Role of Microcredit in Sustainable Rural Development

Abstract

Around 1.7 billion adults have no access to transaction accounts in the world. The majority of those are poor and women in rural areas of two developing regions of the world (South Asia and Sub-Saharan Africa). Rural areas of these regions are home to the poor and poverty, hunger, unemployment/underemployment is widespread phenomenon. Access to financial services is crucial for economic development. However, poor and smallholder have been neglected by traditional banks for a long time. Microcredit a development model to provide loans to the poor who have no, or little collateral emerged in Bangladesh and has been adopted in many countries of the world. In this chapter, microcredit as a solution to much of the problems of the rural areas has been discussed. Over time there has been a shift in objectives of rural development. Rural development nowadays is about an overall improvement of the human quality of life in terms of economic, social, political, and environmental, issues. Access to microcredit has a positive impact on three dimensions of sustainable rural development; social, economic, and environmental. Microcredit helps in the alleviation of poverty, employment, entrepreneurship, higher productivity from agriculture, women empowerment, gender equality, reduced rural outmigration, better health and education, green entrepreneurship, and adoption of modern technology/inputs in agriculture.

1. Introduction

Widespread poverty, low standard of livings, and resultant depopulation of rural areas is the biggest development challenge for the world. Rural population accounts for 43.80% of the total world population and the ratio varies from region to region and country to country. South Asia has the highest percentage of its population (65.12%) living in rural areas, followed by Sub Sharan Africa (58.80%), East Asia and Pacific (39.30%), Central Europe and Baltics (37.50%), Middle East and North Africa (34%), Europe and Central Asia (27.39%), European Union (25%), Latin America and Caribbean (18.88%), and North America (17.45%). Similarly, countries like Papua New Guinea and Burundi have the largest percentage of the population (almost 87%) in rural areas, while countries like Qatar, Uruguay, Iceland have the lowest proportion of their population living in rural areas (1–4%) (World bank).

The urban-rural gap exists in the whole world and in some regions and countries it is consistently widening. Globally, rural areas have been facing endemic poverty. Estimates show that even in 2025 60% of the world’s poor will be in rural areas [1]. Traditionally, the rural population has been engaged in agriculture for their livelihood. However, over the years agriculture has become less profitable and declining productivity is one of the main issues in regions like South Asia and Sub-Saharan Africa. Moreover, lack of access to essential services such as basic infrastructure, education, knowledge, markets (product and financial) is perpetuating rural poverty [2]. International Fund for Agriculture Development estimated that nearly 1 billion people in the world live on less than US$ 1/day and 75% of them live in rural areas. Almost 90% of the rural poor do not have access to financial services. The crucial role of financial services in reducing poverty is very well established. Access to financial services can enable poor people to move forward from hand-to-mouth survival to planning for the future, acquiring physical and financial assets, investing in better nutrition, health and education. Microfinance/microcredit has attracted the attention of the world as a tool to fight poverty since Muhammad Yunus and his Grameen Bank were awarded the Nobel peace prize in 2006. As microfinance services were developed around the world it also has attracted the attention of the researchers to examine the impacts of microcredit on the recipients, community, and society. The main objective of this chapter is to discuss the role and functions of microcredit in sustainable rural development.

2. Defining sustainable rural development

Rural and urban areas are different from each other in terms of socio-economic characteristics and other aspects. Therefore, development strategies aimed at rural areas should be different from those for urban areas. However, to achieve equality on welfare efforts should be made to minimize the differences in living standards of both areas. There is no universally accepted definition of a rural area or rural development. Rural areas can be described as “residential areas where the economy is mainly based on a natural resource such as agriculture & forestry, where face-to-face interaction is more common, rules of daily life are shaped by local customs, and social, economic, and cultural developments are relatively slow and delayed [3].

Similarly, rural development is a challenging notion, in theory, practice, and policy. World Bank [4] defined rural development as raising the level of rural income through agricultural modernization. In the ‘70s rural development was seen as a purely economic issue and rural development was seen synonymous with agricultural development. Later in 1980, World Bank redefined rural development as a strategy to improve the economic and social life of the rural people. Since then, rural development has been defined in various ways.

According to Kata [5] “rural development indicates the overall development of rural areas to improve the quality of life of the rural people”.

Shepherd [6] defined rural development as “the set of activities and actions of diverse actors that taken together leads to progress in rural areas.”

All these above definitions have many missing links and the authors failed to consider some important dimensions and aspects of rural development. From early 1900 to the 1990s the concept of rural development has changed significantly. In 1900s it was guided by profitability, however, in late 20th century it was directed to the sustainability of agriculture and other activities and based on a holistic, inclusive, and participatory local and territorial model [7, 8].

Madhu [9] defined rural development “as an activity concerned with the improvement of spatial and socioeconomic environments of rural areas to enhance the ability of the individuals to cater to and sustain their well-being”.

“Rural development is people who live in rural areas and earn their living mainly from agriculture. with an inclusive approach to increase the welfare of people and families who provide such as nature, environment interaction, use of natural resources and technology, and agriculture-based industry. economic activities are carried out in harmony and aim to create an ecosystem” [3].

Rural development nowadays is about an overall improvement of the human quality of life in terms of economic social, political, environmental, and administrative issues [10]. Rural development has emerged from agricultural development to human, social, environmental development along with agriculture. Therefore, a shift from rural development to sustainable rural development has occurred in the recent past. Sustainable rural development is based on four basic pillars which are social, economic, environmental, and political.

According to a report on the 17th session of the Commission on Sustainable Development of the United Nations “sustainable rural development is vital to the economic, social, and environmental viability of nations. It is essential for poverty eradication since global poverty is overwhelmingly rural. The manifestation of poverty goes beyond the urban-rural divide; it has a sub-regional and regional context. It is therefore critical, and there is great value to be gained, by coordinating rural development initiatives that contribute to sustainable livelihoods through efforts at global, regional, national, and local levels, as appropriate. Strategies to deal with rural development should take into consideration the remoteness and potentials in rural areas and provide targeted differentiated approaches.”

2.1 Importance of sustainable rural development

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 technical, socioeconomic, and environmental conditions of rural areas. 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 called sustainable rural development [11].

Rural development is concerned with the improvement in the different indicators like increasing productivity, raising employment opportunities, high adoption of modern technologies, low poverty, high income, and good infrastructure, etc. just focusing on these things without concerning environmental conditions is not sustainable development. Sustainable development links with social economic, and environmental sustainability of the rural areas which do not compromise the ability of the future generation to meet their own needs. For example, cultivation of crops by using high quantity of chemical fertilizer, chemical may contribute little to crop production, but it is not sustainable because the application of high chemical fertilizers degrades the agricultural land. Similarly, the zero application of fertilizer or pesticides is also not a concern of sustainable development which adversely affects the crop yield leading to low income of farmers. In this way, low income generates many socioeconomic problems in rural areas which adversely affect the current rural population. The main focus in sustainable rural development is meeting your daily needs without compromising the social, economic wellbeing of the current generation of rural population coupled with focusing on the wellbeing of future generations without compromising the environment quality.

3. Rural areas and their challenges

The rural-urban gap exists all over the world and eliminating inequality in access to services and opportunities is the main challenge for policymakers. The rural population is facing many challenges some of which are discussed below.

3.1 Home to poor

The rural areas are considered as a home for the poor. Generally, the rural population is poor as compared to the urban areas. The unequal distribution of assets, working facilities, and uneven land ownership cause high poverty in rural areas. Therefore, the poverty rate in the rural population is 17.2% three times more than in urban areas [12]. Endemic poverty has caused many negative consequences for the rural population. Especially rural population in countries of South Asia, Sub-Saharan Africa, and Latin America is more vulnerable to extreme poverty, climate change events (floods, heatwaves, disease, etc.), and social exclusion.

3.2 Gender inequality

Gender inequality can be observed more in the rural area as compared to urban areas. The women have limited access to services, capital, productive infrastructure, and technologies. Their limited freedom inhibits the women to perform their role actively in the development of the rural areas. According to International Fund for Agriculture Development [13], women spend 12–13 h in different daily activities, but they remain unpaid.

3.3 Limited employment opportunities

Rural areas are normally characterized by seasonal employment opportunities. Unemployment normally prevails more in rural areas. Moreover, underemployment is also a common problem in rural areas. The low productive jobs and low-waged activities discourage the rural youngsters which ultimately tend to migrate to the urban areas.

3.4 Subsistence economy

The majority of the rural population in many developing and even developed countries rely on agriculture as a source of livelihood. In developing countries, the majority of the farmers are small farmers, and the traditional economy is based on subsistence agriculture. Many researchers have estimated that there are around 500 million small farms (landholding up to 2 ha) in the world [14, 15, 16] which makes almost 70–80% of the total farms in the world [17]. Subsistence agriculture is volatile to extreme weather shocks, floods, droughts, degradation of resources.

3.4.1 Dependence on agriculture and related issues

The rural people are majorly depending on agriculture for their earnings. As a major source of earning, agriculture still faces many challenges and problems. The small landholding is one of the main problems impeding the development of rural 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].

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).

Challenges	Description	Local Impacts	National Impacts
Quality and quantity of resource	Declining land holding land fragmentation, declining productivity of land, degradation of soil and water quality	Low productivity Making agriculture low-profit business Loss of natural habitat Rural outmigration	Rising food insecurity Urban sprawls Urban poverty Urban slums Street crimes
Social challenges	Poverty, lack of access to educational, health, and energy services, poor infrastructure, absence of communication networks	Social conflicts Theft and crimes Illiteracy Poor health Deforestation Isolation Low prices of output Obliviousness	Social unrest Inequality Illiteracy
Environmental/climatic	Floods, heat waves, crop and animal diseases, rainfalls, droughts	Low productivity Diseases Mortality Crop and income loss Famine	Food insecurity Emergence of new diseases Increased health expenditures
Financial challenges	Lack of access to financial services	Low productivity of crops and livestock Illiteracy Health problems	Loss of national output Food insecurity Illiteracy Low Human Development

Table 1.

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

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 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.

Bangladesh; Member-owned specialized institution Grameen Bank Non-Governmental Organizations BRAC, Proshika, ASA, BURO-Tangail, BEES, CODEC, SUS, TMSS, Action- Aid, etc. Commercial and Specialized Banks Krishi Bank (BKB), Rajshahi Krishi Unnayan Bank (RAKUB) Government-sponsored microfinance projects BRDB, Swanirvar Bangladesh, RD-12, etc.

Pakistan; 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. Microfinance Institutions Akhuwat Islamic Microfinance, Dameen Support Program, Islamic Relief Pakistan, FFO support Program, CSC empowerment and inclusion Program, etc. Rural Support Programs National Rural Support Program, Punjab Rural Support Program, Sarhad Rural Support Program, etc.

Tanzania; Microfinance Institutions Adroit Financial Services Ltd., AJBE Microfinance Limited, Amani Microfinance Ltd., ASA Microfinance (Tanzania) Limited, BRAC Tanzania Finance Ltd., etc. Government Supported Zanzibar Economic Empowerment Fund (ZEEF) NGO’s Tanzania Network of Religious Loaders Living with or Personally Affected by HIV and AIDS (TANERELA) 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.

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

5. Functions of microcredit

Microfinance/microcredit refers to financial services to the poor people and it’s not limited to only credit but also provides services like money transfers and insurance. According to Murray and Boros [21] “Microfinance as a discipline has created financial products and services that are packaged in a way that enables low-income people to become clients of a banking intermediary. They enlisted the characteristics of microfinance products as follows:

• “Small amounts of loans and savings.

• Short loan terms (usually up to one year).

• Payment schedules featuring frequent installments (or frequent deposits).

• Installments made up from both interest and principal.

• High-interest rates on credit (higher than commercial bank rates but lower than loan-shark rates) reflect the labor-intensive work associated with making small loans and allowing the microfinance intermediary to become sustainable over time.

• Easy access to the microfinance intermediary, saving the client time and money, while also permitting the intermediary to better know the client in their home/business context Simple application forms which are easy to complete.

• Short processing periods (between the completion of the application and the disbursement of the loan).

• The availability of repeat loans in higher amounts for clients who pay on time.

• The use of tapered interest rates (decreasing interest rates over several loan cycles) as an incentive to repay on time. As larger-size loans are less costly to the MFI, some lenders charge lower interest rates: higher rates on small credit amounts and lower ones on larger credits.

• No collateral is required contrary to formal banking practices. To replace collateral (which low-income people generally do not have), microfinance intermediaries use alternative methods, such as the assessments of clients’ repayment potential by running cash flow analyses based on the stream of cash flows generated by the activities for which loans are taken; all enterprise/household income and expenditure items; individual or group guarantees (solidarity groups); and compulsory savings schemes.”

Microfinance has been growing rapidly over the last two decades into an important subfield of development studies and provides a place for researchers to research the causes and consequences of poverty.

The practice of microcredit includes lending small loans to poor people who do not have sufficient funds to meet their basic needs, to create employment opportunities for them. Microcredit refers to shorter loans offered to small and medium enterprises as well as to smallholder farmers for agricultural production. Such microloans are offered by thousands of financial institutions worldwide, ranging from government to non-government financial institutions like formal banks and public institutes. The beneficiaries of these financial programs are individuals and groups. In developing countries, the basic goal of microcredit is to alleviate poverty by providing job creation opportunities to needy people. Microcredit refers to the process of taking control over the acquisition and use of credit in the present time for a certain project, business activity, in exchange for a promise to repay in the future.

Recent trends have shown microcredit in a broader spectrum embracing housing, consumption, education loans, and loans to meet the basic needs of poor people such as electricity, water, and sanitation that are not provided by public financial institutes. For example in Pakistan, a variety of microcredit needs are met by loans from different microfinance providers. There are commercial and Specialized Banks such as First Microfinance Bank providing loans for crop farming, purchase of livestock, construction sheds to farmers, to the enterprise for purchase of inventories and assets, and also for education, health, housing improvements. Similarly, Akhuwat Islamic microfinance which provides interest-free loans covers different credit needs of households and small enterprises. Government-supported programs such as national and provincial rural support programs provide loans to individuals and groups for agriculture, MSMEs, housing, and women empowerment (Table 3).

Commercial and Specialized Banks; First MicroFinance Bank; Agriculture & Livestock (crop farming, purchase of small/large animals, construction of shed, etc.) Enterprise (purchase of inventories, small assets, common facility centers, etc.) General Purpose (Education, housing improvement, income-generating activities)

Microfinance Institutions; Akhuwat Islamic Microfinance; Family enterprises loans Agriculture loans Liberation loans Housing, education, health, marriage loans Emergency loans

Rural Support Programs; National Rural Support Program; Individual Loans (livestock, enterprise, house finance, etc). Groups Loans (Agriculture loans, livestock loans, women empowerment group loans) MSME (Micro Small Medium Enterprise Loans)

Table 3.

Microcredit institutions and their functions in Pakistan.

Though eligibility criteria, tenure, and purpose of loans vary from country to country, however, the target group is the same (poor people).

5.1 Microcredit and family farming

Microcredit serves as a support system for family farms. Agriculture in developing and underdeveloped regions of the world is dominated by family farms. Family farms provide above 70% 0f the global food supply [22]. Food and Agriculture organization-defined family farms as “An agricultural holding which is operated and managed by a household and where farm labor is mainly supplied by that household” [23]. According to Hazell et al. [24] a farm where the main purpose of growing staple food for the consumption of households and where the majority of the labor is supplied by household members. Family farms are different from other farms in many perspectives; freedom provided by self-employment, intergenerational continuity, residence on farms 9owner lives on the farm or in a nearby village, etc. In short family, farming is a lifestyle and tradition [22]. In recognition of its importance for humankind and the global economy, United Nation celebrated 2014 as a year of family farming.

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 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].

Figure 1.

Relationship between microcredit and sustainable rural development.

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.

6.3 Environmental development of rural areas

The role of microcredit in the development of rural areas and economies around the world is not mysterious. Where microcredit became popular in uplifting productivity, poverty alleviation, generating a high income, and employment opportunities, its impact on the environment is also very important to assess. It is expected that microcredit plays important role in the adaptation of climate change. The timely availability of finance to the poor asset them to adopt the climate adaptation strategies such as irrigation technologies, harsh weather tolerant varieties, etc. Jordan [52] described the positive relation of microcredit and the adaptation of climate change strategies. Moreover, the microcredit to the poor in rural areas assists them in generating their high income and lowering their poverty level which requires the quality of the environment with time. They also have the chance of diversified income levels which reduce the risk of loss and have beneficial impacts on the environment [53]. The multidimensional impacts of microcredit in development can be sustainable, for example, microcredit helps the poor to alleviate their poverty which leads to uplifting their socio-economic sustainability, and once they are sustainable in their socio-economic conditions they require a quality environment. For this, microcredit institutions should focus the green entrepreneurship. The timely application of inputs for getting high yield and high income and becoming diversified in earning sources coupled with the environment care leads toward sustainable rural development.

6.4 Role of microcredit in achieving SDGs

Microcredit plays a vital role in achieving many sustainable development goals (SDGs) directly or indirectly. Figure 2 describes the possible role and functions of microcredit for achieving the SDGs. The possible direct impact of microcredit on achieving the 1st SDG called “No poverty” has been extensively addressed in the literature. Microcredit is provided to the poor people who live on $1.25 or $2.00 per day. Poor families through microcredit can reduce the poverty, and ensure smooth consumption [54]. Malnutrition is also a very serious problem worldwide. To overcome this global problem, many studies have described the link between microcredit participation and the nutrition status of participants. Hamad and Fernald [55] reported the positive effect of microcredit on nutritional status and the food security of the participants. Similarly, the socioeconomic and health association has been widely unearthed. The poor people and those having low socio-economic status experience poor health. Microcredit provides the financial resources to the poor people to establish their small businesses, generate their income, and approach their self-sufficiency. In this way, the income and health link are widely acknowledged worldwide [56]. Poverty and health inequalities are indistinguishably linked, and microcredit is the option that can focus on multiple factors like no poverty, good health, low hunger, and better education, etc. Amin et al. [57] described that the poor families who joined the microcredit program tend to have better access to insurance. The 4th SDG “Education” is also approachable by the participation in microcredit programs. The poor families in the rural area mostly remain busy in farming and they keep their children working at the farm to stabilize their financial position. Consequently, their children remain absent from school. Microcredit helps them to stabilize their financial condition, and their children are more likely to attend school. Nader [51] find out a strong association between microcredit and children’s education. Based on the discussion, microcredit has caused the change in income, enabled the participants to provide better health care, increase the provision of nutrition to the children, increase household consumption, enhance female empowerment, and enable the participants to save more [58].

Figure 2.

Role and functions of microcredit to achieve SDGs.

6.5 Evidence from different countries

Microcredit has a positive impact on women’s empowerment [59] which improves their family income and nutrition level. In Pakistan, it was s found that microcredit played important role in poverty alleviation and poverty reduced by 3.05% [28]. Similarly, in Bangladesh, every year, almost 1% of the total population is coming out from poverty in the country because microcredit played an important role in breaking out the vicious cycle [60]. In Zimbabwe, the microcredit borrowers experienced higher average growth in their business profit and family income [61]. In such a way, microcredit in terms of entrepreneurship is also very successful, especially in the case of women. In Malaysia, the microcredit entrepreneurs’ profile was explored, and financing is one of the main variables that significantly affected the success of microcredit entrepreneurs [62]. Similarly, in Sri Lanka, the significant impact of microcredit on women entrepreneurship was found [63]. Moreover, the microcredit impact on nutrition can be explained by quoting the example from Malawi, which described that women’s access to microcredit improved the young girls’ long-term nutrition level [64].

7. Conclusion

Rural areas are facing problems of endemic poverty and hunger across the globe. Especially, in developing countries, rural economies are largely dependent on agriculture. A significant proportion of the population in these countries earn their livelihood from agriculture. Small landholdings, degrading soil and water quality, declining productivity, and low profits are making agriculture an unattractive business in these areas. Consequently, the world is facing challenges to achieve sustainable development in rural areas. Three pillars of sustainable rural development; economic, social, and environmental development depend to large extent on solving resource constraints of the rural population. Access to financial resources is one of the significant resource constraints for rural people. Microcredit which emerged from Bangladesh has the potential to ease the financial constraints of rural people. Microcredit offers small loans to poor people who have less or no collateral and are often ignored by the conventional banking system. Positive impacts of microcredit on poverty alleviation, employment generation, women empowerment, curbing rural outmigration, food security, better health and education, climate change adaptation, and green entrepreneurship are extensively documented in the literature. Hence, microcredit can be used as a tool to achieve sustainable rural development through the economic, social, and environmental development of these areas.