The United Nations has declared 2005 the "International Year of Microcredit." The essential goal of the UN International Year of Microcredit is "to strengthen and spread the availability of good financial services, which offer the possibility and the hope to many poor people of improving their own situations through their own efforts," said Stanley Fischer, Chair of the Advisors Group for the Year and former Vice President of the World Bank. By directly empowering poor people, particularly women, microcredit has become one of the key driving mechanisms towards meeting the UN Millennium Development Goals, specifically the overarching target of halving extreme poverty and hunger by 2015.¹

Microfinancing is the business or policy of making small loans (microloans) to impoverished entrepreneurs.² Microfinancing generally follows a model that emphasizes strategic lending to people living in poverty. As opposed to conventional banking practices that lend money to those with the greatest assets, microlending lends to those that have the greatest potential. There are thousands of microfinancing programs around the world (eg., NGO's, UN, private industry, government-led, etc.), and most follow the model of the Grameen Bank in Bangladesh. The Grameen Bank focuses on helping the poorest people.³ The Bank provides access to a range of financial tools that enable families to invest according to their own priorities, such as school fees, health care, business, nutrition or housing.

Financial assistance to poor women in developing countries is essential to alleviating the burden of poverty since women suffer from many societal inequalities.

The concept of institutional microfinance originated with Economics Professor Muhammad Yunus of the University of Dhaka in Bangladesh, who created the Grameen Bank in the 1970s. The idea behind the Grameen Bank, and subsequent microfinancing programs, has been that poor people are "in need of a hand-up, not a hand-out".⁴ Hernando de Soto, the Peruvian economist, in his book The Mystery of Capital, notes that "many poor people possess some form of capital, ranging from land and property to skills. What condemns them to remain impoverished is that in poorer countries, this capital is often ‘dead' in economic terms. It lacks legal protection and can be taken from them. Crucially, it cannot be used as collateral for a loan."⁵ Microcredit seeks simply to extend to poor households the rights to the same financial services as everyone else, borrowing at reasonable interest rates the start-up capital to allow their entreprenurial ambitions to be expressed.

Microcredit institutions that follow the Grameen Bank model reach into villages, identify target groups, raise their awareness, train them and provide microcredit for income-generation. Interest rates on loans from Grameen-type banks are generally around 20%, as opposed to the 60% rate charged by informal moneylenders.⁶ One method of increasing the likelihood of repayment of the loans is to form a support group where one or two people in the group receive a loan, while the other members must wait until that first loan is repaid prior to receiving their loans. This model has generally been successful, with many programs reporting over 90% of loans being repaid.⁷

The microcredit programs, especially in developing countries, focus on deepening the social empowerment of women. ⁸ According to the Grameen Bank, 96% of all its loans have been made to women.

Financial assistance to poor women in developing countries is essential to alleviating the burden of poverty since women suffer from many societal inequalities. The financing is not based on gender discrimination, but rather providing women who are willing and able to work with the means necessary to succeed. In general, men are privy to loans from commercial banks because of prevailing social norms.⁹

Criticisms of Microcredit

Critics of microcredit programs argue that they only help the "well-off poor": those with some access to education and an entrepreneurial spirit. Anne Hastings, a director of a microcredit agency in Haiti, commenting on the limits of microcredit, said "We're really reaching primarily the upper half of those who are in poverty…for the poorest of the poor…we now know that microcredit alone is not the solution." ¹⁰ In essence, Hastings says microcredit can make poor people poorer by providing loans that they can't repay.

Critics of microcredit programs argue that they only help the "well-off poor": those with some access to education and an entrepreneurial spirit.

Further, the effectiveness of microcredit programs to reduce poverty is unclear. In Bangladesh, the Grameen Bank determined that its microcredit program raises 5% of participants out of poverty each year. But critics argue that these conclusions are misleading. The Grameen Bank reaches out to 20% of the Bangladeshi population. As a result, the program lifts 5% of that 20%, or only 1% of the total population out of poverty each year, while the population increases by 1.8%. ¹¹ In other words, microcredit does not eradicate poverty; rather it makes it easier for countries to live with poverty.

Microcredit has been effective in helping individuals, groups, and villages eradicate poverty, but it like other tools to help developing countries, needs to be part of an overall poverty-reducing scheme. A 2004 United Nations report on microcredit notes, "Populations that are geographically dispersed or have a high incidence of disease may not be suitable microfinance clients." This translates into areas suffering from severe poverty, such as countries in Africa that are also severely affected by the AIDS epidemic.

Conclusion

Providing the poor with microcredit results in asset creation, employment generation, economic security and empowerment of the poor, particularly for women. The eradication of poverty will not be achieved overnight, but by extending financial resources to those that can benefit, poverty can at least be reduced. Proponents of microcredit and microfinancing argue that it must become a national priority and integrated into the financial sector in order to achieve its maximum potential.

Microcredit Success Story:


Adelina Capagas and her husband dreamed of sending their three children to school. Her husband would fish and she would sell the catch on the local market. Adelina was able to provide her family additional income by weaving nylon into fishing nets, but would lose prospective customers because she needed payment in advance to buy the needed materials. When a microcredit¹² program began working in her neighborhood, she joined a group of four poor women also in need of a microloan to finance their businesses. With each woman guaranteeing the others' loan, Adelina received a $100 loan for supplies. She now sells a variety of fishing nets and is able to send all three of her children to school. "Endless possibilities have opened up for my family," she said. The small infusion of money has made all the difference to the Capagas family and many more poor families around the world.¹³

References

¹"Wall Street, UN experts mark International Year of Microcredit", June 10, 2005; available online at: UN News Service.

²The American Heritage® Dictionary of the English Language, Fourth Edition, Copyright © 2000 by Houghton Mifflin Company.

³For more information on the Grameen Bank, go to: Grameen Bank.

⁴Grameen Bank.

⁵Global Growth.Org Website: Global Growth.

⁶Dhakal, Sanjaya. "A tool to tackle poverty", Issue 10, August 2005; available online at: Peace Journalism.

⁷Grameen Bank has a 98% repayment rate.

⁸ Grameen Bank.

⁹It is important to note that many countries in the developing world are moving towards equality for women, and microfinancing is helping the process.

¹⁰International Year of Microcredit website: International Year of Microcredit 2005.

¹¹Tranovich, Anja. "DEVELOPMENT: The Hope and Hype of Microcredit", August 10, 2005. Inter Press Service News Agency.

¹²Microcredit, Microlending, and Microfinancing are used interchangeably.

¹³"Adelina Weaves a Safety Net". Available online at: PovertyFighters.




Contributed by Center for Strategic & International Studies (CSIS) and Globalization101.org.



For more resources on microfinancing, see the Microfinance Reading List for book reviews on the topic.






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