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Logo of Phnom Penh Post newspaper Phnom Penh Post - Microcredit: the hype and hope

Microcredit: the hype and hope

UNITED NATIONS, Aug 10 (IPS) - Muhammed Yunus, a founder of the microcredit movement,

once described it as "a program 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


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 programs 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 UN 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 UN 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.

Programs 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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