Furthermore, certain economists argue that certain individuals, or groups, only take out loans to buy food and other resources. This causes the loan recipient to gather a debt that they are unable to pay back.
In this project, I aim to provide an in depth analysis on the current state of microcredit, introducing the concept and what it’s aimed to, as well as posing the following questions
- Is microcredit financially viable?
- Is microcredit ethically viable?
I chose to pose these exact questions as they are topics of hot debate currently, and much of the current press is biased towards the pros of microcredit, due to the Nobel Prize award going to the “father” of microcredit.
The interest of the topic originated after reading an article in 2006 regarding Muhammad Yunus winning the Nobel Peace Prize for his efforts to create economic and social development with his application of microcredit. The article introduced the concept, and how amazingly high the repayment rates were. I was amazed by how impoverished people had higher repayment rates than people living in developed countries.
Additionally, with microcredit being in the international spectrum following a huge amount of positive press, it is also important to view the darker sides of the model
I was never able to research the topic further, but now I have the chance, as well as the interest, making this a perfect choice for me. Furthermore, I wish to study Economics at University, and I believe this will further my learning in the subject. I also believe that this will help me prepare for the new style of learning at University, which places a large of emphasis on self-learning.
[1] Yearofmicrocredit.org. Primary source with reliable information which is credible.
[2]Banker to the Poor, Muhammad Yunus. Primary source with reliable information.
[3] NobelPrize.org. Primary source with reliable information which is credible.
Literature Review
What is microcredit?
By definition, microcredit is the extension (giving) of small time loans to impoverished entrepreneurs and individuals who aspire to being self sufficient through self-employment. This definition is widely accepted, but exact definitions vary from country to country. The term "microcredit" reflects the very small size of the loans, often less than $100.
Muhammad Yunus, an economist and Professor from Bangladesh and the founder of Grameen Bank, first brought microcredit into the international spectrum. His work in microcredit culminated in Yunus jointly being awarded a Nobel Peace Prize in 2006 along with Grameen Bank for “efforts to create economic and social development” [1] and the UN declaring 2005 the “International Year of Microcredit”. [2]
While leading a group of students to a poor village in 1974, Yunus interviewed a craftswoman who explained that she was forced to borrow money in order to buy materials at rates up to 10 percent a week, leaving very marginal profits for each product. In light of this, he began lending his own money to craftspeople, comprising of mostly women, who often only required a few dollars to buy raw materials. Eventually, Yunus began to organize these clients into groups of borrowers, with these group members supporting the others through difficulties, and securing and supporting each other’s loans. This group centred method now serves as a model for microcredit institutions all over the world.
This work concluded in 1983, when Yunus founded the Grameen Bank. Twenty five years on, Grameen Bank now in excess of 2,500[3] branches as well as inspiring similar projects in more than 40 countries around the world. The immense success of the Bank has resulted in microcredit now being regarded as the most effective tool for poverty alleviation and development in Bangladesh. These achievements culminated in micro credit achieving a more credible status in the world of finance, and mainstream banks and financial institutions contemplating microcredit projects.
Arguments for and against
There are many success stories regarding Grameen Bank’s micro loans, with the bank claiming that over 50% of their clients have risen out of acute poverty, due to their loans. Moreover, the bank boasts a repayment rate exceeding 98% [4]. This figure is higher than standard loan repayments in developed countries.
The bank’s “16 decisions” have also been praised:
These ‘decisions’ are recited by the bank’s clients once a week, when the borrower meet’s their debt collector and supervisor. The bank asks its members to abide to these laws, and vow to follow them, although they are not legally binding. Various positive things come out of this, the main one being child education, with the almost every client of the bank enrolling their children into full time education, due to the increases in income, hereby assisting social change and educating the future generations of Bangladesh.
Yunus also had the vision of empowering women, by making them almost the sole clients of Grameen Bank. In 2007, 97% of the banks borrowers were women [5]. He achieved this by only allowing being women in groups of other borrowers being eligible for loans, except for special circumstances. The World Bank believes that microcredit helps to empower women through more control over household resources and assets, something that was predominantly controlled by the man of the household, as well as enabling women to participate in public life on a more frequent basis. Previously, only 10% of the labour force was made up by women, but with the utilisation of microloans, this figure is increasing and henceforth increasing the production possibility of Bangladesh, and hereby improving its economy.
The model of targeting women as the main benefactors of the microloans has not all been positive, though. A retired professor commented on how she believed that “Women are chosen because they are more used to form and manage groups.” And that the microcredit institutions use these qualities, and these women just to make money [6].
Certain religious leaders in Bangladesh also condemned these policies, due to beliefs that women should play the motherly role, and not spend their time in business, and doing labour. Furthermore, critics argue that the women are often just a collector of the loan, and that men are in fact the benefactors. A study showed that in only 37% [7] of the cases had women retained full or significant control over the businesses that were in their names, and that 22% [7] of those they surveyed did not know how their male counterparts had utilised the loan, and had not even been involved in "their" enterprises.
Grameen Bank has also received criticism over other issues regarding its microloans. The main criticism is regarding the banks relatively high interest rates, which vary around the figure of 20% [8]. This criticism is one that is shared by the majority of microcredit establishments. These rates however, are far lower than other moneylenders who now often charge in excess of 10% [9] a month. Critics also claim that these rates conclude in, already poverty stricken families, accumulating un-payable debts. Furthermore, the bank is very strict in enforcing paybacks. Allegations have been made regarding the fact that the bank does not take natural disasters into account that may cause the prevention of punctual loan repayments. There are sources suggesting that the debt collectors often harass the clients if they are unable to reimburse their loans. One former employee claimed “Their technique is to scare borrowers and insult them. We tell them to sell their clothes and that they have no other choice.” He went onto say that “several times, “I had even been obliged to say ‘sell your children’” [10]. There have been various reports from newspaper articles, and microcredit journals stating that people unable to pay the loans back have been forced to find other sources of credit to pay back the loan, and eventually accumulating heaps of debt that are un-payable for the person, therefore making the person worse off than before.
The banks model has also come under fire, with critics claiming it to be un-sustainable and that it requires heavy subsidies from the government in order to maintain business. Furthermore, there is evidence to show that the venture is unprofitable, but supporters claim this is untrue, as well the fact that the bank does not solely exist for profit, but was originally founded for poverty alleviation.
Grameen’s method of allowing only women belonging to "loan circles" to be eligible for loans is a controversial one. If one woman in a loan circle fails to meet her obligations, the others in the circle would either be disqualified for future loans, or be held responsible for repayment of her loan. In this way, the collective liability of the group is used as collateral. This can lead to peer pressure, and other problems, and is seen as unfair by many people, but as the only way to ensure repayments. One client claimed that:
“NGOs never excuse us in any situation. We are tortured both physically and mentally. We remain bound to pay instalment in time at any cost. If we do not pay back the other members of the group also lose their future loans”
Finally, Grameen Banks’ 16 Decisions are a matter of controversy; Critics claim that these rules force women to live how the rules state and women are asked to recite these rules at every meeting with their loan workers. Although these things are not regularly followed up by the bank, people are often pushed into following these rules by their group members.
Many of these criticisms are shared by the majority of microfinance establishments, as many of these institutions have based their models on Grameen’s method, but microcredit has also showed its fair share of successes.
But countless people still believe that microcredit can change lives for the better, and there are many sources of evidence to support this view. At a brief glance, one would think that microcredit obviously would help the entrepreneur and his business, but microcredit can do much more. Microcredit institutions often encourage their members to send their children to full time education, hence helping to educate the next generation of people. Education itself is a fundamental part of poverty alleviation. Furthermore, with micro loans, borrowers are able to purchase medicines they might not have been able to purchase without the monetary assistance, therefore saving lives.
People have completely turned their lives around with microcredit. From starting from very little, and with no hope left in the world, people have been able to increase their living standards and not have to worry about what they are going to eat for their next meal.
Microcredit institutions also encourage hard work, instead of encouraging handouts. Certain individuals rely on free aid, and if this does not come, these individuals can suffer extensively.
By lending them money to start a business these people will receive incentives to work hard, as well as teaching them essential things that they can use in life and in business. Furthermore, loans instead of handouts, helps the borrowers maintain dignity and confidence which would have previously been undermined.
Microcredit establishments do not just offer loans for businesses, which is the general belief. Loans can be used for non productive purposes such as building shelters, buying food or medical supplies and much more. For example a woman from Bangladesh took a loan of 75$ to run a campaign to become a member of her village council. Her campaign was successful, and she was able to hold her seat for two consecutive terms [11].
In terms of microcredit and its impact on women, it is also effective. Women often face religious and traditional barriers in LEDC’s (Less economically developed countries). The method of making microcredit available to mainly women has allowed women to break these barriers, and change their lives. Women borrowers can also feel that they are in control, and therefore gain vital confidence that they may not have had before. Microcredit can effectively act as a catalyst in the struggle of women being able to be equal to men in these countries.
Donors often believe that money they donate to charities often is the right thing to do, but this aid is only a temporary measure, and will not help people from breaking the poverty cycle, but instead make them reliant on aid. What is needed, argue certain institutions, such as Grameen Bank, is a longer lasting approach that will improve lives in the long run. Furthermore, the majority of this aid is used in administration [12]. Microcredit organizations such as Kiva.org encourage donors to lend directly to these impoverished people, instead of just supplying handouts.
On the other hand, some recipients of loans take them under false pretences, and use the loan for non productive (things which will not supply any return) such as buying food. These people often have to take out various other loans in order to pay off the current loan, and therefore gathering debt they cannot pay back.
Many of these loans were often used to educate children, or for healthcare which was previously provided free, or with very little cost from NGOs (non-governmental organisations). Due to the successes of microcredit, the majority of these NGOs have switched to offering loans, and therefore these services are now increasingly hard to get, and more expensive. “If they provide some facilities such as medical treatment, monetary help for the education of children, and become more liberal about the weekly collection of payments, I think, it would be better for us [13].” Was the way one client of microcredit put it.
Microcredit banks often see the only collateral that their clients possess is the people themselves. They can rely on peer pressure, which can lead to abuse, in order to secure their loans. They are often accused of not considering peoples’ situations, and taking money no matter what the state of the client is.
It is also argued that the microcredit model is unsustainable, and relies on government subsidies to continue functioning effectively, as well as being reliant on donations. According to certain critics like Elisabeth Hofmann, “The profits generated are then insufficient for them to step over the poverty line in any sustainable way” [14]
[1] NobelPrize.org. Primary source with reliable information which is credible.
[2] Yearofmicrocredit.org. Primary source with reliable information which is credible.
[3] Banker to the poor – Muhammad Yunus. Secondary source which contains bias but is credible with a good reputation.
[4] Credit delivery system. Grameen Communications . Primary source of evidence with reliable factual information, but contains vested interest and can be bias.
[5] Grameen Bank At a Glance. Grameen Communications. Primary source of evidence with reliable factual information, but contains vested interest and can be bias.
[6] Hedwige Peemans-Poullet interview. Secondary source of evidence containing heavy bias.
[7] Microcredit, microresults by Gina Neff. Secondary source of evidence contain heavy bias and vested interests.
[8] Understanding and Dealing with High Interest Rates on Microcredit - A Note to Policy Makers in the Asia and Pacific Region by Fernando, Nimal A. Neutral viewpoint containing little bias and with no vested interests. Reliable and credible
[9] Banker to the Poor – Muhammad Yunus. Secondary source which contains bias but is credible with a good reputation.
[10] Korshed Alom, on an interview for France 24. Primary piece of evidence containing vested interests and bias.
[11] The Goldin Institute – Microcredit resources. Primary source of evidence with no vested interests, neutrality and no bias and reliable figures.
[12] ActionAid International. Primary source of evidence with reliable factual information.
[13] The Goldin Institute – Microcredit resources. Primary source of evidence with no vested interests, neutrality and no bias and reliable figures.
[14] Credit for Women: A Future for Men? Elisabeth Hofmann and Kamala Marius-Gnanou. Secondary evidence containing bias and vested interests.
Discussion
Is microcredit an economically viable concept?
What is economic viability?
Economic viability is the capability of a company or organisation to survive or succeed. This can be interpreted in different ways. Viability is often linked with sustainability. By definition economic sustainability is:
“ of careful, efficient, and prudent use of natural, , and over the with minimal , and for all ( and non-monetary) .” [1]
These economic terms mean very little without understanding of their meaning. The word fiscal relates to spending, and borrowing. Monetary items refers to assets or liabilities which have fixed prices without a relationship to future prices, whereas non monetary items are the very opposite, with examples like land, and buildings.
Essentially, this can be defined as the “Effective utilisation of all available resources in the long term, with minimal wastage and record recording all costs.”
These definitions can be interpreted differently by different individuals, with critics claiming microcredit to be unsustainable due to its reliance on government subsidies, foreign grants and money from donors.
Although some MFIs rely on subsidies, and grants, these are often non profit organisations, and hence they require a way of funding their projects and paying employees. This is because in these cases microfinance cannot be made profitable due to the clients living in remote and extremely poor areas who cannot afford to pay the interest.
Critics argue that the money that these MFIs lend should just be given to the borrowers, without them having to pay – ie. the usual donation, as the money is being provided by people other than the MFI. Muhmmad Yunus argues that:
“The foreign aid machinery was designed years ago when people assumed that a magic quantum of investment would generate enough economic activity to somehow eliminate hunger and poverty. So neither the donors nor the recipients actually bothered about how the poor live. Donor assistance was aimed at eye catching physical structures – bridges, giant prestige factories, dams – not at institution building, replacing obsolete institutions organizing people to solve their own problems. Self-help projects were dismissed.”
Personally, I agree with Yunus’s view; handouts do not work in the long run. People become dependent on these handouts, and they are also non productive. Giving these people a loan encourages them to work, and provides self-confidence, as well as motivation for the future. By relying on handouts, people will not leave the poverty cycle, and therefore the children of these people will suffer from the same problems, and this carries on from generation to generation. Giving loans directly to the people also makes sure the money gets to the person who needs it, and not to a huge bureaucracy which becomes corrupt and inefficient and quickly incurs huge losses. Even after bribing officials to let the aid through, a research institution estimated that over 75% [2] of aid doesn’t actually reach a country like Bangladesh. Furthermore, a large amount of foreign aid goes to projects such as building roads, or bridges. Things like this will only become effective when the poor are able to take advantage of their existence. In this case, only the rich benefit.
Other MFI’s, such as Grameen Bank are enterprises which do look to make money, and claim that they in fact make a profit every year.
The high repayment rates, coupled with relatively high interest rates can cause microcredit to be a profitable endeavour, argue supporters. With interest rates bordering 20% [3] and repayment rates being incredibly high, with Grameen Bank claiming a repayment rate exceeding 98% [4], the figures suggest that microcredit can in fact be a way of making money as well as aiding impoverished people. Critics allege that these figures have been adjusted or tweaked, but Yunus claims that:
“Money is a sticky substance. It has the habit of clinging to the person who is currently in possession of it.
If the repayment time were to come six months or one year after the loan has been taken, even if the borrower had the cash ready in his pocket, her or she would hesitate to give it back because it is such a large amount, and large amounts are difficult for people to part with – a psychological barrier arises.
The psychology of the borrower is extremely important: we decided to make the payments small, small enough for the psychological barrier never to come into play.”
Yunus believes that Grameen owes its high repayment rates to this model; asking clients to pay in weekly deposits. This also means that the 20% interest rate, which is a source of a lot of criticism, is financially affordable for the clients. In my opinion, in order to make microcredit sustainable, MFIs must seek to make profits. Without any profit incentives, staff will not be encouraged to work their best, and the company will not be properly sustainable due to its reliance on subsidies and grants. Moreover, the lender will not be encouraged to use their resources efficiently, as essentially, they cannot lose anything. Yunus also adds that:
“We decided that if Grameen was to work, we had to trust our clients. From the very first day, we decided that in our system there would be no room for the police. We never use the judiciary in seeking repayment of our loans.
Grameen succeeds or fails depending on how strong our personal relationship is with the borrowers. We place trust in people, and the result is that they in turn trust us.”
This method of trust also adds to the already high repayment rates, in my opinion, as it changes the mentality of the borrower by making them think that the lenders aren’t just some wealthy businessmen sitting in offices after their money, but individuals who are genuinely interested in their welfare. Another element of this successful rate is down to the group centred system, which also has its moral implications. These implications mainly involve peer pressure.
For other MFIs, a research carried out by the MicroBanking Bulletin contained date from 62 self-sufficient lenders proved that microcredit could be rewarding. The average return for these institutions was 5.8% [5], which is comparable to the returns of commercial banks. These results are so promising; that some mainstream banks are contemplating microcredit projects as a way for income in the future.
Critics argue that running the banks on a usual business model, with the main concern being profit only will lead to MFIs exploiting poor people, and in some cases abusing them. Even projects such as Bangladesh Rural Advancement Committee and ASA in Bangladesh, who place high emphasis on poverty alleviation, have proved that it can be lucrative, by achieving in excess of 4% [6] profit.
In my view, MFIs must seek a balance between profitability and poverty alleviation to prevent exploitation. This way the MFIs have the incentive to work hard, and also help their clients. Without incentives, workers will not be driven, and investors will have no enticements to provide financial backing, apart from the moral rewards. If MFIs are too obsessive with profit, this can lead to exploitation of people who are already very poor, and in the long run can cause the people to be worse off than the previously were.
In addition, the reputation of microcredit is improving substantially and getting more recognised, as well as the fact that interest rates are gradually decreasing due to better efficiency. Due to this, the demand for microcredit is increasing. This means that the possible profit that firms can make is increasing, and the rate of demand growth is going up each year, meaning that these profits are not just a temporary thing, but they are also sustainable. Furthermore, these profits will not only repeat year after year, but increase due to this increase in demand. In order for microcredit to be viable, it must be sustainable, and this growth supports the sustainability of the project.
Furthermore, microcredit is not just limited to third world countries, but the model currently being replicated in countries all around the world, ranging from Europe to America. There are currently 59[7] different countries which contain replications of Muhammad Yunus’ microcredit model. This means that microcredit still has the potential to grow, and therefore new possibilities of making money are being opened, therefore supporting the idea that microcredit can be sustained.
Finally, with the bigger banks become interested in the field of microcredit, possible profits by these firms will probably be larger, due to higher efficiencies and capabilities of securing money to lend to the poor. Personally, I believe that the fact that these huge institutions (eg Citibank etc) contemplating providing microfinance is a reason to support the argument that microcredit is financially viable, as these companies have a vast amount of experience and knowledge. If the model of microfinance was not viable, then these companies would consider branching into the area.
Is microcredit ethically viable?
Many aspects of the microcredit model have come under criticism; with the majority of these branching from the group based lending, and the targeting of women borrowers.
Critics argue that women are targeted because they are more vulnerable, and are more likely to circum to peer pressure due to fear of others in the community terrorising them. Furthermore, in some isolated incidences, clients of MFIs claim that loan collectors have threatened to sexually abuse them. [8]
Another large criticism is that of the way the loans are collected, and the people who collect these loans. One debt collector claimed:
“I had even obliged to say 'sell your children if the client could not repay the loan.'” [9]
The MFI involved denied all claims, but in another case, a baby was auctioned in order to pay off a microloan for $350. [10] This is a case where MFIs had abused the sex of their clients in order for repayment of the loan, and I believe that is wrong, but I also feel that this was an isolated incident. The same debt collector went on to say:
“Their technique is to scare borrowers and insult them. We tell them to sell their clothes, and that they have no other choice.”
These claims seem extreme, but although few clients mentioned violence, many mentioned how inconsiderate the debt collectors were:
“The field workers were never considerate of our situation. Might it be storm, flood or any other disaster, they always tried to collect the loan instalments from us. They were very harsh with us.”
This tactic employed by these MFI debt collectors is wrong, but still these institutions deny the many claims of abuse. They declare that they are more lenient than a standard bank, and that in these cases they did give leniency, even claiming that they offer loans to help those who have been involved in natural disasters by using emergency funds.[11]
An MFI like Grameen claim that they hold meetings with their clients on a weekly basis to offer advice, and listen to the clients. They also claim that their debt collectors are carefully chosen, and don’t abuse their power over the clients. One client from an interview stated:
“The good ones listen to our problems, but there are bad ones who have no consideration for our conditions. They are here for money and they will go away taking the money. It doesn’t matter to them whether we can eat that day or die starving.”
This is like anything else, there are bad apples in every bunch, and this cannot be helped. But even so, these bad apples should be removed, in my opinion, and shouldn’t even be in this position in the first place.
The targeting of mostly women is also something that is heavily debated, with 94% [12] of clients being female. Some say that women are only chosen because of their vulnerability, but MFIs claim that women are more reliable. MFIs claim that studies show that women are more likely to repay the loan than men, and spend the money on more effective things such as education and food, and even save the money, whereas men are more likely to spend the money for more selfish means.
MFIs such as Grameen also place heavy emphasis on the empowerment of women. They believe that making the woman the breadwinner of the house gives her a better moral standing, and allows her to experience things that she never would have in the past. This also helps equality for women, because in many of these deprived parts of the world, women are expected to raise children, and often looked down upon by their male counterparts. The loan can also help a woman’s confidence, when previously she was seen as a burden by her husband and her parents- her parents would have had to pay a dowry to get rid of her, as it were, but with this loan she has been trusted for the first time in her life with a large sum of money. In Yunus’s eyes “The loan is not simply cash; it becomes a kind of ticket to self-discovery and self-exploration. The borrower begins to explore her potential, to discover the creativity inside her.”
I feel that this method of targeting women is an affective one that helps the social standing of women, as well as being beneficial for the lenders as it provides a larger repayment rate. Critics claim that even though the women take out the loans, they only do this as they are asked to do so by their male partners. A research showed that 37% of the cases had women retained full or significant control over the business, and 22% of those they surveyed had no idea what their male counterparts had done with the money. [13]
The group based model often comes under criticism due to its reliance on peer pressure and fear of abuse. MFIs feel that this group system is their only insurance, their collateral, and so they were justified in using it. Clients who failed to pay instalments would cause any future loans to the other members of their group to cease, and hence they receive abuse and pressure from their group members. The women who are in these groups also are vulnerable to the debt collectors, with one client saying:
“MFI workers abuse the women a lot. Women have to bear the pressure coming from both sides.”
So, to add insult to injury, women who are unable to pay a loan back are abused by their peers, and the debt collectors. This is hardly empowering women like Muhammad Yunus set out to achieve. But MFIs maintain the argument that they do not deliberately abuse their clients, but since many of them refuse to use the judiciary or the police in order to secure repayments (they claim this is to create trust with the client) that this may be the only means necessary.
I can understand that MFIs rely on groups to be the collateral for their loans, as they have nothing else to secure payments on. Just by giving out the loan, they are taking huge risks, and often just to benefit the client, and so when a person does not repay their loan, they prevent another person from receiving one (as the money is not being put back into the system).
MFIs also claim that this group based system actually encourages their clients to work harder, and also encourages them to take the loan out in the first place. Women are often too scared of facing their husbands in order to take out the loan, and often do so with the other members of their group, henceforth increasing self-confidence. Grameen claims that a group system gives a member “a feeling of protection” and that “Individually, a person tends to be erratic in her behaviour.... group membership creates group support and group pressure smoothes out behaviour patterns and makes the borrower more reliable.”
I agree with this view, and believe that a group can be far more effective than an individual borrowing money. The group can help members through tough times, providing emotional and maybe financial help if required. As Muhammad Yunus stated:
“Subtle, and at times not so subtle, peer pressure keeps the group members in line with the broader objectives of the credit programme.”
Another aspect that is debated is the question that are the MFIs exploiting these impoverished people out of money that they cannot afford by charging huge interest rates, often exceeding 20%.[14]
MFIs claim that they require these high rates due to the huge amount of labour used – they spend a lot of resources monitoring, advising, and collecting money off their clients weekly.
But some of these companies were also making large profits, which meant that they could afford lowering their interest rates to a point where they broke even, and yet offered a substantial cut in the interest rates for their clients.
I do not find any problem with the current interest rates that the MFIs charge as it is lower than the average rate that the money lenders charge in most of these areas, and it also provides profits that are enough to keep the MFIs motivated enough to improve their company, and give incentives for the employees to work as hard as they can.
Another argument put forward was that the fact that profits were being generated was attracting ‘Big Players’, such as Citigroup and Deutsche Bank, who were more likely to exploit the clients, due to their main interests being in profit, the critics argue. This could cause increases in interest rates, and therefore cause the clients to be worse off in general.
I feel that these Big Players would in fact have a positive effect on microcredit, as I feel that these bigger companies would be more efficient and effective, and therefore would be able to provide loans at lower interest rates rather than the higher ones critics argue would be the case.
[1]
[2]World View Magazine: The Littlest Banker. Secondary source of information that shows a bias.
[3] Understanding and Dealing with High Interest Rates on Microcredit - A Note to Policy Makers in the Asia and Pacific Region. Manila, Philippines: Fernando, Nimal A. Primary piece of evidence that is very factual, reliable and non-bias.
[4] "Credit delivery system". Grameen Communications. 2002-09-18. Secondary piece of information which is heavily supportive and biased towards microcredit.
[5] MicroBanking Bulletin. Secondary source of information that is factual and non-bias with reliable information
[6] CGAP.org - Is There a Trade-off between Profitability and Reaching Poorer Clients? Secondary piece of information, containing views from both sides with reliable information.
[7]Banker to the poor – Yunus, Muhammad. Secondary source which is very opinionated and biased.
[8] Goldin Institute Journal. Primary source of evidence which has arguments for both sides.
[9] Korshed Alom Interview for France 24 Primary source of information but biased.
[10] CGAP.org Primary piece of information, containing views from both sides with reliable information.
[11] Banker to the poor – Yunus, Muhammad. Secondary source which contains bias but is credible with a good reputation.
[12] Women and Microcredit – Microcredit bulletin. Primary source of information with reliable information
[13] World Development, Anne Marie Goetz and Rina Sen Gupta. Secondary source which shows bias
[14] Understanding and Dealing with High Interest Rates on Microcredit - A Note to Policy Makers in the Asia and Pacific Region. Manila, Philippines: Fernando, Nimal A. Primary piece of evidence that is very factual, reliable and non-bias.
Conclusion
In conclusion, I believe that microcredit is economically viable, but not when the main goal is to create profits. In this case, it requires government subsidies and foreign grants to operate. But when a correct balance is maintained, creating a profit is possible granted the employees are effective, and the correct clients are approached. Statistics support this argument, with the majority of MFIs which seek to make profits doing so.
A research carried out by the Goldin Institute interviewed microcredit clients and asked them how they thought it could be improved. The results of these interviews “were insightful and diverse”.
One thing borrowers noted is that it was impossible to generate a profit after just one week after the loan was taken, but MFIs still asked for a loan repayment instalment after this first week. Many of these clients used the money to plant crops. A suggestion i would make would be to not ask for loan instalments until after the crops had been harvested. Instead, borrowers had to borrow a bit of extra money, in order to pay these first instalments back.
Another thing that was suggested was that NGOs who provide microfinance should offer other services, other than microfinance. NGOs in the past offered services such as shelter, education and healthcare, but now mainly offer microfinance. This results in impoverished people having to pay for these services which were previously provided for free. Some loan recipients admitted that they took out loans from these NGOs just to pay for education and healthcare, which were previously provided for free, but the providers had switched to supplying microcredit.
“If they provide some facilities such as medical treatment, monetary help for the education of children, and become more liberal about the weekly collection of payments, I think, it would be better for us.”
These simple and straightforward proposals come out of direct lived experience with what does and does not work for microcredit borrowers themselves.
I feel that the allegations on the morals of its method do have a base, but only from isolated incidences. I do feel, however, that MFIs should be more selective when recruiting staff, to make sure they are capable of doing the job effectively, and without abusing or threatening the clients.
In conclusion, microcredit is currently economically and ethically viable, but still can be improved.
But as Muhammad Yunus said, “Micro-credit may not be a cure-all, but it is a force for change, not only economic and personal, but also social and political” and I truly believe it can one day be a vital tool in poverty alleviation. I also feel that it would be used most effectively with other aid programs, as alone it will not fight poverty.
Glossary of Key Words
Microcredit - Extension of small time loans to impoverished entrepreneurs and individuals who aspire to being self sufficient through self-employment.
Microloans – The extension of fairly small amount of money as a loan, often under 100$, from a microcredit institution to an entrepreneur.
NGO – Nongovernmental organisation often formed of volunteers and non profit groups.
Collateral – A guarantee or financial security, usually involving an asset which can be repossessed by the loan lender if the client is unable to pay.
Entrepreneur – Someone who is willing and aspires to assume the responsibility, risk and rewards of starting and operating a business.
Self Employment – Working for oneself, or acting as an independent contractor.
Interest Rates – The percentage of a loan charged to a borrower on top of the loan itself. Often paid weekly or monthly, along with loan instalments
Sustainable – Capable of being able to exist or maintain.
Loan – Temporary provision of a sum of money, usually at interest, which must be repaid by borrower as the contract states.
Microfinance: The Supply of loans, savings, and other basic financial services to the poor.
MFI - Microfinance Institution: An organization that provides microfinance services, ranging from small non-profit organizations to large commercial banks
Non-productive: Activities that do not produce profit or a good / service
Bibliography
Websites
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Books
Banker to the Poor: Yunus, Muhammad
Microfinance and Anti-Poverty Strategies: Jos�EGarson, UNCDF
Articles
The Financial Times: Microcredit potential 'grossly overestimated'- 15 February, 2007
The Guardian: Microcredit won't make poverty history- 17 October, 2006
The Guardian: A microcheer for microcredit- 15 October, 2006
The Times: Nobel prizewinner using micro-credit for macro benefit- December 16, 2006
The Economist: Microcredit and disasters: Starting over- December 14, 2005
France 24: The crushing burden of microcredit- 4 April, 2008
The Left Business Observer: Microcredit, microresults
Scottish Banker: Microfinance comes of age- 3 March, 2007
Forbes: When small loans make a big difference- 3 June, 2008
CNN: Your $25 can start a business, change a life- 4 March, 2008
The Wall Street Journal: Microlending for Microbankers- 20 March, 2008
CBS News: Fight Poverty with Microlending- 31 October, 2007
Time: Lending a Hand- 5 Apr, 2007
Journals
Understanding and Dealing with High Interest Rates on Microcredit - A Note to Policy Makers in the Asia and Pacific Region- Nimal Fernando, May 2006
Credit delivery system- Grameen Communications, September 2002
Grameen Bank at a Glance- Grameen Communications, October 2007
Credit for Women: A Future for Men? – Kamala Hoffman & Gnanou Marius, October 2001
MicroBanking Bulletin: Can microfinance be profitable? Spring 2008
CGAP: Is There a Trade-off between Profitability and Reaching Poorer Clients? January 2009
CGAP: Are the Poor Being Exploited by High Microcredit Interest Rates? February 2009
Video
Channel 4: Millionaires’ Mission
KBYU Television: Small Fortunes- Microcredit and the Future of Poverty (available to watch on the internet)
