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Microcredit
Under The Microscope
Wanted: microlenders who empower the poor rather
than maintain them on the treadmill of debt.
Feature, Himal South
Asia
by Kavaljit Singh, Nan Dawkins-Scully and Daphne
Wysham
1996
SUDDENLY, it appears, everyone is jumping
on the microcredit bandwagon. The Microcredit Summit, organised in early
February in Washington DC was only the latest and most high-profile
activity (see accompanying article). The reasons for this trend are
as varied as the players.
Microcredit has the support of many women's
advocates who view expansion of microcredit as a potential bellweather for
women's empowerment. Multilateral development banks, in an era of budget
cuts and disbursement reductions, are embracing microcredit as an
opportunity for them to move away from the capital-intensive
"development as charity" model to the potentially more
profitable "development as business". But perhaps most
significantly, the financial community has woken up to the fact that there
is a great deal of money to be made in microlending, where interest rates
can range from 20 to 100 percent.
Microcredit is often portrayed as a
"win-win" option, wherein investors profit handsomely while the
poor gain access to resources that allow them to help themselves. The
reality, however, is not always so rosy.
In India, a number of self-help groups (SHGs)
were created in the 1980s to provide credit facilities to the poor,
especially women, in both urban and rural areas. These SHGs stumbled upon
a surprising finding: by targeting women, repayment rates came in well
over 95 percent, higher than most traditional banks. Impressed by those
repayment rates, institutions like National Bank for Agriculture and Rural
Development (NABARD) and Small Industries Development Bank of India (SIDBI)
began increasing their lending to SHGs in India. However, the lending
rates of SHGs to borrowers were not cheap. For example, SIDBI lent to NGOs
at 9 percent; NGOs were allowed to onlend to SHGs at rates up to 15
percent; and SHGs, in turn, were allowed to charge up to 30 percent to
individual borrowers. Although such high-interest credit is touted as a
vehicle for poverty alleviation wherein the poor use the funds to
undertake commercial ventures, studies have found that the loans are
largely used by poor people to meet their daily consumption needs.
Nevertheless, similar microcredit
operations are now being established elsewhere in India, with liberal
grants from international donor agencies like the Ford Foundation, UNDP
and the Swiss Agency for Development and Cooperation (SDC). This seed
money, in turn, will attract additional capital from the corporate sector
and financial institutions. Loans are to be provided to borrowers through
a network of subsidiary lending institutions. In order to assure investors
a good rate of economic return, these corporate entities will lend at
market rates. Critics charge that such microcredit, rather than resulting
in poverty alleviation, will simply keep the poor on the treadmill of debt
or bypass them altogether in favour of those who can afford credit at
market rates.
Assist the Poorest
The World Bank last year launched its own microlending arm, the
Consultative Group to Assist the Poorest (CGAP), with the goal of
"systematically increasing resources in microfinance". The
Bank's President James Wolfensohn announced the programme at the 1995
Fourth World Conference on Women in Beijing, claiming CGAP would improve
access to microcredit for "the globe's poorest citizens, particularly
women".
In order to evaluate whether CGAP and other
microlending programmes will actually achieve the goals they set for
themselves, it is important to distinguish between the two types of
microlenders: those whose primary goal is to empower the poor and those
whose primary goal is profit. The field is already crowded with
microlenders of the latter variety whose exorbitant interest rates keep
the poor trapped in a downward spiral of debt. What is desperately needed
are more microlenders committed to the empowerment of the poor.
The laudable successes of microcredit
programmes like the Self-Employed Women's Association (SEWA) of Ahmedabad
was not won overnight, nor was it derived from a simple process of making
small loans to the poor. Microlenders like SEWA combine low-interest
microloans with labour advocacy on behalf of women employed in the
informal sector for provision of health care, training and other services,
thereby raising the wages, educational levels, and standard of living for
the women it serves. Access to credit is only a small part of the picture
of SEWA's success.
The World Bank's CGAP, by contrast, appears
to be narrowly focused on microlending as an end in itself. And the means
to that end, critics charge, may do more damage to "empowerment
lenders" like SEWA and Grameen than good. A recent report produced by
the Washington DC-based Institute for Policy Studies, found that 46
percent of CGAP's expenditures in its first year of operation was spent on
policy reforms which may benefit lenders but end up hurting poor
borrowers, particularly women. For example, CGAP views microlending as
unviable in the presence of usury laws—laws which provide ceilings on
interest rates. Thus, its first order of business at a USD 500,000
conference in Mali was to get government officials to repeal their
nations' usury laws.
CGAP also calls on countries to completely
privatise their microlending institutions, removing all subsidies for
banks which service the poor. Such reforms would force banks such as the
Grameen, which relied on subsidies for 17 years before becoming
financially viable, to shut down or charge much higher interest rates to
reach self-sufficiency in a shorter time-span. CGAP also advocates
stronger debt collection laws—specifically collateral laws—which will
result in a safer environment for bankers but which could exclude the
poorest, and poor women in particular, from access to small loans.
CGAP is arguably a small programme—whose
total budget approximates one-tenth of one percent of overall World Bank
lending. Yet, if past performance is any guide, this small programme could
prove to wield significant clout in defining the parameters and practices
for microlenders.
In the current global economic climate,
microcredit as a poverty alleviation tool, by itself, is analogous to
giving a man a fishing pole, and telling him to go fish—in the wake of a
giant trawler whose net spans the horizon. Macroeconomic policies of
liberalisation and globalisation have destroyed many formal sector jobs;
drastic cuts in social sector spending under the rubric of World
Bank-imposed structural adjustment programmes coupled with the absence of
any social safety net has further aggravated poverty for the world's
poorest.
The only option for many poor is
self-employment, which microcredit aims to foster. But the odds are
stacked against the self-employed in the global marketplace. Consumer
trends fluctuate nearly as wildly as the economy, which is becoming more
prone to external factors as India, for one, opens its markets. Aggressive
brand selling and marketing coupled with the strong financial clout of
transnational corporations places the poor, especially poor women, at a
particularly unfair advantage in the global marketplace.
Against this background, microcredit can,
at best, lead to micro-solutions. This is not to say that microcredit
cannot play a valuable role in poverty alleviation. But any developmental
strategy will require far more than the "band-aid" of
microcredit on the gaping wound of poverty and unemployment. As
microlenders chasing the growing ranks of the poor multiply, a proper
regulatory and supervisory framework under which these entities should
function must be developed in order to ensure that intermediaries,
corporate bodies and others involved in microcredit come under close
public scrutiny. Otherwise, these new entities may simply lend legitimacy
and greater financial clout to an exploitative form of organised
money-lending.
K. Singh is the coordinator of the Public
Interest Research Group, Delhi. N. Dawkins-Scully and D. Wysham are
colleagues at the Women's Power Project, Institute for Policy Studies,
Washington DC.
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