The Difference Between Micro Credit and Micro Finance

by Marquis Codjia; Updated September 26, 2017
Microfinance helps low-income individuals meet short-term needs.

Microfinance and microcredit activities help low-income or unemployed individuals fulfill personal needs in the short term and long term. These activities also help developing and underdeveloped countries balance budgets and fund social programs.

Microcredit Defined

Microcredit includes all types of loans that financial institutions, such as banks and insurance companies, provide to poor or unemployed individuals. These people may live in developed countries, such as the United States, or in poor nations.

Function

Microcredit activities may help a small business owner with no credit reference or asset to provide as collateral. Without a microcredit or small loan, the owner may be unable to operate. Collateral is a type of financial guarantee.

Microfinance Defined

Microfinance is a financial practice that helps improve living conditions for the poor and unemployed in the short term and long term. Microfinance institutions usually provide microcredit services.

Microfinance Significance

Microfinance plays a central role in modern economies, especially in developing countries. Most of these countries may rely on international financial aid or microfinance activities to balance annual budgets or fund social programs.

Microcredit Versus Microfinance

Microcredit is distinct from microfinance. However, there are instances in which the terms interrelate. For example, an entrepreneur living in a developing country seeks funding for a startup company. He may apply for a microcredit with a local microfinance bank.

About the Author

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.

Photo Credits

  • poor house image by Alexey Klementiev from Fotolia.com