Global Policy Forum

The Hope and Hype of Microcredit


By Anja Tranovich

Inter Press Service
August 10, 2005

Muhammed Yunus, a founder of the microcredit movement, once described it as "a programme for putting homelessness and destitution in a museum, so that one day our children will visit it and ask how we could have allowed such a terrible thing to go on for so long." The United Nations declared 2005 the official year of microcredit, and the Philippine government has announced that microcredit will form the cornerstone of its antipoverty policies.

But after 30 years, it is still unclear if microcredit fulfills some of its proponents' loftier claims of poverty reduction. The point of contention hinges on the effectiveness of the neo-liberal market model, with some researchers questioning whether increases in income through self-employment can solve the structural problems of poverty.

Microcredit programmes extend small loans, often of just 75 or 100 dollars, to very poor people, especially women, for starting or augmenting businesses in the hopes of increasing profit. The loan is usually paid back over a period of six months to a year. Microcredit began in the 1970s in Bangladesh when the Grameen Bank began giving small loans to those too poor to be eligible for credit from other banks. Grameen has a particularly high repayment rate, due, in large part to its weekly meetings and peer monitoring group. The most effective microcredit programs follow this model and are complimented by health and education classes that assist loan recipients in their small businesses, ideally slowly raising themselves out of poverty by providing capital and training. Dominic Sasia Malusi, a loan recipient and supermarket owner in Kenya, recounts his success story: "Since I was 11 years old, I have wanted to be an entrepreneur. With the loans provided by K-Rep Bank I have been able to realise my business plans." It is clear that microcredit works for some. However, it is unclear to what extent it works and for whom. Some researchers argue that microcredit is only applicable to the "well-off poor" and those with some access to education, as loan recipients need verbal math skills and a sense of entrepreneurialism to succeed. "Poverty eradication is not a simple, linear process. And microfinance is not a simple solution. It is a long-term proposition and only a component of poverty eradication," Christina Barrineau of the U.N. Development Programme told IPS.

The statistics on microcredit's ability to reduce poverty are unclear. The Grameen Bank, for example, conducted a study on its own programme and found that it lifted as many as five percent of participants out of poverty each year, making it a fairly successful antipoverty tool. However, another researcher contextualised these findings. In Bangladesh, where the bank operates, microcredit programmes reach about 20 percent of the population -- probably one of the largest percentages in the world. But this still means that only one percent of the total population in Bangladesh can rise from poverty each year through microcredit. While this one percent rises from poverty, the population is increasing by 1.8 percent. The overall effect of microcredit programmes is then to hold poverty at bay rather than defeat it. This has led some academics, like Khandakar Q. Elahi and Constantine Danopolous, to suggest that microcredit only helps populations live with poverty instead of freeing them from it. "Helping people live in and with poverty is not sustainable poverty alleviation," they argued in a 2004 article in the International Journal of Social Economics, titled "Microcredit in the Third World".

Microcredit's expansion is another source of contention. If microcredit programmes reached a higher percentage of the population, it would seem that they would have more of an effect on poverty elimination. But a 2004 U.N. report on microcredit notes that "populations that are geographically dispersed or have a high incidence of disease may not be suitable microfinance clients." Areas that often have the most severe poverty, such as rural areas or countries severely affected by the AIDS epidemic would, therefore, not benefit from microcredit. Many in microfinance institutions claim that microcredit does not work for the severely poor. Anne Hastings, a director of a microcredit agency in Haiti, comments on the limits of microcredit, "We're really reaching primarily the upper half of those who are in poverty," she says. "For the poorest of the poor, which is a majority in Haiti, we now know that microcredit alone is not the solution. Instead, it ends up being a burden." In other words, microcredit can make poor people even poorer by giving them a loan they can't repay. If microcredit cannot reach the very poor, it may serve to increase inequality, lifting some segments of the population while others fall farther behind.

The popularity of microcredit among development professionals represents a greater faith in market-based development projects rather than state-led development programmes. However, a World Bank study by Shahidur R. Khandker suggests that both are necessary to battle poverty. The study found that investment in infrastructure improvements in Bangladesh was at least as cost-effective as microcredit in increasing consumption among the rural poor. Programmes like land reform have been statistically as successful as, or more successful than microcredit. A report on agrarian land reform from the Philippine Institute for Development Studies found that land reform in the Philippines was statically twice as effective in combating poverty as microcredit (using the Grameen Bank statistics for comparison.)

Still, Barrineau believes that microcredit is powerful tool in overcoming poverty. "Without strong and efficient financial services, poor people have little chance of growing their wealth, but it is certainly not the only thing that is important -- and in some cases microfinance may be the last tool needed," she said. "For example, in times of serious crisis, a loan or a savings account may not be very helpful. Microfinance should be part of a long-term national strategy to grow and develop, strengthen and stabilise its financial sector and economy."

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