Micro-credits are small loans (of a few hundred dollars) made to individuals or groups, and due for repayment after a short period of time, normally a year or less.
Lending to groups (particularly of women) is a very successful model in some parts of Asia where each group provides guarantees based on the solidarity of its members.
Micro-credits in general are extended for the financing of micro productive activities such as farming, commerce, handicrafts, food, and so on.
There is minimal red tape when extending micro-credits and processing steps are quick and friendly. Administratively, however, micro-credits are labour-intensive; they can be geographically scattered over large areas and monitoring and recovery costs represent a large component of the interest charged by the micro-lenders. Lending rates vary between about 40 per cent and 100 per cent annually, depending on how they are presented.
The great success of micro-credits as financial tools of empowerment for many at the bottom of the pyramic (BOP) is underpinned by a very low level of losses. Equally significant is the fact that formal micro-lenders are in many countries subject to some form of formal government or financial consumer regulation, providing assurance that micro-clients will be treated with fairness and consideration. These, in turn, place great value in their relationship with established micro-lenders since otherwise their source for credit would be informal street "curb" money lenders or loan sharks, who charge usurious day-lending rates.