Micro-credit: medicine or myth?
The friendly advertisements in Pakistan's leading newspapers read, "Micro-credit at your doorstep." A Micro Credit Bank, with $ 90 million from the World Bank, has already been established which will dole out small credit to the poor at the grassroots level. On international level micro- credit is increasingly promoted as a panacea for the poverty afflicted South. The rising clamour for the micro-credit raises so many questions that needs to be honestly and objectively answered before leaping into the sea of yet another debt quagmire - this time directed at our grassroots.
The first question that comes to mind is, why is it so that the World Bank President James Wolfensohn says that credit is "a particularly effective way of reaching women"; Kofi Anan calls it "a critical anti-poverty tool for the poorest" and even Hillary Clinton points to microcredit as a tool that will help poor women "survive globalisation"; but according to a UN report, small loans should not be viewed as a primary means of eradicating poverty because many recipients are not in a position to use the money effectively ("Seattle Post-Intelligencer" FINAL; Vol. 12-172; 9-2-98). The report questions the strategy of relying on so-called microcredit loans.
The report noted that some lending institutions in Asia and Latin America have been successful in making the loans. But it cited studies showing there are "limits to the use of credit as an instrument for poverty eradication." The study says: "Many people, especially the poorest of the poor, are usually not in a position to undertake an economic activity, partly because they lack business skills, and even the motivation for business." Similarly, other studies show that micro-credit brings far more benefit to people just below the poverty line than to those far below it, and that the poorest people have in some cases been made worse off (Hulme and Mosley, 1996, Finance Against Poverty). Women do not necessarily benefit from loans disbursed in their names, especially when their growing need for cash to repay debts creates additional tension in the household (Goetz and Sen Gupta, 1996, `Who takes the credit, World Development, 24-1).
We have tried several poverty-alleviation programmes. Of late, micro-credit has become one of the important means of bringing about poverty alleviation. This movement promises credit for poor people with no savings or cash collateral. A closer look, however, shows the movement to be financially dangerous, subtly coercive, and, in most cases, an enemy to children and families. We need to understand that poverty is not just about economic deprivation. Robert Chambers has disaggregated deprivation into five dimensions: a) poverty proper (lack of income and assets); b) physical weakness (malnutrition, sickness, disability, lack of strength); c) isolation (ignorance, illiteracy, lack of access, peripheral location); d) vulnerability (to contingencies, natural disasters, to becoming poorer); and e) powerlessness (unable to control one's own destiny, lack of political power or organisation).
To make sure that the capital goes back to the capitalists, the micro-credit movement was launched without looking into the intricacies of poverty. The capitalists gave it a big boost at the 1995 UN conference on women. The person who received the largest round of applause was Muhammad Yunus, who runs Grameen Bank, the most politically correct bank in the world. Capitalists controlled academic journals and books have touted Yunus and Grameen in dozens of studies. All major newspapers, including the Wall Street Journal, have run glowing profiles. Famous TV show, "McNeil-Lehrer Newshour," did a full segment. The Economist magazine has been taken in. He has been nominated for the Nobel peace prize. The World Bank and other capitalist forces are urging poor governments like Pakistan and their bankers to replicate Yunus's so-called "successes."
We need to analyse why the fairy tale of Grameen Bank sounds so wonderful. The bank actually functions as a conduit for huge grants. That aid is used as the basis of a credit pyramiding scheme that not only provides micro-loans but also funds a creepy form of social engineering that wars against children and marriage. The funds are usually lent to Grameen at 2 per cent that is well below the market rates. The Bank then deposits the money in fixed-deposit accounts in commercial banks that pay higher rates. Grameen pockets the killing difference. Mr. Yunus calls it merely arbitrage, but if private citizens did this with government funds, it would be called graft. Grameen charges its customers 20% interest, below the market in a country with high inflation and virtually no savings. At this rate, the reinvestment scheme subsidizes its loans by 39%. The bank is forever forecasting future profits.
The 98% repayment figure does not reflect the behaviour of actual individual borrowers. Grameen relies on the "peer group" method of repayment. Borrowers are lumped into cells of five. Any future loans--which offer 80% more money than the first one--depend on repayment by the entire cell. If one person doesn't pay, others in the cell "lean" on them to fork over the cash, or pay it themselves. The person in the cell who wants another loan has the incentive to get all the money one way or another. In this way, Grameen does get paid. But the 98% repayment rate records final payments grouped by cells, and only on first-time loans.
To try to ensure that credit does not go to less poor people, women from households with total assets worth more than the value of one acre of land are not permitted to join or to take loans. In Bangladesh, those with no land have not benefited from NGO-based rural finance (Journal of the Bangladesh Institute of Development Studies, 18-4). In such a densely populated setting, imposing a ceiling of one acre of land in order to prevent loans being allocated to better-off people does not necessarily mean that the poorest are included.
It is also an undeniable reality that credit programs rarely reach the poorest. In most cases poorest of the poor refuse to take such loans even if other community members agree to provide social collateral. Microlenders under pressure from donors for recovery in a short period of time are drawn toward less poor and secure borrowers. The capitalist lenders are less concerned with the costly - but crucial - capacity building necessary to improve the productive capacity of the poorest borrowers. This "efficiency" approach to lending is especially detrimental where there is a weak market for the products micro-entrepreneurs can produce and sell. According to microlender Jaya Aranachulum (Working Women's Forum, India), the donor-driven emphasis on financial efficiency undermines the potential of credit as a poverty-alleviation tool: "Microcredit will never be the only solution for poverty, especially when it comes with exorbitant interest rates [which] create a debt burden on the poor."
Keeping the excellent commercial proposition for the otherwise sick financial sector in view, the capitalists consider micro-credit for poverty alleviation as a win-win strategy. The Questions is: Are we just targeting relatively well off people? If it is so, then this intermediation can be more effectively done by formal financial sector rather than NGOs for poverty alleviation. Isn't it true that economists have yet to find a convincing empirical evidence of positive impacts of micro-financing on poverty alleviation? As discussed above, will poverty ever be really reduced with such strategies? Even in the words of the World Bank, the impact of micro-finance on poverty reduction as measured by increased income (and consumption) is inconclusive. This kind of impact is evident only in slightly well off clients or long-term micro-finance clients, but can never alleviate poverty of the poorest of the poor.
As opposed to the sustainability of MFIs approach that targets less poor segment of the poor; a number of poverty related organizations feel that working as MFIs may deviate them from their main goal of extending credit in a systematic way to harness potential of the poorest of the poor. The poverty approach needs to target poorest of the poor and that is a very costly proposition for the capitalists. Unlike relief efforts, it measures success by how well it fulfils the needs of the poorest in the long term. In this approach, shortfall between revenues and cost of capital is met by altruistic grants. This way the commercialisation of poverty programmes or the MFIs on the basis of a trade-off between real goals of poverty alleviation and micro-financing sustainability for the capitalists is an extremely dangerous trend.
Undoubtedly, micro-credit has, in some circumstances, contributed positively to help the poor survive economic crises in the short term. However, donors and advocates consistently over-exaggerate the power of micro-credit and related assistance, while ignoring key structural issues that are far more pertinent to the long-term problem of poverty. Some popular misconceptions have permeated the current rhetoric regarding micro-credit and encouraged its mischaracterization as a panacea.
For instance, it is argued that micro-credit empower women in particular. However, since credit by itself cannot overcome patriarchal systems of control at household and community levels, this potential is not always realized. In "Who Takes The Credit: Gender, Power, and Control Over Loan Use in Rural Credit Programs in Bangladesh" (World Development, 1996), Anne Marie Goetz found that the majority of women borrowers in the programs studied did not control either the loans received or the income generated from it. Moreover, recent research suggests that the very non-contractual nature of informal-sector trade can reinforce women's reliance on male family members as enforcers in the marketplace (Peter Gibbons, Structural Adjustment and the Working Poor in Zimbabwe, 1995).
The expansion of NGO-managed credit in Bangladesh is attributed to the flood of international aid to that country. The absence of equivalent flows in India has enabled the emergence there of thrift and credit cooperatives based much more surely on borrowers' requirements (Rutherford, Empowerment and Credit in Rural Bangladesh, p. 136). The tracking of such institutional change is vital in designing relevant anti-poverty interventions at home.
In summary, the eagerness with which micro-credit in particular, has been touted as solutions to global poverty can be faulted on a number of counts.
- It encourages a single-sector approach to the allocation of resources to combat poverty. Insufficient emphasis is given to the questions of whether financial intermediation is an appropriate intervention in a specific context and, if so, which complementary policies are required.
- Empirical evidence, which suggests that micro-enterprise credit is at best irrelevant to the poorest people, is ignored.
- An over- simplistic notion of poverty is used, based on average annual income at a household level. Seasonal vulnerability, sudden shocks, and the social and power relations within and between households are omitted.
- The emphasis on scale down-grades institution-building in favour of quantitative targets, and thus implicitly undermine the very sustainability that is needed.
Conclusion
Micro-finance cannot be assumed to reduce poverty just because it achieves high levels of outreach or almost perfect repayment rates. Those considering an intervention in this area should value a better understanding of the specific financial requirements of very poor people, and evidence of where these are and are not being satisfied through existing private intermediaries. Institutions deciding whether and how to try to reduce poverty through provision of financial services need to be clear about at least three factors:
- A working definition of poverty: a broad definition would take account of vulnerability to fluctuations in income and changing social relations (including intra-household relations); a narrower one might be based on an individual or household's total annual income. Either would need to clarify time-scale (positive improvements today may have adverse effects tomorrow, for example through environmental degradation), and to decide whether poor people's own definitions are to be given prominence.
- Information on poor people's current access to savings and credit in the specific location.
- What people currently use credit for, and whether demand exists for goods and services that poor people might provide if they had greater access to credit.
Irrespective of any debate on the issue, the fact will, however, remain that as long as microcredit is offered as a substitute for harnessing people's potential for a meaningful social development, for employment that offers real security, for viable small-farm and enterprise production, and for fundamental changes in the economic policies, it will only impede and deviate progress from finding real answers to the very real problem of poverty in Pakistan and elsewhere.
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