Impact of microcredit

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The impact of microcredit is the study of microcredit and its impact on poverty reduction which is a subject of much controversy. Proponents state that it reduces poverty through higher employment and higher incomes. This is expected to lead to improved nutrition and improved education of the borrowers' children. Some argue that microcredit empowers women. [1] In the US and Canada, it is argued that microcredit helps recipients to graduate from welfare programs. Critics say that microcredit has not increased incomes, but has driven poor households into a debt trap, in some cases even leading to suicide. [2] [3] They add that the money from loans is often used for durable consumer goods or consumption instead of being used for productive investments, that it fails to empower women, and that it has not improved health or education.

Contents

The available evidence indicates that in many cases microcredit has facilitated the creation and the growth of businesses. It has often generated self-employment, but it has not necessarily increased incomes after interest payments. In some cases it has driven borrowers into debt traps. In addition, it can produce unintended rent-seeking entrepreneurship. [4] There is no evidence that microcredit has empowered women. [5] In short, microcredit has achieved much less than what its proponents said it would achieve, but its negative impacts have not been as drastic as some critics have argued. Microcredit is just one factor influencing the success of a small businesses, whose success is influenced to a much larger extent by how much an economy or a particular market grows. A critical review of 58 papers covering experiences in 18 countries concluded "there is no good evidence for the beneficent impact of microfinance on the well-being of poor people" and that "the greatest impacts are reported by studies with the weakest designs". [6]

The attempt to objectively evaluate the impact of microcredit on a global or a local scale is marred by numerous methodological challenges. There are only few rigorous evaluations of microcredit, [7] and much of the literature on the impact of microcredit is based in anecdotal reports or case studies that are not representative. Even among the rigorous evaluations many "suffer from weak methodologies and inadequate data", according to a systematic literature review of the impact of microcredit conducted in 2011 by a group of researchers on behalf of UKAid. [6] A 2008 review of over 100 articles on microcredit found that only 6 used enough quantitative data to be representative, and none employed rigorous methods such as randomized control trials. [8] Rigorous impact evaluations using control and treatment groups are difficult to undertake today, because microcredit is so common in developing countries today that few locations remain where such a research setting can still be applied. Further complicating impact studies is the often highly politicized context of poverty alleviation initiatives. [9]

Income and poverty

Microlending aims at increasing income through productive activities such as goat herding, as shown here in Rwanda on a cooperative funded through microlending. Rwandan farm cooperative goats.jpg
Microlending aims at increasing income through productive activities such as goat herding, as shown here in Rwanda on a cooperative funded through microlending.

Among 6 representative studies selected from a sample of more than 100 studies as being methodologically most sound, five found no evidence that microcredit reduced poverty, although they found other positive impacts.[ which? ] [8] [10]

The first randomized evaluation of the impact of introducing microcredit in a new market has been undertaken by Abhijit Banerjee of the M.I.T. Poverty Action Lab in slums in Hyderabad, India, in 2008. It compared two groups of randomly selected slums. In the treatment group banks opened branches that provided microcredits, while in the control group this was not the case. The study showed that fifteen to 18 months after lending began, there was no effect on average monthly expenditure per capita, but expenditure on durable goods increased. Consumption thus shifted from consumables to durable goods. Also, the number of new businesses increased by one third, but they were not very profitable. [5] Pulitzer prize winner Nicholas Kristof quotes another rigorous study by Abhijit Banerjee and Esther Duflo covering loans by Spandana in India. In this case, loans were also used to buy durable goods, but in addition they were used to expand existing businesses. [11]

Tazul Islam argues that the Grameen Bank does not reach the poorest, since the clients of the bank tend to be clustered around the poverty line of predominantly moderately poor or vulnerable non-poor. [12] Of the poor who join Grameen bank’s microcredit program, a high percentage often drop out after only a few loan cycles, while many others eventually drop out in later loan cycles as loan amounts begin to exceed their repayment capacity. [13] Nevertheless, he concludes that microcredit in Bangladesh had a "positive impact on enterprise and household income and asset accumulation". [12] Microloans in Canada have allowed small business owners to make their businesses their primary source of income with 67% of the borrowers showing a significant increase in their income as a result of their participation in certain micro-loan programs. [14]

A film by the Danish journalist Tom Heinemann, The Micro Debt, alleges that microcredit in Bangladesh had little impact on poverty. The film highlighted the purported continued poverty of Sufiya Begum, the original loan recipient of Grameen, in Jobra Village. [15] After a thorough investigation in December 2010 by the Norwegian Foreign Ministry, the alleged problems have been proven to be false. [16] Documentary maker Gayle Ferraro found the woman alive and well, confirming the original Grameen story. [17]

Milford Bateman, the author of Why Doesn't Microfinance Work?, argues that microcredit offers only an "illusion of poverty reduction". "As in any lottery or game of chance, a few in poverty do manage to establish microenterprises that produce a decent living," he argues, but "these isolated and often temporary positives are swamped by the largely overlooked negatives." Bateman concludes that "The international development community is now faced with the reality that, overall, microfinance has been a development policy blunder of quite historic proportions." [3]

Professor Anu Muhammad of Jahangirnagar University in Bangladesh, a Marxist and critic of microcredit, claims that "according to different studies" which he does not name, "you cannot find more than 5-10 per cent people who could change their economic conditions through micro-credit." [18]

German journalist Kathrin Hartmann relates tales of women who she met in 2012 while visiting Kurigram District in Bangladesh trapped in debt. She was told by rural women of brutal methods to enforce debt repayments, including the forced sale of goats, cows, house utensils and land. She also describes intense peer pressure under group lending schemes. Heavily indebted men and women even sold their kidneys to organized groups in order to be able to repay loans, as discovered by the police in summer 2011. Hartmann writes, without quoting a source, that one third of microcredits are taken in order to pay for food or health care, especially during the times of the year called Monga when food and work opportunities are scarcest. Children drop out of school to earn money and families cut down on food expenses in order to repay loans. When natural disasters strike, such as Cyclone Sidr in 2007, weekly instalments to repay loans continue, although the ability of borrowers to earn income has been destroyed by the disasters. [2]

A study in the Philippines by Dean Karlan of Yale University and of Innovations for Poverty Action compared a treatment group, financed through microcredit, and a control group that did not receive microcredit, in Manila. In this case many microcredits were loaned to people with existing businesses. The businesses became more profitable, but laid off unproductive employees including friends and relatives that they previously had felt obliged to employ. Male-owned businesses increased profits, but female-owned businesses did not. [19]

Debt traps, suicides and group pressure

In 2008, economist Jonathan Morduch of New York University noted there were still major gaps in research on microcredit, such as on debt traps and the use of microcredits for consumption. [7]

There has been much criticism of the high interest rates charged to borrowers. The real average portfolio yield cited by the sample of 704 microfinance institutions that voluntarily submitted reports to the MicroBanking Bulletin in 2006 was 22.3% annually. However, annual rates charged to clients are higher, as they also include local inflation and the bad debt expenses of the microfinance institution. [20] Interest rates charged by the Mexican Banco Compartamos on their micro-loans reached 86% per year while it sold stocks in the stock market in 2007. [21] [22] [23]

In India microfinance institutions have been criticized for creating small-debt traps for the poor in Andhra Pradesh with high interest rates and coercive methods of recovery. [13] Villagers often did not know the interest that they were being charged and were not aware of the consequences of taking multiple loans as they take the second loan to clear the first loan. [24] In 2010 aggressive lending by microcredit institutions has been blamed for over 80 suicides in Andhra Pradesh. [25] Bangladesh's former Finance and Planning Minister M. Saifur Rahman charged in 2005 that some microfinance institutions use excessive interest rates. [26] A 2008 study in Bangladesh showed that some loan recipients sink into a cycle of debt, using a microloan from one organization to meet interest obligations from another. Field officers who are in a position of power locally and are remunerated based on repayment rates sometimes use coercive and even violent tactics to collect instalments on the microloans. [27]

Private banks and large MNCs have become involved in microfinance. With large corporations investing, local MFIs are under pressure to deliver high returns each quarter; this comes at the expense of borrowers. Foreign and corporate capital investment take advantage of emerging and developing economies across Asia and Africa, introducing new forms of collateral requirements; individuals borrowers sometimes end up in even more debilitating debt and poverty than when they started.

The Cambodian market offers a key example of such problematic and debilitating debt traps. Throughout the early 1990s, Cambodia began as a success story for microfinance in the developing world. By the early 2000s, however, the situation deteriorated until “the typical loan amount [to] now exceed the average annual household income and require land-based collateral”. [28] The introduction of land-based collateral has driven thousands of borrowers to sell their property at depreciating rates compared to actual property value in order to pay off their accumulating debts. Companies and stakeholders, on the other hand, benefit from borrower losses. In 2020, as the pandemic ravaged Cambodia’s economy, “six of the country’s eight biggest microfinance companies posted record earnings,” while loanees were driven into devastating amounts of debt due to skyrocketing interest rates. As the market has evolved, companies have deviated from the initial goal of providing loans to fund and develop income-generating opportunities to offering credit for daily living costs and prior loan repayments.

Some microfinance institutions lend only to groups of women. This practice puts loan recipients under pressure, because all women are liable for the loans of the other women in the group and each member can only obtain a new loan if each member has repaid the previous loan. [24]

Muhammad Yunus argues that microfinance institutions that charge more than 15% above their long-term operating costs should face penalties. [29]

Empowerment of women

Meeting of clients of the Indian microlender ESAF in the state of Kerala. An ESAF 'Sangam' Meeting in progress in Kerala.jpg
Meeting of clients of the Indian microlender ESAF in the state of Kerala.

Microcredit has been directed at women because it was believed that, compared to men, they are better clients of microfinance institutions and that women's access to microcredit has more desirable development outcomes, since women tend to spend more money on basic needs compared to men. [30] [31] Microcredit has also been promoted as a tool to empower women. Early studies tended to confirm this positive picture. For example, a 1996 study in Bangladesh claims that the "success" of reaching women with microcredit was "highly impressive", but also notes that loans are often given over to male relatives or husbands. Only in a minority of cases there was an increase in domestic violence for women who did not get the loan or had to wait a long time to get the loan. The study also showed that women are more likely to retain control over their loans in traditional women’s work like livestock rearing that are considered "women's work". [32] The President of Grameen Foundation USA suggested in 2005, based on a review of various studies, that "there is strong evidence that female clients are empowered". It also found that "even in cases when women take but do not use the loan themselves, they and their families benefit more than if the loan had gone directly to their husbands". [1]

However, a 2008 study of microcredit programs in Bangladesh found that women often act merely as collection agents for their husbands and sons, such that the men spend the money themselves while women are saddled with the credit risk. [27] The bigger the size of the loan, the more women lose control. For example, a study in Bangladesh showed that women have 100% control over loans that are smaller than 1000 Taka but only 46% of control if the loan is bigger than 4,000 Taka. [33] A study in India showed that women may be put under pressure by their male relatives to join a credit group and indebt themselves. [13] A study in Bangladesh showed that microcredit increases dowries, with women forced at times to take microcredit loans as the only means to pay these increased dowries for their daughters. [27] The first randomized evaluation of the introduction of microcredit, carried out in Hyderabad in India, found no impact on women's decision-making. [5]

One scientist argues that empowerment cannot be given to women by (mostly male) development practitioners in the form of loans, since empowerment is a self-directed process. More female employees should be hired by microfinance institutions, and male staff should be trained in gender awareness. [34]

Based on the evidence of the two rigorous evaluations in India and in Manila, Nicolas Kristof concludes that "there is no evidence that microcredit has any effect on (...) women’s empowerment." [11]

Other impacts

Tazul Islam asserts a positive influence of microcredit on the level of education, health and nutrition. [12] In the US, microcredit has created jobs directly and indirectly, as 60% of borrowers were able to hire others. Business owners in Canada were able to improve their housing situation after their income improved due to business expansion facilitated by microloans, 70% indicating their housing has improved. Ultimately, many of the small business owners that use social funding are able to graduate from government funding. [14] According to reports every domestic microcredit loan creates 2.4 jobs. These entrepreneurs provide wages that are, on average, 25% higher than minimum wage. [35]

A 2005 review published by the Grameen Foundation summarize scores of studies, concluding that "society-wide benefits that go beyond clients’ families are apparently significant". [1]

Based on the evidence of two rigorous evaluations in India and in Manila, Nicolas Kristof concludes that "there is no evidence that microcredit has any effect on health or education." [11]

Unintended consequences of microfinance can include informal intermediaton: That is, some entrepreneurial borrowers become informal intermediaries between microfinance initiatives and poorer micro-entrepreneurs. Those who more easily qualify for microfinance split loans into smaller credit to even poorer borrowers. Informal intermediation ranges from casual intermediaries at the good or benign end of the spectrum to 'loan sharks' at the professional and sometimes criminal end of the spectrum. [36]

Related Research Articles

<span class="mw-page-title-main">Microcredit</span> Small loans to impoverished borrowers

Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment, and a verifiable credit history. It is designed to support entrepreneurship and alleviate poverty. Many recipients are illiterate, and therefore unable to complete paperwork required to get conventional loans. As of 2009 an estimated 74 million people held microloans that totaled US$38 billion. Grameen Bank reports that repayment success rates are between 95 and 98 percent. The first economist who had invented the idea of micro loans was Jonathan Swift I the 1720’s Microcredit is part of microfinance, which provides a wider range of financial services, especially savings accounts, to the poor. Modern microcredit is generally considered to have originated with the Grameen Bank founded in Bangladesh in 1983. Many traditional banks subsequently introduced microcredit despite initial misgivings. The United Nations declared 2005 the International Year of Microcredit. As of 2012, microcredit is widely used in developing countries and is presented as having "enormous potential as a tool for poverty alleviation." Microcredit is a tool that can possibly be helpful to reduce feminization of poverty in developing countries.

<span class="mw-page-title-main">Microfinance</span> Provision of microloans to poor entrepreneurs and small businesses

Microfinance is a category of financial services targeting individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; microinsurance; and payment systems, among other services. Microfinance services are designed to reach excluded customers, usually poorer population segments, possibly socially marginalized, or geographically more isolated, and to help them become self-sufficient. ID Ghana is an example of a microfinance institution.

<span class="mw-page-title-main">Grameen Bank</span> Bank and microfinancer in Bangladesh

Grameen Bank is a microfinance specialized community development bank founded in Bangladesh. It makes small loans to the impoverished without requiring collateral.

<span class="mw-page-title-main">Muhammad Yunus</span> Bangladeshi banker, economist and Nobel Peace Prize recipient

Muhammad Yunus is a Bangladeshi social entrepreneur, banker, economist and civil society leader who was awarded the Nobel Peace Prize in 2006 for founding the Grameen Bank and pioneering the concepts of microcredit and microfinance. These loans are given to entrepreneurs that are too poor to qualify for traditional bank loans. Yunus and the Grameen Bank were jointly awarded the Nobel Peace Prize "for their efforts through microcredit to create economic and social development from below". The Norwegian Nobel Committee said that "lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty" and that "across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development". Yunus has received several other national and international honours. He received the United States Presidential Medal of Freedom in 2009 and the Congressional Gold Medal in 2010.

<span class="mw-page-title-main">Self Employed Women's Association</span> Indian non-governmental organisation

Self-Employed Women's Association (SEWA), meaning "service" in several Indian languages, is a trade union based in Ahmedabad, India, that promotes the rights of low-income, independently employed female workers. Nearly 2 million workers are members of the Self-Employed Women’s Association across eight states in India. Self-employed women are defined as those who do not have a fixed employer-employee relationship and do not receive a fixed salary and social protection like that of formally-employed workers and therefore have a more precarious income and life. SEWA organises around the goal of full employment in which a woman secures work, income, food, and social security like health care, child care, insurance, pension and shelter. The principles behind accomplishing these goals are struggle and development, meaning negotiating with stakeholders and providing services, respectively.

A micro-enterprise is generally defined as a small business employing nine people or fewer, and having a balance sheet or turnover less than a certain amount. The terms microenterprise and microbusiness have the same meaning, though traditionally when referring to a small business financed by microcredit the term microenterprise is often used. Similarly, when referring to a small, usually legal business that is not financed by microcredit, the term microbusiness is often used. Internationally, most microenterprises are family businesses employing one or two persons. Most microenterprise owners are primarily interested in earning a living to support themselves and their families. They only grow the business when something in their lives changes and they need to generate a larger income. According to information found on the Census.gov website, microenterprises make up 95% of the 28 million US companies tracked by the census.

Opportunity International is a 501(c)(3) nonprofit organization chartered in the United States. Through a network of 47 program and support partners, Opportunity International provides small business loans, savings, insurance and training to more than 14 million people in the developing world. It has clients in more than 20 countries and works with fundraising partners in the United States, Australia, Canada, Germany, Switzerland, Singapore, Hong Kong and the United Kingdom. Opportunity International has 501(c)(3) status as a tax-exempt charitable organization in the United States under the US Internal Revenue Code.

<span class="mw-page-title-main">Association for Social Advancement</span>

The Association for Social Advancement is a non-governmental organisation based in Bangladesh which provides microcredit financing.

<i>Banker to the Poor</i>

Banker to the Poor: Micro-Lending and the Battle Against World Poverty is an autobiography of 2006 Nobel Peace Prize Winner and Grameen Bank founder Muhammad Yunus. The book describes Yunus' early life, moving into his college years, and into his years as a professor at Chittagong University. While a professor at Chittagong University, Yunus began to take notice of the extreme poverty of the villagers around him. In 1976, Yunus incorporated the help of Maimuna Begum to collect data of people in Jobra who were living in poverty. Most of these impoverished people would take a loan from moneylenders to buy some raw material, using that raw material to create some product, and then selling back the good to the moneylender to repay the loan, earning a very meager profit. One woman interviewed made no more than two cents per day creating bamboo stools using this system. The list Begum brought back to Yunus named 42 women who were living on credit of 856 taka.

<span class="mw-page-title-main">Lift Above Poverty Organization</span> Nigerian organisation

LAPO is a Nigerian organisation with a microfinance bank dedicated to self-employment through microfinance and an NGO, a non-governmental, non-profit community development organization focused on the empowerment of the poor and the vulnerable.

<span class="mw-page-title-main">Solidarity lending</span> Lending practice

Solidarity lending is a lending practice where small groups borrow collectively and group members encourage one another to repay. It is an important building block of microfinance.

<span class="mw-page-title-main">Grameen family of organizations</span>

The Grameen family of organizations has grown beyond Grameen Bank into a multi-faceted group of both commercial and non-profit ventures. It was first established by Muhammad Yunus, the Nobel Peace Prize-winning founder of Grameen Bank. Most of the organizations in the Grameen group have central offices at the Grameen Bank Complex in Mirpur, Dhaka, Bangladesh. The Grameen Bank started to diversify in the late 1980s when it began attending to unutilized or underutilized fishing ponds, as well as irrigation pumps like deep tubewells. In 1989, these diversified interests started growing into separate organizations, as the fisheries project became Grameen Fisheries Foundation and the irrigation project became Grameen Krishi Foundation.

Grameen America is a 501(c)(3) nonprofit microfinance organization based in New York City. It was founded by Nobel Peace Prize recipient Muhammad Yunus in 2008. Grameen America is run by former Avon Chairman and CEO Andrea Jung. The organization provides loans, savings programs, financial education, and credit establishment to women who live in poverty in the United States. All loans must be used to build small businesses.

<span class="mw-page-title-main">Microcredit Regulatory Authority</span>

Microcredit Regulatory Authority (MRA) is the central body to monitor and supervise microfinance operations of non-governmental organizations of the Republic of Bangladesh. It was created by the Government of People's Republic of Bangladesh under the Microcredit Regulatory Authority Act. License from the Authority is mandatory to operate microfinance operation in Bangladesh as an NGO.

<span class="mw-page-title-main">Microcredit for water supply and sanitation</span>

Microcredit for water supply and sanitation is the application of microcredit to provide loans to small enterprises and households in order to increase access to an improved water source and sanitation in developing countries. While most investments in water supply and sanitation infrastructure are financed by the public sector, investment levels have been insufficient to achieve universal access. Commercial credit to public utilities was limited by low tariffs and insufficient cost-recovery. Microcredits are a complementary or alternative approach to allow the poor to gain access to water supply and sanitation.

<span class="mw-page-title-main">Women's World Banking</span> Nonprofit organization

Women's World Banking is a global nonprofit organization dedicated to women's economic empowerment through financial inclusion.

The SIDBI foundation for Microcredit (SFMC)

Community banking is a non-traditional form of money-lending. Unlike banks or other classic lending institutions, the funds that community banks lend to borrowers are gathered by the local community itself. This tends to mean that the individuals in a neighborhood or group have more control over who is receiving the capital and how that capital is being spent. This practice has existed in some form for centuries; in ancient Egypt, for example, when grain was often used as currency, local granaries would store and distribute the community’s food supply. Since that time, a variety of community banking models have evolved.

Gender inequality has been improving a lot in Bangladesh, inequalities in areas such as education and employment remain ongoing problems so women have little political freedom. In 2015, Bangladesh was ranked 139 out of 187 countries on the Human Development Index and 47 out 144 countries surveyed on the Gender Inequality Index in 2017. Many of the inequalities are result of extreme poverty and traditional gender norms centred on a patrilineal and patriarchal kinship system in rural areas.

<span class="mw-page-title-main">Kashf Foundation</span> Non-profit organization

Kashf Foundation is a non-profit organization, founded by Roshaneh Zafar in 1996. Kashf is regarded as the first microfinance institution (MFI) of Pakistan that uses village banking methodology in microcredit to alleviate poverty by providing affordable financial and non-financial services to low income households - particularly for women, to build their capacity and enhance their economic role. With headquarters in Lahore, Punjab, Kashf have regional offices in five major cities and over 200 branches across Pakistan.

References

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  2. 1 2 Kathrin Hartmann:"Erlösen kann uns nur der Tod" ("Only Death Can Save Us"), Frankfurter Rundschau, 30 August 2012
  3. 1 2 Milford Bateman (2010-09-01). "The illusion of poverty reduction". Red Pepper magazine.
  4. ↑ Arp, Frithjof (12 January 2018). "The 34 billion dollar question: Is microfinance the answer to poverty?". Global Agenda. World Economic Forum.
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  23. ↑ Businessweek Online Extra: Yunus Blasts Compartamos
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