC, Proshika, ASA, BURO-Tangail, BEES, CODEC, SUS, TMSS, Action- Aid, etc.

#### C. **Commercial and Specialized Banks**

Krishi Bank (BKB), Rajshahi Krishi Unnayan Bank (RAKUB)

#### D. **Government-sponsored microfinance projects**

BRDB, Swanirvar Bangladesh, RD-12, etc.

#### **Pakistan**

#### A. **Commercial and Specialized Banks**

First MicroFinance Bank, Advance Microfinance bank, Khushali Microfinance bank, Pak Oman Microfinance bank, NRSP Microfinance bank, Sindh Microfinance Bank, Finca Microfinance bank, Mobilink Microfinance bank, etc.

#### B. **Microfinance Institutions**

Akhuwat Islamic Microfinance, Dameen Support Program, Islamic Relief Pakistan, FFO support Program, CSC empowerment and inclusion Program, etc.

#### C. **Rural Support Programs**

National Rural Support Program, Punjab Rural Support Program, Sarhad Rural Support Program, etc.

#### **Tanzania**

#### A. **Microfinance Institutions**

Adroit Financial Services Ltd., AJBE Microfinance Limited, Amani Microfinance Ltd., ASA Microfinance (Tanzania) Limited, BRAC Tanzania Finance Ltd., etc.

#### B. **Government Supported**

Zanzibar Economic Empowerment Fund (ZEEF)

#### C. **NGO's**

Tanzania Network of Religious Loaders Living with or Personally Affected by HIV and AIDS (TANERELA)

D. **Banks**

Akiba Commercial Bank (ACB), DCB Commercial Bank, Equity Bank Tanzania Limited, FINCA Microfinance Bank Tanzania (FINCA), MUCOBA BANK PLC, etc.

#### **Table 2.**

*Microfinance networks in Bangladesh, Pakistan, and Tanzania.*

various experiments and innovations. The huge mobile industry has also entered in sending and receiving microcredit loans.
