**6. Role of microcredit in sustainable rural development**

Microcredit has been widely used as a development tool, especially in rural areas. Rural development is concerned with improving the quality of life and social, economic wellbeing of the people living in the rural areas. Sustainable rural development is little different from rural development. It also focuses on the environmental conditions of rural areas and the ability of future generations to meet their own needs. Therefore, the daily basic needs of the rural population are covered by realistic public utilities combined with technical, socioeconomic, and environmental conditions to support regional economies and urban-rural linkages [11]. The rural people must also develop some non-farming activities paired with farming systems, to counter the economic shocks and environmental challenges in the context of climate change. Based on the sustainable rural development aspects, the microcredit role cannot be ignored. Where the rural areas face many challenges especially in agriculture (major source of income) they need capital/financial support to manage their daily needs, but the main source of finance can be only microcredit because it is the loan available for the small farmers without collateral. Where the concern is sustainable rural development, the rural people's needs (especially small farmers) financial capital to overcome and timely manage their problems faced in daily life. Microcredit has a multidimensional and interlinked impact on rural areas.

**Family farming—**one important role played by microcredit is in the sustainability of family farms (discussed above). Farmers engaged in family farming solely rely on agriculture as a source of income, hence, their credit needs are higher compared to those with off-farm incomes. Large and commercial farming is posing a serious threat to the existence of family farms. Considering the socio-cultural, economic, and environmental contributions of family farming there is a greater need to protect and preserve it. In 2014, the importance of family farms for sustainable agriculture and rural development was greatly highlighted. Family farming is solving the problem of food security, nutrient supply, unemployment, and controlling rural outmigration. Hence, by providing timely and inexpensive credit to family farms, a tradition (family farming) can be preserved, and many issues faced by rural areas can be addressed.

Microcredit role in rural development is not limited to just family farming, it can play important role in capacity building of human resources, promoting cooperative culture, expanding production area, enhancing marketing capabilities of farmers, protecting and developing rural heritage and rural life, providing a safety net against climate shocks, controlling rural-outmigration, and reducing hidden or seasonal unemployment. Furthermore, the role of microcredit in the social, economic, and environmental development of rural areas is discussed below.

#### **6.1 Economic development of rural areas**

Among all other things, poverty and food security are the greatest threat to the existence of humans, and rural areas are home to a majority of poor people. Poverty is the situation in which the people lack the usual and socially acceptable amount of money or material possessions [25]. Lack of income and resources limited the

capabilities of rural populations which leads to severe poverty. The provision of credit to the poor has been considered an important strategy to reduce poverty and promote rural entrepreneurship. Meehan [26] found in their study that, offering microcredit to rural people plays an important role in alleviating poverty and ensuring food security. Increased access to financial services enables the poor to smooth consumption (in case of adverse shocks), start or expand a business, cope with risk and diversify income. Microcredit distribution to the poor people of rural areas enables them to overcome their financial problems and limited resources. A small amount of loan or capital facilitates the rural people to generate small business opportunities generating enough income to feed their families, send their kids to school, and build suitable housing [27]. Shirazi and Khan [28] explored the positive role of microcredit in poverty alleviation and stated that microcredit reduced the poverty by 3.05 percentage points in the period of study under consideration. Moreover, access to credit empowers the rural poor by improving their access to production facilities. Microcredit enhances self-reliance, assists in the creation of employment opportunities, and engages women in economically productive activities. The provision of timely credit at an affordable rate increases the capacity of investment in a productive manner and may help to generate high income and improve the social and economic standards [29]. Kasali et al. [30] analyzed the role of microcredit in poverty alleviation in Nigeria. They stated the significant impact of microcredit on poverty reduction in the countries.

The role of SMEs in the development of any economy cannot be ignorable. Small and medium-sized business needs sudden financial capital to overcome the uneven changes in financial and market conditions. SMEs plays important role in generating a high income, and employment in areas that contribute to the economic growth of the country [31]. Rural areas SMEs are also very important in the development of the rural areas. SMEs plays role in the alleviation of poverty (social and economic sustainability), and improvement in the income of poor peoples (economic sustainability). Waliaula [32] described the strong and significant relationship between microcredit and SMEs in Kenya. Similarly, the SMEs owned by the women also need microcredit occasionally. The timely provision of microloans helps the women entrepreneurs to empower themselves and support their families which contributes to the sustainable development of the rural areas. Alhassan et al. [33] described the significant impact of microcredit on the average monthly profit earned by the women borrowers running SMEs themselves in Northern Ghana. Ruslan et al. [34] also stated the sale growth of SMEs with microcredit borrowers was having high sale growth and employment than non-microcredit borrowers.

Access to credit helps the rural economy in many ways; access to credit improves the ability of the households to meet their financial needs, enables farmers to purchase improved agricultural inputs and adopt modern technology, which in return increases the income of smallholders and break the perpetuity of poverty cycle they are entangled with. The positive impact of microcredit on uptake of improved inputs and increased agricultural productivity are extensively discussed in the literature. Zuberi [35] found that more than 70% of the microloans availed by smallholders are used in purchasing quality inputs. Rahman and Khandker [36], Khandker and Faruqee [37], Ahmad et al. [38] and Chandio et al. [39] found positive impacts of microcredit on the productivity of recipient farmers. Agriculture is an important source of income to rural households in most developing countries [40]. Agricultural productivity largely depends on the traditional farm technologies and land management practices which are labor and capital intensive. The poor

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

rural people normally lack financial capital which limits their capacity to manage their farm at an efficient level. Access to microcredit has a positive impact on agricultural productivity. It provides the poor farmers with liquid capital to purchase timely farm inputs [41]. The timely purchase and application of critical farm inputs increase agricultural productivity. Ashaolu et al. [42] found that the user of microcredit was attaining higher profit than the non-user. Microcredit also increases the technical and economic efficiency of farmers by overcoming their financial constraints which affect their purchase of farm inputs on time. Moreover, it also allows the farmers to shift the most remunerative crops (**Figure 1**) [43].

#### **6.2 Social development of rural areas**

Microcredit stands to benefit the poor individual who lacks collateral, steady employment, verifiable credit history, or other requirements necessary to gain access to formal credit [44]. By putting money into the hands of poor families, and particularly poor women microcredit has the potential to increase households' health and education, empower women. Microcredit helps the rural poor to increase their productive capacity by bringing improvement in their human resources and financing [45]. The role of women in the rural economy area is significant and is not ignorable. They work as wage earners, farmers, and entrepreneurs. Empowering rural women has a significant impact on productivity and agricultural-led growth [46]. They are key agents for rural development by their agitator role toward gaining the transformational social, economic, and environmental changes necessary for sustainable development. Their limited access to credit, education, and health care facilities limit the capabilities of women in performing their active roles [47].

Microcredit can play a significant role in empowering poor women in rural areas. Ahmed et al. [48] described the role of microcredit in reducing the vulnerability of women living in rural areas. They assessed that the women with credit were generating high profits than those without credit access. They also stated that the borrower women obtained significantly high income which reduced their vulnerability effectively. Similarly, Shah and Butt [49] described the positive impact of microcredit on the socio-economic empowerment of female borrowers in Pakistan. Consequently, women's empowerment in rural areas increases the social and economic sustainability contributing to sustainable rural development. It is also evident that the women are more concerned about the environment and their role to manage the natural recourses of their families [50]. Microcredit also improves the well-being of women and their families. Nader [51] confirmed the higher children's education and availability of assets and the high-income level in the families of the women who borrowed the microcredit.
