Microcredit Schemes – Miracle, Disaster or Somewhere in Between?
Microcredit Schemes – Miracle, Disaster or Somewhere in Between?
The term "microfinance" or "microcredit" - the provision of financial services and small loans to people who don't qualify for traditional banking services - is a concept that many of us are familiar with. But when it comes to tackling poverty, how helpful is it really?
Providing the entrepreneurial poor with credit to help them overcome poverty was the underlying motive when Muhammad Yunus, the 2006 Nobel Peace Prize laureate, founded the Grameen Bank in 1976. As the bank itself states, the word microcredit is today employed in so many different contexts by so many different actors that it has come to mean everything to everybody. Added to this is a lot of confusion about the terms microcredit and microfinance.
Generally, microfinance refers to the financial services – like credit, insurance, savings, money transfers and deposits – to poor and low-income entrepreneurs.
“very small loans for unsalaried borrowers with little or no collateral, provided by legally registered institutions”.
This short video below gives a pretty comprehensive overview.
The Grameen Bank
The term "microfinance" dates way back to the 1970s when organisations like the Grameen Bank in Bangladesh pioneered the concept under the leadership of Nobel prizewinner Muhammad Yunus. Set up in response to the terrible famine in Bangladesh in 1974, Yunus's Grameen Bank - and its respective methodology - rejected the framework of traditional banking, where the poor are regarded as not creditworthy and therefore not eligible for a "traditional" bank loan.
The Grameen credit is usually given out through non-profit organisations or public institutions. Women are specifically targeted because they are seen as more reliable borrowers than men. All loans taken out must be repaid in weekly or bi-weekly instalments resulting in an obligatory saving for the recipients who can only borrow again if the previous credit is repaid – at an interest rate close to the market rate.
The system is based on group lending, i.e. in order to obtain credit the borrower must join a group. These groups actually function as a kind of financial collateral because if one group member cannot repay his or her debt, all group members are excluded from further borrowing.
An important feature is the “promotion of social capital” in the Bank’s own introduction. Not only the formation of groups, regular group meetings with the bank or election of group leaders provide the borrowers with social capital but also learning the social agenda of “16 decisions”. These 16 decisions are a set of principles which all borrowers have to accept and that are to serve as a basis for improving and transforming the community. They include a variety of provisions from “keeping the family size small” to “being ready to help to each other”.
Another key aspect in the Grameen methodology is the “human development approach”. In contrast to the 1970s and1980s, today the main understanding of development is that it is about more than economic growth. Human development is also about “greater access to knowledge, better nutrition, security, political and cultural freedoms as well as the ability to participate in community activities.”
Accordingly, the Grameen Bank considers a family as having moved out of poverty not only by monetary criteria but also if, for example, they use “a sanitary latrine and all children over six years of age attend school or finished a primary school education”.
These kinds of additional components and the explicit claim to empower its borrowers – which also holds true for other microcredit programmes – forms one of the core points in the current debate about the pros and cons of microcredits.
There is a growing academic literature about the problematic aspects of the microcredit programs, including the Grameen Bank model.
An influential article is Ahmad’s “Distant Voices: The Views of the Field Workers of NGOs in Bangladesh on Microcredit”, which examines views on microcredit of selected field workers from four types of NGOs in Bangladesh and concludes that “the very poorest people are not reached by the NGOs investigated because of their definitions of their target population and because of the preferences of field workers”. Moreover, two major problems are demonstrated in the program implementation: First, the credit is not always used for business purposes by the borrowers. Second, NGO workers tend to target the less poor to ensure better repayment. Additional problems that have been identified are “non-accessibility to the poorest, low return, misuse and overemphasis on repayment as the problems."
A further related criticism is directed at the high interest rates. Thus, when the borrowers cannot repay their loans on time, they prefer to borrow from other lenders at even higher rates and as a consequence their level of indebtedness rises. This might also result in a higher burden on children, who have to work to assist their mothers.
There are other problems, too. For instance, the women’s financial vulnerability may actually increase as they are held are accountable for loans they have taken out in their name but which have been used and not repaid by their husbands. Hence, “Who takes the credit?” is a legitimate question for Sen-Gupta and Goetz to ask in pointing out the importance of control over resources when talking about empowerment.
Talking about empowerment requires a sophisticated discussion about the definitions of power. One’s judgement on the empowerment capacity of microcredit programs always depends on how you understand the terms “power” and “empowerment”. Nevertheless, leaving this theoretical discussion aside, one could still conclude that the aforementioned problems make an improvement in living conditions through microcredits generally questionable.
Researchers like Mayoux indicate the importance of “best practices” which should eliminate the disadvantages that might be caused. This can be most notably achieved through assisting programs. Based on the UNDP’s experience in India, Burra has, for example, developed a catalogue of benchmarks that are crucial for a successful program implementation: capacity building, knowledge about livelihood options, finances, political processes, accounting and the banking system, social mobilization on non-banking related issues as well as a flexible system of savings and loan repayment.
Despite criticism, there is a significant amount of research which concludes that the microcredit programs do indeed contribute to women’s empowerment. Among them, a very important study compiling testimonies of borrowers has been conducted by Kabeer, who asserts that the credit recipients usually had an increased voice in the household decision making and a stronger feeling of self-worthiness. In her opinion, negative research results on the relationship between empowerment and microcredit usually look at the process whereas positive conclusions are often due to the focus on the programmes’ outcomes.
Microcredit schemes are mainly criticized because they do not reach the “poorest of the poor” and their claim to empower women does not meet the facts. Of course, the highly subjective nature of empowerment makes it difficult to reach a judgment about the microcredit’s contribution to women’s empowerment.
One must bear in mind that differences in approaches are also due to specific cultural contexts. Thus, instead of viewing microcredit as a standardized universal tool, developing context-specific assistance to the borrowers may change the direction of the current debate, which has to come to a conclusion if the Sustainable Development Goals are going to be met.