Microcredit
From Wikipedia, the free encyclopedia
(Redirected from Microlending)This article is specific to small loans. For financial services to the poor,
see Microfinance. For small payments, see Micropayment.
see Microfinance. For small payments, see Micropayment.
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 not only to support entrepreneurship
and alleviate poverty, but also in many cases to empower women and uplift entire communities by extension.
In many communities worldwide, in developed and developing nations alike, women lack the highly stable
employment histories that traditional lenders tend to require. This reality might result from factors such as leaving
the paid workforce to care for children and elderly relatives. As of 2009 an estimated 74 million men and women
held microloans that totalled US$38 billion.[1] Grameen Bank reports that repayment success rates are between
95 and 98 per cent.
collateral, steady employment and a verifiable credit history. It is designed not only to support entrepreneurship
and alleviate poverty, but also in many cases to empower women and uplift entire communities by extension.
In many communities worldwide, in developed and developing nations alike, women lack the highly stable
employment histories that traditional lenders tend to require. This reality might result from factors such as leaving
the paid workforce to care for children and elderly relatives. As of 2009 an estimated 74 million men and women
held microloans that totalled US$38 billion.[1] Grameen Bank reports that repayment success rates are between
95 and 98 per cent.
Microcredit is a division of microfinance, which is the provision of 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."[2]
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."[2]
Critics argue, however, that microcredit has not had a positive impact on gender relationships, does not alleviate
poverty, has led many borrowers into a debt trap and constitutes a "privatization of welfare".[3] The first
randomized evaluation of microcredit, conducted by Esther Duflo and others, showed mixed results: there was no
effect on household expenditure, gender equity, education or health, but the number of new businesses increased
by one third compared to a control group.[4] Professor Dean Karlan from Yale University says that whilst
microcredit generates benefits it isn't the panacea that it has been purported to be. He advocates also giving the
poor access to savings accounts.[5]
poverty, has led many borrowers into a debt trap and constitutes a "privatization of welfare".[3] The first
randomized evaluation of microcredit, conducted by Esther Duflo and others, showed mixed results: there was no
effect on household expenditure, gender equity, education or health, but the number of new businesses increased
by one third compared to a control group.[4] Professor Dean Karlan from Yale University says that whilst
microcredit generates benefits it isn't the panacea that it has been purported to be. He advocates also giving the
poor access to savings accounts.[5]
Contents |
[edit]History
[edit]Early beginnings
Ideas relating to microcredit can be found at various times in modern history. Jonathan Swift inspired the Irish
Loan Funds of the 18th and 19th centuries.[6] In the mid-19th century, Individualist anarchist Lysander Spooner
wrote about the benefits of numerous small loans for entrepreneurial activities to the poor as a way to alleviate
poverty.[7] At about the same time, but independently to Spooner, Friedrich Wilhelm Raiffeisen founded the first
cooperative lending banks to support farmers in rural Germany.[8] In the 1950s, Akhtar Hameed Khan began
distributing group-oriented credit in East Pakistan. Khan used the Comilla Model, in which credit is distributed
through community-based initiatives.[9] The project failed due to the over-involvement of the Pakistani government,
and the hierarchies created within communities as certain members began to exert more control over loans than
others.[9]
Loan Funds of the 18th and 19th centuries.[6] In the mid-19th century, Individualist anarchist Lysander Spooner
wrote about the benefits of numerous small loans for entrepreneurial activities to the poor as a way to alleviate
poverty.[7] At about the same time, but independently to Spooner, Friedrich Wilhelm Raiffeisen founded the first
cooperative lending banks to support farmers in rural Germany.[8] In the 1950s, Akhtar Hameed Khan began
distributing group-oriented credit in East Pakistan. Khan used the Comilla Model, in which credit is distributed
through community-based initiatives.[9] The project failed due to the over-involvement of the Pakistani government,
and the hierarchies created within communities as certain members began to exert more control over loans than
others.[9]
[edit]
Nobel laureate Muhammad Yunus, the founder of Grameen Bank, whichis generally considered the firstmodern microcredit institution.
Modern microcredit
[edit]
Miicrocredit is ideally based on a unique set of principles that are readily distinguished from trends in the wider credit market.[13] Microcredit organizations were initially created as alternatives to the "loan-sharks" known to take advantage of clients.[9] Indeed, many microlenders began as non-profit organizations and operated with government funds or private subsidies. By the 1980s, however the ‘financial systems approach,’ influenced by neoliberalism and propagated by the Harvard Institute for International Development, became the dominant ideology among microcredit organizations. The commercialization of microcredit officially began in 1984 with the formation of Unit Desa (BRI-UD) within the Bank Rakyat Indonesia. Unit Desa offered ‘kupedes’ microloans based on market interest rates.
Economic principles of microcredit
Ironically, many microcredit organizations now function as independent banks. This has led to their charging
higher interest rates on loans and placing more emphasis on savings programs.[9] Notably, Unit Desa has
charged in excess of 20% on small business loans. The application of neoliberal economics to microcredit has
generated much debate among scholars and development practitioners, with some claiming that microcredit bank
directors, such as Muhammad Yunus, apply the practices of loan sharks for their personal enrichment.[10] Indeed,
the academic debate foreshadowed a Wall-street style scandal involving the Mexican microcredit organization
Compartamos.[9]
higher interest rates on loans and placing more emphasis on savings programs.[9] Notably, Unit Desa has
charged in excess of 20% on small business loans. The application of neoliberal economics to microcredit has
generated much debate among scholars and development practitioners, with some claiming that microcredit bank
directors, such as Muhammad Yunus, apply the practices of loan sharks for their personal enrichment.[10] Indeed,
the academic debate foreshadowed a Wall-street style scandal involving the Mexican microcredit organization
Compartamos.[9]
Even so, the numbers indicate that ethical microlending and investor profit can go hand-in-hand. In the 1990s a rural
finance minister in Indonesia showed how Unit Desa could lower its rates by about 8% while still bringing attractive
returns to investors. Today, smaller investment firms are adopting the microlending movement's original ideals. For
instance, whereas small coffee farmers in Honduras are typically charged an 18% bank rate, a private investment firm
in the US has room to 1) offer more ethical loan terms and 2) offer an attractive return to investors.
finance minister in Indonesia showed how Unit Desa could lower its rates by about 8% while still bringing attractive
returns to investors. Today, smaller investment firms are adopting the microlending movement's original ideals. For
instance, whereas small coffee farmers in Honduras are typically charged an 18% bank rate, a private investment firm
in the US has room to 1) offer more ethical loan terms and 2) offer an attractive return to investors.
[edit]Group lending
Though lending to groups has long been a key part of microcredit[citation needed], micro-credit initially
began with the principle of lending to individuals.[10] Despite the use of solidarity circles in 1970s Jobra,
Grameen Bank and other early microcredit institutions initially focused on individual lending.[11] Indeed,
Muhammad Yunus propagated the notion that every person has the potential to become an entrepreneur.
The use of group-lending was motivated by economics of scale, as the costs associated with monitoring
loans and enforcing repayment are significantly lower when credit is distributed to groups rather than
individuals.[11]
Many times the loan to one participant in group-lending depends upon the successful repayment
from another member, thus transferring repayment responsibility off of microcredit institutions to loan
recipients.[11]
[edit]Lending to women
Lending to women has become an important principle in microcredit, with banks and NGOssuch as
BancoSol, WWB, and Pro Mujer catering to women exclusively.[11] ThoughGrameen Bank initially tried to
lend to both men and women at equal rates, women presently make up ninety-five percent of the bank’s
clients. Women continue to make up seventy-five percent of all microcredit recipients worldwide.[11]
Exclusive lending to women began in the 1980s when Grameen Bank found that women have higher
repayment rates, and tend to accept smaller loans than men. Subsequently, many microcredit institutions
have used the goal of empowering women to justify their disproportionate loans to women.[9]
BancoSol, WWB, and Pro Mujer catering to women exclusively.[11] ThoughGrameen Bank initially tried to
lend to both men and women at equal rates, women presently make up ninety-five percent of the bank’s
clients. Women continue to make up seventy-five percent of all microcredit recipients worldwide.[11]
Exclusive lending to women began in the 1980s when Grameen Bank found that women have higher
repayment rates, and tend to accept smaller loans than men. Subsequently, many microcredit institutions
have used the goal of empowering women to justify their disproportionate loans to women.[9]
[edit]Examples
Mumbai Headquarters of the National Bank
for Agriculture and Rural Development of
India, which on-lends funds to banks providing
microcredit.
Mumbai Headquarters of the National Bank
for Agriculture and Rural Development of
India, which on-lends funds to banks providing
microcredit.
Developing countries
Grameen Bank in Bangladesh is the oldest and probably best-known microfinance institution in the world.
In India, the National Bank for Agriculture and Rural Development (NABARD) finances more than 500 banks
that on-lend funds to self-help groups (SHGs). SHGs comprise twenty or fewer members, of whom the majority
are women from the poorest castesand tribes. Members save small amounts of money, as little as a few rupees
a month in a group fund. Members may borrow from the group fund for a variety of purposes ranging from
household emergencies to school fees. As SHGs prove capable of managing their funds well, they may borrow
from a local bank to invest in small business or farm activities. Banks typically lend up to four rupees for every rupee
in the group fund. In Asia borrowers generally pay interest rates that range from 30% to 70% without commission
and fees.[14] Nearly 1.4 million SHGs comprising approximately 20 million women now borrow from banks,
which makes the Indian SHG-Bank Linkage model the largest microfinance program in the world. Similar programs
are evolving in Africa and Southeast Asia with the assistance of organizations like IFAD, Opportunity International,
Catholic Relief Services, Compassion International, CARE, APMAS, Oxfam, Tearfund and World Vision.
In India, the National Bank for Agriculture and Rural Development (NABARD) finances more than 500 banks
that on-lend funds to self-help groups (SHGs). SHGs comprise twenty or fewer members, of whom the majority
are women from the poorest castesand tribes. Members save small amounts of money, as little as a few rupees
a month in a group fund. Members may borrow from the group fund for a variety of purposes ranging from
household emergencies to school fees. As SHGs prove capable of managing their funds well, they may borrow
from a local bank to invest in small business or farm activities. Banks typically lend up to four rupees for every rupee
in the group fund. In Asia borrowers generally pay interest rates that range from 30% to 70% without commission
and fees.[14] Nearly 1.4 million SHGs comprising approximately 20 million women now borrow from banks,
which makes the Indian SHG-Bank Linkage model the largest microfinance program in the world. Similar programs
are evolving in Africa and Southeast Asia with the assistance of organizations like IFAD, Opportunity International,
Catholic Relief Services, Compassion International, CARE, APMAS, Oxfam, Tearfund and World Vision.
[edit]Developed countries
Grameen Bank launched their US operations in New York in April 2008.[15] Bank of America has announced plans
to award more than $3.7 million in grants to nonprofits to use in backing microloan programs.[16] ACCION USA, the
US subsidiary of the better-known ACCION International, has provided US$117 million in microloans since 1991, with
an over 90% repayment rate.[citation needed]
to award more than $3.7 million in grants to nonprofits to use in backing microloan programs.[16] ACCION USA, the
US subsidiary of the better-known ACCION International, has provided US$117 million in microloans since 1991, with
an over 90% repayment rate.[citation needed]
Even so, efforts to replicate Grameen-style solidarity lending in developed countries have generally not succeeded.
For example, theCalmeadow Foundation tested an analogous peer-lending model in three locations in Canada,
rural Nova Scotia and urban Toronto and Vancouver, during the 1990s. It concluded that a variety of factors — including difficulties in reaching the target market, the high risk profile of clients, their general distaste for the joint liability
requirement, and high overhead costs — made solidarity lending unviable without subsidies.[17] However, debates
have continued about whether the required subsidies may be justified as an alternative to other subsidies targeted to the entrepreneurial poor, and VanCity Credit Union, which took over Calmeadow's Vancouver operations, continues to use
peer lending.[citation needed]
For example, theCalmeadow Foundation tested an analogous peer-lending model in three locations in Canada,
rural Nova Scotia and urban Toronto and Vancouver, during the 1990s. It concluded that a variety of factors — including difficulties in reaching the target market, the high risk profile of clients, their general distaste for the joint liability
requirement, and high overhead costs — made solidarity lending unviable without subsidies.[17] However, debates
have continued about whether the required subsidies may be justified as an alternative to other subsidies targeted to the entrepreneurial poor, and VanCity Credit Union, which took over Calmeadow's Vancouver operations, continues to use
peer lending.[citation needed]
Microcredits have also been introduced in Israel,[18] Russia, Ukraine and other nations where micro-loans help small
business entrepreneurs overcome cultural barriers in the mainstream business society. The Israel Free Loan
Association (IFLA) has lent more than $100 million in the past two decades to Israeli citizens of all backgrounds.
business entrepreneurs overcome cultural barriers in the mainstream business society. The Israel Free Loan
Association (IFLA) has lent more than $100 million in the past two decades to Israeli citizens of all backgrounds.
[edit]Peer-to-peer lending over the Web
The principles of microcredit have also been applied in attempting to address several non-poverty-related issues.
Among these, multiple Internet-based organizations have developed platforms that facilitate a modified form of
peer-to-peer lending where a loan is not made in the form of a single, direct loan, but as the aggregation of a
number of smaller loans—often at a negligible interest rate. There are several ways by which the general public
can participate in alleviating poverty using Web platforms.
Among these, multiple Internet-based organizations have developed platforms that facilitate a modified form of
peer-to-peer lending where a loan is not made in the form of a single, direct loan, but as the aggregation of a
number of smaller loans—often at a negligible interest rate. There are several ways by which the general public
can participate in alleviating poverty using Web platforms.
New platforms that connect lenders to micro-entrepreneurs are emerging on the Web, for example Kiva, Zidisha,
Lend for Peace, and theMicroloan Foundation. Another WWW-based microlender United Prosperity uses a variation
on the usual microlending model; with United Prosperity the micro-lender provides a guarantee to a local bank which
then lends back double that amount to the micro-entrpreneur. United Prosperity claims this provides both greater
leverage and allows the micro-entrepreneur to develop a credit history with their local bank for future loans. In 2009,
the US-based nonprofit Zidisha became the first peer-to-peer microlending platform to link lenders and borrowers
directly across international borders without local intermediaries.[19] Vittana allows peer-to-peer lending for student
loans in developing countries.[20]
Lend for Peace, and theMicroloan Foundation. Another WWW-based microlender United Prosperity uses a variation
on the usual microlending model; with United Prosperity the micro-lender provides a guarantee to a local bank which
then lends back double that amount to the micro-entrpreneur. United Prosperity claims this provides both greater
leverage and allows the micro-entrepreneur to develop a credit history with their local bank for future loans. In 2009,
the US-based nonprofit Zidisha became the first peer-to-peer microlending platform to link lenders and borrowers
directly across international borders without local intermediaries.[19] Vittana allows peer-to-peer lending for student
loans in developing countries.[20]
[edit]Impact
Microcredit is being justified by its positive impact on poverty reduction, income, consumption, the creation of
businesses, education and health, the empowerment of women and the empowerment of the poor in general.
businesses, education and health, the empowerment of women and the empowerment of the poor in general.
Critics argue that microcredit has driven poor households into a debt trap, that the money from loans is used for
consumption, that men actually use the money for which their female relatives get into debt and that microcredit
does not alleviate poverty or improve health and education.
consumption, that men actually use the money for which their female relatives get into debt and that microcredit
does not alleviate poverty or improve health and education.
At the 2008 Innovations for Poverty Action/Financial Access Initiative Microfinance Research conference, economist
Jonathan Morduch of New York University noted there are only one or two methodologically sound studies of
microfinance's impact.[21] Grameen Foundation has released two papers summarizing the state of research on the
impact of microfinance on poverty: "Measuring the Impact of Microfinance, Taking Stock of What We Know" by
Nathanael Goldberg[22] (now with Innovations for Poverty Action) and an update, "Measuring the Impact of
Microfinance: Taking Another Look" by Professor Kathleen Odell. These two papers identify scores of findings
indicating positive impact in research conducted over the last twenty years, as well as some findings that suggest
limited or negative impact in some cases.
Jonathan Morduch of New York University noted there are only one or two methodologically sound studies of
microfinance's impact.[21] Grameen Foundation has released two papers summarizing the state of research on the
impact of microfinance on poverty: "Measuring the Impact of Microfinance, Taking Stock of What We Know" by
Nathanael Goldberg[22] (now with Innovations for Poverty Action) and an update, "Measuring the Impact of
Microfinance: Taking Another Look" by Professor Kathleen Odell. These two papers identify scores of findings
indicating positive impact in research conducted over the last twenty years, as well as some findings that suggest
limited or negative impact in some cases.
[edit]Impact on income, consumption and the creation of businesses
Microlending aims at increasing income
through productive activities such as goat
herding, as shown here in Rwanda on a
cooperative funded through microlending.
Tazul Islam suggests that microcredit has a “positive impact on enterprise and household income
University in the Philippines compared two groups in Manila: a treatment group, financed through
microcredit, and a control group that did not receive microcredit. The study showed that in this case
many microcredits were loaned to people with existing business, and not to those seeking to establish
new businesses. The businesses became more profitable and laid off unproductive employees
including friends and relatives that they previously had felt obliged to employ.[24]
The first randomized evaluation of the impact of introducing microcredit in a new market has been undertaken in slums in Hyderabad, India, in 2008. Half the slums were randomly selected for opening branches of banks that provided microcredits while the remainder were not. 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 and the number of new businesses increased
by one third.[4]
[edit]Impact on poverty
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."[25]
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."[25]
Sociologist Jonathan H. Westover, Ph.D. found that much of the evidence on the effectiveness of microfinance
for alleviating poverty is based in anecdotal reports or case studies. He initially found over 100 articles on the
subject, but included only the 6 which used enough quantitative data to be representative, and none of which
employed rigorous methods such as randomized control trials similar to those reported byInnovations for Poverty
Action and the M.I.T. Jameel Poverty Action Lab. One of these studies found that microfinance reduced poverty.
Two others were unable to conclude that microfinance reduced poverty, although they attributed some positive
effects to the program. Other studies concluded similarly, with surveys finding that a majority of participants feel
better about finances with some feeling worse.[26]
for alleviating poverty is based in anecdotal reports or case studies. He initially found over 100 articles on the
subject, but included only the 6 which used enough quantitative data to be representative, and none of which
employed rigorous methods such as randomized control trials similar to those reported byInnovations for Poverty
Action and the M.I.T. Jameel Poverty Action Lab. One of these studies found that microfinance reduced poverty.
Two others were unable to conclude that microfinance reduced poverty, although they attributed some positive
effects to the program. Other studies concluded similarly, with surveys finding that a majority of participants feel
better about finances with some feeling worse.[26]
According to Islam 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.[27] 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.[28]
around the poverty line of predominantly moderately poor or vulnerable non-poor.[27] 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.[28]
Some problems with microcredit are mistakenly alleged in The Micro Debt, a film by the Danish journalist
Tom Heinemann.[29] After a thorough investigation in December 2010 by the Norwegian Foreign Ministry,
the alleged problems have been proven to be false and no further actions against the Grameen Bank and
its founder, Muhammad Yunnis, have been taken.[30] The documentary by Heinemann also looks at the
effectiveness of Grameen Bank and alleges that it has little impact on poverty by highlighting the purported
continued poverty of Sufiya Begum, the original loan recipient of Grameen, in Jobra Village. This allegation
is disputed, since documentary maker Gayle Ferraro found the woman alive and well, confirming the original
Grameen story.[31]
Tom Heinemann.[29] After a thorough investigation in December 2010 by the Norwegian Foreign Ministry,
the alleged problems have been proven to be false and no further actions against the Grameen Bank and
its founder, Muhammad Yunnis, have been taken.[30] The documentary by Heinemann also looks at the
effectiveness of Grameen Bank and alleges that it has little impact on poverty by highlighting the purported
continued poverty of Sufiya Begum, the original loan recipient of Grameen, in Jobra Village. This allegation
is disputed, since documentary maker Gayle Ferraro found the woman alive and well, confirming the original
Grameen story.[31]
Risks like sickness and natural disasters are a critical dimension of poverty and poor people rely heavily on
informal savings to manage these risks. Microfinance institutions could provide savings services to this population
to reduce these risks, but not all of them have been successful at doing so. For example, a study of microcredit
institutions in Bolivia in 2003, for example, found that they were very slow to deliver qualitymicrosavings services
because of easy access to cheaper forms of external capital.[32]
informal savings to manage these risks. Microfinance institutions could provide savings services to this population
to reduce these risks, but not all of them have been successful at doing so. For example, a study of microcredit
institutions in Bolivia in 2003, for example, found that they were very slow to deliver qualitymicrosavings services
because of easy access to cheaper forms of external capital.[32]
Microcredit has been blamed for many suicides in India: aggressive lending by microcredit companies in
Andhra Pradesh is said to have resulted in over 80 deaths in 2010.[33]
Andhra Pradesh is said to have resulted in over 80 deaths in 2010.[33]
[edit]Interest rates, stock offerings and repayment rates
There has been much criticism of the high interest rates charged to borrowers. For example, Bangladesh's former
Finance and Planning Minister M. Saifur Rahman charged in 2005 that some microfinance institutions use excessive
interest rates.[34] Sharma has criticized microfinance institutions for creating small-debt traps for the poor in Andhra
Pradesh in India with high interest rates and coercive methods of recovery.[28] A 2008 study in Bangladesh showed
that some loan recipients sink into a cycle of debt, using a microcredit loan 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 installments on the microcredit loans.[2] 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.[35] Muhammad Yunus has recently
made much of this point, and in his latest book[36] argues that microfinance institutions that charge more than 15%
above their long-term operating costs should face penalties.
Finance and Planning Minister M. Saifur Rahman charged in 2005 that some microfinance institutions use excessive
interest rates.[34] Sharma has criticized microfinance institutions for creating small-debt traps for the poor in Andhra
Pradesh in India with high interest rates and coercive methods of recovery.[28] A 2008 study in Bangladesh showed
that some loan recipients sink into a cycle of debt, using a microcredit loan 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 installments on the microcredit loans.[2] 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.[35] Muhammad Yunus has recently
made much of this point, and in his latest book[36] argues that microfinance institutions that charge more than 15%
above their long-term operating costs should face penalties.
A related issue is interest rate disclosure: Many suppliers of microcredit quote their rates to clients using the
flat calculation method, which significantly understates the true Annual Percentage Rate.[citation needed] In
Andhra Pradesh, the villagers who take out the loan 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.[37]
flat calculation method, which significantly understates the true Annual Percentage Rate.[citation needed] In
Andhra Pradesh, the villagers who take out the loan 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.[37]
The issuing of stocks through IPOs (Initial Public Offerings) by microfinance institutions has also been criticized.
In July 2010 India's biggest MFI, SKS Microfinance also went public. In both instances Muhammad Yunus publicly
stated his disagreement, saying that the poor should be the only beneficiaries of microfinance.[38][39]
In July 2010 India's biggest MFI, SKS Microfinance also went public. In both instances Muhammad Yunus publicly
stated his disagreement, saying that the poor should be the only beneficiaries of microfinance.[38][39]
Tucker argued in 1995 that the 98% repayment rate of Grameen’s loans only refer to first-time loans, that they are
often repaid by new loans and that the practice of lending only to groups of women puts lenders under pressure
because each member can only obtain a new loan if each member has repaid the previous loan.[37]
often repaid by new loans and that the practice of lending only to groups of women puts lenders under pressure
because each member can only obtain a new loan if each member has repaid the previous loan.[37]
[edit]Gender impact
A 1996 study in Bangladesh acknowledges the "success" of reaching
women with microcredit as "highly impressive", but also notes that
loans are often given over to male relatives or husbands. In a minority
of cases there was even 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”.[40] 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.[2] The bigger
the size of the loan, women lose their control more. 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.[41] A study in India showed that women may be put under pressure by their male relatives to join a credit
group and indebt themselves.[28] 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.[2]
The first randomized evaluation of the introduction of microcredit, carried out in Hyderabad in India, found no impact
on women's decision-making.[4]
women with microcredit as "highly impressive", but also notes that
loans are often given over to male relatives or husbands. In a minority
of cases there was even 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”.[40] 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.[2] The bigger
the size of the loan, women lose their control more. 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.[41] A study in India showed that women may be put under pressure by their male relatives to join a credit
group and indebt themselves.[28] 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.[2]
The first randomized evaluation of the introduction of microcredit, carried out in Hyderabad in India, found no impact
on women's decision-making.[4]
A large majority of microloans is awarded to women, often under the pretense of ensuring their empowerment.[42]
Parmar takes issue with the idea that empowerment can be given to women by (mostly male) development practitioners
in the form of loans, arguing that empowerment is a self-directed process.[43] Johnson argues for the inclusion of
more female employees in microcredit institutions, and gender awareness training for existing staff.[43] Additionally,
Leach claims that men must be included in the process of lending to women in order to diminish gender antagonism,
as men often feel excluded from microcredit services.[42]
Parmar takes issue with the idea that empowerment can be given to women by (mostly male) development practitioners
in the form of loans, arguing that empowerment is a self-directed process.[43] Johnson argues for the inclusion of
more female employees in microcredit institutions, and gender awareness training for existing staff.[43] Additionally,
Leach claims that men must be included in the process of lending to women in order to diminish gender antagonism,
as men often feel excluded from microcredit services.[42]
Some authors argue that microcredit not only empowers women, but men as well. For example, Cheston and Kuhn
say that microcredit programs have the "potential" to transform power relations and empower the poor — both men
and women.[44]
say that microcredit programs have the "potential" to transform power relations and empower the poor — both men
and women.[44]
[edit]Impact on education and health
Tazul Islam asserts a positive influence of microcredit on the level of education, health and nutrition.[23] However,
the first randomized evaluation of microcredit, carried out in Hyderabad in India, did not find any evidence of an
impact on education and health.[4]
the first randomized evaluation of microcredit, carried out in Hyderabad in India, did not find any evidence of an
impact on education and health.[4]
[edit]Suggestions to improve microcredit
[edit]Combining With Other Services
Many microfinance institutions also offer
savings facilities, such as Banco Palma
in Brazil shown here.
Many scholars and practitioners suggest an integrated package of services (‘a credit-plus’ approach)
rather than just providing credits. When access to credit is combined with savings facilities, non-
productive loan facilities, insurance, enterprise development (production-oriented and management
training, marketing support) and welfare-related services (literacy and health services, gender and
social awareness training), the adverse effects discussed above can be diminished.[45] Some argue
that more experienced entrepreneurs who are getting loans should be qualified for bigger loans to
ensure the success of the program.[40]
[edit]Reducing Interest Rates
One of the principal challenges of microcredit is providing small loans at an affordable cost. The global
average interest and fee rate is estimated at 37%, with rates reaching as high as 70% in some markets.[46]
The reason for the high interest rates is not primarily cost of capital. Indeed, the local microfinance
organizations that receive zero-interest loan capital from the online microlending platform Kiva charge
average interest and fee rates of 35.21%.[47] Rather, the principal reason for the high cost of microcredit
loans is the high transaction cost of traditional microfinance operations relative to loan size. [48]
average interest and fee rate is estimated at 37%, with rates reaching as high as 70% in some markets.[46]
The reason for the high interest rates is not primarily cost of capital. Indeed, the local microfinance
organizations that receive zero-interest loan capital from the online microlending platform Kiva charge
average interest and fee rates of 35.21%.[47] Rather, the principal reason for the high cost of microcredit
loans is the high transaction cost of traditional microfinance operations relative to loan size. [48]
Microcredit practitioners have long argued that such high interest rates are simply unavoidable, because
the cost of making each loan cannot be reduced below a certain level while still allowing the lender to
cover costs such as offices and staff salaries. The result is that the traditional approach to microcredit
has made only limited progress in resolving the problem it purports to address: that the world's poorest
people pay the world's highest cost for small business growth capital. The high costs of traditional microcredit
loans limit their effectiveness as a poverty-fighting tool. Offering loans at interest and fee rates of 37% mean
that borrowers who do not manage to earn at least a 37% rate of return may actually end up poorer as a
result of accepting the loans.[49]
the cost of making each loan cannot be reduced below a certain level while still allowing the lender to
cover costs such as offices and staff salaries. The result is that the traditional approach to microcredit
has made only limited progress in resolving the problem it purports to address: that the world's poorest
people pay the world's highest cost for small business growth capital. The high costs of traditional microcredit
loans limit their effectiveness as a poverty-fighting tool. Offering loans at interest and fee rates of 37% mean
that borrowers who do not manage to earn at least a 37% rate of return may actually end up poorer as a
result of accepting the loans.[49]
According to a recent survey of microfinance borrowers in Ghana published by the Center for Financial
Inclusion, more than one-third of borrowers surveyed reported struggling to repay their loans. Some
resorted to measures such as reducing their food intake or taking children out of school in order to
repay microfinance debts that had not proven sufficiently profitable.[50]
Inclusion, more than one-third of borrowers surveyed reported struggling to repay their loans. Some
resorted to measures such as reducing their food intake or taking children out of school in order to
repay microfinance debts that had not proven sufficiently profitable.[50]
In recent years, microcredit providers have shifted their focus from the objective of increasing the volume
of lending capital available, to address the challenge of providing microfinance loans more affordably.
Analyst David Roodman contends that in mature markets, the average interest and fee rates charged by
microfinance institutions tend to fall over time. [51] However global average interest rates for microcredit
loans are still well above 30%.
of lending capital available, to address the challenge of providing microfinance loans more affordably.
Analyst David Roodman contends that in mature markets, the average interest and fee rates charged by
microfinance institutions tend to fall over time. [51] However global average interest rates for microcredit
loans are still well above 30%.
The answer to providing microcredit at an affordable cost may lie in a rethinking of one of the fundamental
assumptions underlying microcredit: that borrowers need extensive monitoring and interaction with loan
officers in order to benefit from and repay their loans. In 2009, the US-based nonprofit Zidisha became the
first online person-to-person lending platform to link carefully vetted, computer-literate microcredit borrowers
in developing countries with individual lenders directly, without any loan officers or local intermediaries to manage
the loans. Dubbed an "eBay for microfinance", Zidisha operates on the assumption that microcredit borrowers can
be trusted to participate responsibly in an online lending community and repay loans on their own, as do residents
of wealthy countries. Eliminating local intermediaries allows Zidisha to outsource many of the record-keeping and communications functions that have traditionally been performed by brick-and-mortar lending institutions to Zidisha's
online user community, as lenders dialogue directly with borrowers and track their performance via eBay-style
feedback ratings. Eliminating local intermediaries reduces the interest and fee cost to just 8% on average, of which
5% covers Zidisha's administrative costs and 3% represents interest paid out to lenders. To the surprise of many
observers, Zidisha borrowers have maintained a repayment rate of 98%. Zidisha's success suggests that it is possible
to provide microcredit services on a large scale at substantially lower cost.[52]
assumptions underlying microcredit: that borrowers need extensive monitoring and interaction with loan
officers in order to benefit from and repay their loans. In 2009, the US-based nonprofit Zidisha became the
first online person-to-person lending platform to link carefully vetted, computer-literate microcredit borrowers
in developing countries with individual lenders directly, without any loan officers or local intermediaries to manage
the loans. Dubbed an "eBay for microfinance", Zidisha operates on the assumption that microcredit borrowers can
be trusted to participate responsibly in an online lending community and repay loans on their own, as do residents
of wealthy countries. Eliminating local intermediaries allows Zidisha to outsource many of the record-keeping and communications functions that have traditionally been performed by brick-and-mortar lending institutions to Zidisha's
online user community, as lenders dialogue directly with borrowers and track their performance via eBay-style
feedback ratings. Eliminating local intermediaries reduces the interest and fee cost to just 8% on average, of which
5% covers Zidisha's administrative costs and 3% represents interest paid out to lenders. To the surprise of many
observers, Zidisha borrowers have maintained a repayment rate of 98%. Zidisha's success suggests that it is possible
to provide microcredit services on a large scale at substantially lower cost.[52]
[edit]See also
- Cooperative banking
- Count Me In (charity)
- Crowdfunding
- Crowd sourcing
- Flat rate (finance)
- Micro credit for water supply and sanitation
- Microgrant
- Project Enterprise
- Solidarity lending
- Oikocredit
[edit]References
1. ^ Microfinance Information Exchange, Inc. (2009-12-01).
2. "MicroBanking Bulletin Issue #19, December, 2009, pp. 49". Microfinance Information Exchange, Inc..
"The Limits of Microcredit—A Bangladeshi Case", Food First Backgrounder
(Institute for Food and Development Policy), Winter 2008, volume 14, number 4.
4. ^ Gina Neff:Microcredit, microresults The Left Business Observer #74, October 1996
"The miracle of microfinance? Evidence from a randomized evaluation". Retrieved 17 April 2012.
6. ^ a b BBC:Business Weekly, 2 August 2009
7. ^ Aidan Hollis (University of Calgary); Arthur Sweetman (University of Victoria) (March 1997).
The Irish Loan Funds through Three Centuries". Retrieved 30 January 2012.
8. ^ Spooner, Lysander (1846). "Poverty: Its illegal causes and legal cure.". Boston.
Retrieved 30 January 2012.
9. ^ Deutscher Raiffeisenverband:The Raiffeisen organization: Beginnings, tasks, current developments,
March 2011
The MIT Press.
13. ^ Nobel Prize.org:The Nobel Peace Prize 2006:Muhammad Yunus, Grameen Bank,
retrieved on 13 February 2012
14. ^ Vrajlal Sapovadia:Micro Finance: The Pillars of a Tool to Socio-Economic Development,
Development Gateway, 2006
15. ^ Nimal A. Fernando:Understanding and Dealing with High Interest Rate on Microcredit, Asian
Development Bank, May 2006, p. 1
16. ^ University of Michigan, Urban and Regional Planning Economic Development Handbook:
Microcredit strategies for assisting neighborhood businesses, 22 March 2005,
retrieved on 13 February 2012
17. ^ "Bank of America Issues Grants for Microloans". Wall Street Journal. October 6, 2010.
Retrieved 30 January 2012.
18. ^ Cheryl Frankiewicz. "Calmeadow Metrofund: A Canadian Experiment in Sustainable Microfinance",
Calmeadow Foundation, April 2001.
19. ^ Svivatomehet.org.il (Hebrew)
21. ^ Rao. L. (2010). Vittana Applies The Kiva Model To Help Finance Education In Developing Countries.
Retrieved March 9, 2011, from
22. ^ Morduch, Jonathan (2008-10-17). "Comments Made at IPA/FAI Microfinance Conference Oct. 17 2008".
Philanthropy Action. Retrieved 2008-10-17.
23. ^ "Measuring the Impact of Microfinance, Taking Stock of What We Know". Grameen Bank. 2005.
Retrieved 2011-10-25.
25. ^ Karlan, Dean S., and Jonathan Zinman. 2011. "List Randomization for Sensitive Behavior: An
Application for Measuring Use of Loan Proceeds." Journal of Development Economics 2012. http://www.povertyactionlab.org/evaluation/measuring-impact-microcredit-and-interest-rate-
26. ^ "The illusion of poverty reduction". Red Pepper magazine. 2010-09-01.
27. ^ Westover J. (2008). The Record of Microfinance: The Effectiveness/Ineffectiveness of
28. ^ Islam, Tazul (2007). Microcredit and poverty alleviation. pp. 3.
29. ^ a b c Sharma, Sudhirendar. "MFIs lay small-debt trap in Andhra".
30. ^ "Tom Heinemann: "Fanget i Mikrogæld"". Dr.dk. Retrieved 2011-03-25.
31. ^ "Grameen: Norway gives all-clear to Bangladesh bank". BBC News (BBC). 2010-12-08.
Retrieved 17 September 2011.
32. ^ "David Roodman's Microfinance Open Book Blog". Blogs.cgdev.org. Retrieved 2011-03-25.
33. ^ Hillary Miller. The paradox of savings mobilization in microfinance: why microfinance
institutions in Bolivia have virtually ignored savings.
Development Alternatives Inc. and USAID, Washington, 2003.
34. ^ "India's micro-finance suicide epidemic". BBC News. 2010-12-16.
35. ^ Bangladesh Strategic and Development Forum:Saifur takes swipe at micro-credit,
21 November 2005, retrieved on 13 February 2012
36. ^ Microfinance Information Exchange, Inc. (2007-08-01).
Microfinance Information Exchange, Inc..
37. ^ Muhammad Yunus and Karl Weber. Creating a World Without Poverty: Social Business
and the Future of Capitalism. PublicAffairs, New York, 2007
38. ^ a b Tucker, Jeffrey (November 1995). "The Micro-Credit Cult". The Free Market, The Mises
Institute Monthly. retrieved on 13 February 2012
39. ^ Businessweek, "Online Extra: Yunus Blasts Compartamos"http://www.businessweek.com/magazine/content/07_52/b4064045920958.htm
40. ^ ABCNews, SKS Launches India's First Microfinance IPO
Gender, Power, Control over loan use in Rural credit program in Bangladesh 24 (1). http://www.citt.ufl.edu/portfolio/genders/Readings/ReadingsW10/Whotakesthecredit.pdf.
42. ^ Montgomery, Bhattacharya; Hulme. "Credit for the poor in Bangladesh: the BRAC Rural
Development Programme and the Government Thana Resource Development and
Employment Programme,". Finance Against Poverty.
Development in Practice 12: 575–588.
re-Evaluating the Discourse". Canadian Journal of Development Studies XXIV (3): 461–476.
45. ^ cheston; kuhn. empowering women through microfinance.
46. ^ Holvoet, Nathalie. The Impact of Microfinance on Decision-Making Agency: Evidence from South India.
48. ^ "Kiva Help - Interest Rate Comparison". Kiva.org. Retrieved October 10, 2009.
50. ^ http://www.quora.com/Microfinance/Do-the-micro-loans-contribute-to-the-well-being-of-the-people-
52. ^ Roodman, David. "Due Diligence: An Impertinent Inquiry Into Microfinance."
Center for Global Development, 2011.
Bibliography
Following is a selected bibliography about microcredit.
- Adams, Dale, Doug Graham and J.D. Von Pischke (eds.). Undermining Rural Development with Cheap Credit. Westview Press, Boulder, Colorado, 1984.
- Drake, Deborah, and Elizabeth Rhyne (eds.). The Commercialization of Microfinance: Balancing Business and Development. Kumarian Press, 2002.
- Rhyne, Elizabeth. Mainstreaming Microfinance: How Lending to the Poor Began, Grew and Came of Age in Bolivia. Kumarian Press, 2001.
- Fuglesang, Andreas and Dale Chandler. Participation as Process – Process as Growth – What We can Learn from the Grameen Bank.Grameen Trust, Dhaka, 1993.
- Gibbons, David. The Grameen Reader. Grameen Bank, Dhaka, 1992.
- Harper, Malcolm and Shailendra Vyakarnam. Rural Enterprise: Case Studies from Developing Countries. ITDG Publishing, 1988.
- Hulme, David and Paul Mosley. Finance Against Poverty. Routledge, London, 1996.
- Johnson, Susan and Ben Rogaly. Microfinance and Poverty Reduction. Oxfam, Oxford UK, 1997.
- Kadaras, James & Elizabeth Rhyne. Characteristics of equity investment in microfinance. Accion International, 2004.
- Khandker, Shahidur R. Fighting Poverty with Microcredit. Bangladesh edition, The University Press Ltd, Dhaka, 1999.
- Ledgerwood, Joanna. Microfinance Handbook. Washington, D.C., World Bank, 1998.
- Rutherford, Stuart. ASA: The Biography of an NGO, Empowerment and Credit in Rural Bangladesh. ASA, Dhaka, 1995.
- Small Enterprise Development. Intermediate Technology Publications, London.
- Todd, Helen Women at the Center: Grameen Borrowers After One Decade. University Press Ltd, Dhaka, 1996.
- Wood, Geoff D. & I. Sharif (eds.). Who Needs Credit? Poverty and Finance in Bangladesh. University Press Ltd., Dhaka, 1997.
- Yunus, Muhammad. Banker to the Poor: Micro-Lending and the Battle Against World Poverty. Public Affairs, 2003.
- Padmanabahn, K.P., Rural Credit, Intermediate Tech. Publ. Ltd., London 1988.
- Germidis D. et al.,Financial Systems and Development: what role for the formal and informal financial sectors?, OECD, Paris 1991.
- Robinson, Marguerite S., The microfinance revolution, The World Bank, Washington D.C., 2001.
- Mauri, Arnaldo, A new approach to institutional lending and loan administration in rural areas of LDCs, International Review of Economics, Vol. XLV, no. 4 (1995).
- Goetz, A.-M., and R. Sengupta. 1996. Who Takes the Credit? Gender, Power and Control over
Loan Use in Rural Credit Programmes in Bangladesh. World Development 24:45–63.
- Johnson, S. 1997. Gender and Micro-finance: guidelines for best practice. Action Aid-UK.
- Kabeer, N. 1998. 'Money Can't Buy Me Love'? Re-evaluating Gender, Credit and Empowerment
in Rural Bangladesh. IDS Discussion Paper 363.
- Mayoux, L. 1998a. Women's Empowerment and Micro-finance programmes: Approaches,
Evidence and Ways Forward. The Open University Working Paper No 41.
- Rahman, A. (1999). “Micro-credit Initiatives for Equitable and Sustainable Development: Who
Pays?” World Development 27(1): 67–82.
- CHESTON, S. and KUHN, L. (2002). Empowering Women through Microfinance. Pathways Out of Poverty: Innovations in Microfinance for the Poorest Families
- Harper, A. ( 1995). Providing women in Baltistan with access to loans – potential and problems.
Lahore, AKRSP Pakistan.
- Mutalima, I. K., 2006, Microfinance and Gender Equality: Are We Getting There?: Micro Credit
Summit, Halifa, Royal Tropical Institute and Oxfam Novib. http://www.microcreditsummit.org/papers/Workshops/28_Mutalima.pdf
- ZAIDI, S AKBAR, HAROON JAMAL, SARAH JAVEED and SARAH ZAKA. (2007). "Social
Impact Assessment of Microfinance Programmes."
[edit]External links
- Latest Findings from Randomized Evaluations of Microfinance Access to Finance Forum by CGAP and Its Partners No. 2, December 2011
- Building a Microfinance Institution from Scratch Institution's objective is to offer financial services on a self-sustaining yet efficient basis to microentrepreneurs.
- Journal of Microfinance, a forum for practitioners in microfinance and microenterprise development to exchange information and ideas
- Omidyar-Tufts Microfinance Fund, a partnership between Pierre Omidyar and Tufts University.
- "Microfinance in the U.S." Helping ensure egalitarian access to needed financial services.
- The Promise of Microfinance for Poverty Relief in the Developing World
- Microcredit Regulatory Authority, MRA The central body to monitor and supervise microfinance operation of NGOs of Bangladesh
- Alleviation and poverty and enpowerment of the poor, BRAC Bangladesh
- The European Union Project "Credit Cooperatives – Russian Federation" official web site
- Small Fortunes: Microcredit and the Future of Poverty web site for a PBS documentary
