MICROCREDIT is the extension of very small loans, known as microloans, to the working poor to spur entrepreneurship.

Most of these individuals lack the collateral, steady employment and a genuine credit history to meet the minimal requirements for commercial bank loans.

Microcredit is believed to have originated in 1976 with the formation of the Grameen Bank in Bangladesh - a community bank which doles out small loans to the poor without demanding collateral.

It was founded on the belief that the poor have skills which are underutilised.

A group-based credit approach uses a system of peer pressure to ensure that borrowers exercise caution and discipline in their financial dealings. The system also ensures repayments are made on time, thus allowing borrowers to develop good credit standing.

This article was first published in The Straits Times.