Beginning with Bolivia in and then South Africa in , after a quick succession of microcredit meltdowns created huge problems in Nicaragua, Bosnia, Morocco, Pakistan, Cambodia and, the biggest to date, in the Indian state of Andhra Pradesh.
Bosnia is one of the worst examples of this phenomenon. However, little could be done to stop the rising over-indebtedness and the meltdown. Moreover, this destructive episode took place in tandem with a number of spectacular instances of fraud and egregious profiteering in the microcredit sector that were the inevitable outgrowths of the extensively deregulated environment demanded by the World Bank.
Cambodia also saw a massive expansion of microcredit after thanks to a flood of foreign investment and technical support, including that provided by the Bank and its private-sector arm, the International Financial Corporation IFC.
Yet ultra-rapid growth driven by spectacular profitability has brought the sector to the verge of meltdown, and the Cambodian government has been forced into taking a series of aggressive and costly measures of late in order to limit the inevitable damage. The reality across the global South is that the microcredit industry and its investors now view the miserly earnings of informal microenterprises as a flow of funds that can be used to repay a growing supply of high interest rate microloans, thus allowing them to capture an increasingly large part of the economic surplus of a poor community.
Such a debilitating scenario is probably not what the early pioneers of microcredit had expected to happen, but it has transpired nevertheless. With an abundance of research staff, lobbyists and programmes, the Bank proceeded to sell financial inclusion to the international development community and western governments. With little independent evidence , the World Bank nevertheless continues to vector enormous resources into promoting financial inclusion.
One of the latest developments in the financial inclusion space, driven by the World Bank , but ably abetted by USAID acting on behalf of the biggest US financial and digital payments corporations , is the deployment of a range of IT and digital payments systems that increasingly include the poor in the local financial system.
Marketed by the Bank as of enormous benefit to the poor, there are already worrying signs that this latest innovation will actually considerably add to their vulnerability and deprivation.
For a start, even advocates accept that the simplicity in obtaining a new microloan and other trivial products and services via a mobile phone is going to extend the already pressing over-indebtedness problem in many countries, especially in Africa.
Global commercial banks, such as Citigroup Inc. Even people with just a few dollars to spare are going to microcredit Web sites and, with a click of the mouse, lending money to rice farmers in Ecuador and auto mechanics in Togo.
All this enthusiasm for microcredit has attracted untold billions of dollars. This fervor suggests that microcredit really must help the poor. Yet my analysis of the macroeconomic data suggests that although microcredit yields some noneconomic benefits, it does not significantly alleviate poverty. Indeed, in some instances microcredit makes life at the bottom of the pyramid worse.
Contrary to the hype about microcredit, the best way to eradicate poverty is to create jobs and to increase worker productivity. In the first case, the women must make enough money to pay off their usually high-interest loans while competing with each other in exactly the same market niche.
Meanwhile the garment manufacturing business can exploit economies of scale and use modern manufacturing processes and organizational techniques to enrich not only its owners, but also its workers. As these scenarios illustrate, a surer way to ending poverty is to create jobs and to increase worker productivity, rather than investing in microfinance. The microfinance movement addresses a basic yet devastating glitch in the formal banking system: Poor households cannot get capital from traditional banks because they do not have collateral to secure loans, and traditional banks do not want to take on the risks and costs of making small, uncollateralized loans.
Without this capital, impoverished people cannot rise above subsistence. For example, a seamstress cannot buy the sewing machine that would allow her to sew more clothes than she could by hand, and thereby pull herself out of poverty. Microfinanciers use innovative contractual practices and organizational forms to reduce the risks and costs of making loans, such as lending to groups, rather than just to one person.
Some microcredit organizations give their clients more than loans, offering education , training, healthcare, and other social services. Typically, these organizations are not-for-profit or are owned by customers or investors who are more concerned about the economic and social development of the poor than they are with profits. In contrast to nonprofit organizations, commercial banks that make microloans typically provide only financial services. Some large commercial banks, such as the Indian bank ICICI, do not lend directly to individual microcredit clients, but instead work through small microfinance organizations.
Another innovation that many nonprofit microfinance organizations have adopted is targeting women. A major selling point of microfinance is its alleged ability to empower women. It also increases their self-esteem and self-worth. In spite of having access to credit, some female microcredit clients do not have control over the loans contracted or the income generated by the microenterprises. Despite the hoopla surrounding microcredit, few have studied its impact. Erin Beck is an assistant professor of political science at the University of Oregon.
Share a story idea here link opens in a new window. Photos by Erin Beck. Above: A loan officer verifies the monthly repayments of loan group members. Post Archive Select Year Thank you for signing up to receive the NextBillion Notes newsletter. We respect your privacy. Many concluded that the classic conception of microcredit was based much more on anecdotes than on robust evidence. Rather than see microcredit as it was portrayed in its heyday — as a way to get people out of poverty — we should see it through a different lens: as a way to expand options for poor people by offering more reliable financial services.
Extremely poor people need these services just like everyone else, and the availability of capital to deal with irregular and at times unpredictable incomes is a huge help to them. This benefit, along with its impressive growth around the world, arguably makes microcredit a success. Go behind the scenes. Chat with creators. Support Vox video. Heads up: You might be asked to sign in to Google first.
Another problem is predicting who will repay a loan. However, that changed in the late s and early s, with a new vision of how to offer microcredit to the poor, and what it could do for them.
Economist Muhammad Yunus played a big role in shaping this new perspective. In his book Banker to the Poor , Yunus describes meeting a woman in Bangladesh who was making stools out of bamboo and earned only two cents per day, because she had to repay so much money to her bamboo supplier. If she had a dependable source of credit, Yunus thought, she and others in similar situations could make their way out of poverty. He also took the crucial step of convincing outside funders, such as the Ford Foundation, that it was a good idea to invest in loans for the very poor.
The original Grameen Bank model included a few core elements. The first is that after a loan for a microenterprise is granted, repayment starts immediately, with frequent, regular payments over the course of a year or so.
The second is group loans, in which a small group of borrowers from different households receive loans together — which then puts pressure on the members to help each other repay. Finally, the model cuts overhead costs by having loan officers hold weekly meetings in villages to collect and disburse payments, obviating the need for physical bank branches. A huge number of organizations all over the world entered the scene over the next two decades more than 3,, as reported in , though most borrowers are clustered in a few countries such as India and Bangladesh.
Borrowers repay loans to microcredit institutions at very high repayment rates , upward of 96 percent on average. Tim Ogden, managing director of the Financial Access Initiative , says that before Grameen Bank, there was a consensus that it was bad to lend to those living on only a dollar or two per day, because it would only trap them in debt. How is that not going to trap her in debt? Female empowerment also became integral to the story.
Many microcredit institutions including Grameen made it a priority to lend to groups of women about 80 percent of microcredit borrowers are now women. Investors and donors poured money into microfinance, and in , Yunus won the Nobel Peace Prize.
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