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Helping to alleviate poverty is the key aim of any individual or group involved
in development. The classic diagram of the poverty trap is frequently used to
explain why it is so difficult to break out of the cycle of poverty.
Low productivity means that there is no money to invest in those things that
could increase output. Banks will not lend even the small amounts required
to invest in the means to increase productivity because those on such low
incomes can provide no security against the loan. The only money available
is often from local moneylenders who charge exceptionally high interest
rates that only make the situation worse. In the last 30 yearsthere have been
some attempts to change the situation and microfinance is a term used to
describe how financial services can be made available to poor people. It has
received a lot of support from people involved in international development
because it has been seen as an important way of helping millions of people
out of the poverty trap. However recent criticisms by some politicians and
development experts mean that the advantages and disadvantages of
microfinance have been the subject of many discussions and caused
many arguments.
Grameen Bank extended its original microcredit project with the support of
the nationalized commercial bank in 1979 and in 1983 it was transformed
into an independent bank by government legislation. Although it started as a
non-profit organization dependent on government subsidies, it became a
corporate bank in 2002. Today it is 90% owned by its borrowers (the rural
poor) and 10% by the government. It is estimated that nearly nine million
people are borrowers from the Grameen Bank in Bangladesh and 95% of
them are women. Yunus received the Nobel Prize in 2006 for his work in
alleviating poverty in rural areas but he was controversially removed from his
post as head of the Grameen Bank by the Central Bank of Bangladesh in
2011 because of his age (70 years old). The move was widely seen as a
political attack by the Bangladesh Prime Minister, Sheikh Hasina, a long-term
critic of Yunus and the Grameen Bank who, she claimed, were making money
from poor people by charging high interest rates.
The success of the Grameen model has encouraged the growth of many
more microfinance institutions in Latin America, Africa and Asia such as Kiva
and PRODEM (later Banco Sol). It is the growth of these institutions and the
increased involvement of commercial banks with neoliberal principles that
has caused a debate about the true value of microcredit as a means of
reducing poverty.
castes and tribes, the majority of them women. Each member is expected to
save a small amount a month which goes into a group fund. Members can
borrow from the fund for a number of reasons and if the group shows itself
capable of managing its funds they can borrow extra funds from a local bank
to invest in small business or agricultural activity.
It is a common feature of microcredit institutions that most borrowers are
female. Women make up around 75% of all microcredit recipients worldwide.
This is not just because women form the majority of poor people in rural
areas but also because they are seen as having the biggest influence in
attempting to reduce poverty and are more reliable in making repayments.
Lending to women has become a core principle for most microcredit
organizations indeed, some lend exclusively to women.
Grameen Bank says that it encourages borrowers eventually to become
savers so that their local capital can be converted into new loans. It claims
that, since 1995, 90% of its loans have been funded by interest income and
deposits collected and that it converts deposits made in villages into loans
for those most in need in the villages. It has also diversified its investment
programme and made use of technology, as with its Village Phone
programme (see box).
Criticisms
High interest rates are a major criticism and the high demand for the
services of microcredit institutions is one of the major causes. The rapidly
expanding demand for micro-lending encouraged institutions to look for
capital from foreign commercial private equity providers. The non-profit
models of the micro-lending institutions were in conflict with the private
equity providers. As a result, many of them changed their status to for-profit
in 2005, converting their philanthropic nonprofit assets into private forprofit assets.
One such micro-finance program was Compartamos in Mexico, which in 2007
launched an initial public stock offering. According to a New York Times
article, it charged its borrowers an annual interest rate of near 90 percent,
producing a return on equity of more than 40 percent, nearly three times the
15 percent average for Mexican commercial banks. This made Compartamos
highly attractive to private equity investors. The public offering brought in
$458 million, of which private Mexican investors, including the banks top
executives, pocketed $150 million. (David Korten, Microcredit: The Good,
the Bad, and the Ugly, Yes Magazine, 9 January 2011)
For some people it is this neoliberal intrusion into micro-lending that has
subverted a philanthropic ideal and caused many of the problems identified
by critics. Others think that this notion is too simplistic and fails to take
account of other basic problems.
Microcredit has driven poor households into a debt trap
One of the impacts of high interest rates has been to force poor households
into a debt trap. Households borrowing money have to earn more than the
interest accumulating on the loan or face increasing debt. The previously
mentioned 2008 study in Bangladesh found that some families were using a
microcredit loan from one organization to meet interest obligations from
another. Officials working for the microcredit institutions often had their own
wages based on repayment rates paid by lenders and sometimes used
coercion to collect repayments on loans. In some situations, instead of
gaining release from the poverty cycle, families were driven deeper
into debt.
Microcredit does not alleviate poverty or improve health and
education.
Claims by some supporters of microcredit about the contribution that
microcredit can make to alleviating poverty are deemed to be unrealistic by
many. One estimate by a researcher in Bangladesh suggested that 5% of the
loans given by Grameen Bank resulted in the loanee escaping poverty a
worthwhile contribution to development but not the panacea that some
people hoped it would be.
means volatile income. The poor need to set aside money in times of plenty
and draw it out in lean times. Financial services allow you to save for
wedding expenses, borrow for funeral costs or insure for health care. (David
Roodman, Washington Post, 8 March 2012)
The privatizing of welfare argument
There are some people who believe that the biggest problem with
microcredit is that it gives neoliberal politicians the opportunity effectively to
privatize welfare and avoid government responsibility for providing the help
and support that poor people need to escape poverty. Individual
responsibility is a good thing but individuals cannot provide the
infrastructure that communities need to make themselves wealthier and
healthier, such as healthcare, clean water and sanitation, education and
political freedom. It is an argument that is repeated many times in
development studies. To what extent should people living in poverty be left
to do things for themselves?
The arguments about the effectiveness of microfinance in alleviating global
poverty will continue. They often reflect the different political values brought
to bear on the whole field of world development.
The links below are to helpful articles and websites for further reading;
Blog from The NewYork Times by David Bornstein that provides a good
background to the dispute between the Grameen Bank and the Bangladesh
government. Contains good recent data.
opinionator.blogs.nytimes.com/2012/08/22/an-attack-on-grameen-bank-andthe-cause-of-women/
UNESCO website article that contains mostly uncritical information about the
Grameen Bank
unesco.org/education/poverty/grameen.shtml
Article from the Sydney Morning Herald by Ben Doherty from 2011 about the
problems encountered by the microcredit industry
smh.com.au/world/poor-can-no-longer-bank-on-microcredit-201104081d7ok.html#ixzz29YsVAdnp
Guardian article by Mark Tran from June 2012 about whether microinsurance
provides a more stable future for small-scale farmers
guardian.co.uk/global-development/2012/jun/29/microinsurance-stablefuture-small-scale-farmers
Blog from The Guardian by Les Roopanarine about some success stories for
microfinance, 28 March 2012
guardian.co.uk/global-development/povertymatters/2012/mar/28/microfinance-engine-of-development-says-finca
Interesting article from The Guardian by Jonathan Glennie that comments on
the differing views of microfinance held by Milford Bateman and David