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Micro-Credit : Background & Perspective

By Laxmi Murthy

More than 10,000 micro-lending organizations are today providing loans to 25 million poor people throughout the world, most of them women. The number of these organisations grew dramatically during the 1990s, spurred by the notion of 'self-help' and a faith in the creditworthiness and entrepreneurial potential of the poor. But is the current euphoria over micro-credit missing some fundamental questions? Does micro-credit really reach the poorest? Does it really empower women?

Micro-credit in India: The early years/ Scale of micro-credit in India/ Micro-credit, poverty reduction and empowerment/The flip side: Problems of micro-credit

Micro-credit for the poor has emerged as an idea that appeals to several sections of people. In principle, even the world's poorest people can acquire savings and investment if they have access to capital. The strategy is redistributive (appeals to liberals), entrepreneurial (appeals to conservatives) and empowering (appeals to radicals). The emergence of micro-credit as an alternative to the existing methods of addressing rural poverty through the provision of credit has questioned the fundamentals of the development paradigm in developing countries.

Though it was not the first microlending institution, the famed Grameen Bank (http://www.grameen-info.org/) of Bangladesh has become the most celebrated and widely imitated. Grameen, which began as an experiment initiated in 1976 by economist Muhammed Yunus, became a full-fledged bank in 1983. In a Muslim country with strong patriarchal traditions, empowering women, as Grameen did, had social-change implications far beyond immediate entrepreneurship. It also made sound business sense, since repayment rates remained high, generally above 95%.

International donor agencies frustrated with negligible results in other sectors were drawn by the comparatively low costs of micro-credit programmes, which did not simply give away money but actually made a profit while carrying out their professed mission of poverty alleviation and women's empowerment.

The Grameen model has inspired more than 10,000 microlending organisations providing loans to more than 25 million poor people throughout the world, most of them women. The number of these organisations grew dramatically during the 1990s, spurred by the notion of ‘self-help’ and a faith in the creditworthiness and entrepreneurial potential of the poor. The movement took off with strong support both from the free-enterprise zealots of the right and the anti-poverty warriors of the left.

But three decades into the vast social experiment of lending to the poor, many questions remain. Does micro-credit really help the world's poorest citizens? Does it genuinely empower women? How well has the Grameen model worked in other countries? And can we expect it to be sustainable without subsidy?

Micro-credit in India: The early years

Micro-credit is not a new idea in India. Research conducted in India by t he National Bank for Agriculture and Rural Development ( NABARD) (http://www.nabard.org/) during the early-’80s showed that despite a wide network of rural bank branches which implemented specific poverty alleviation programmes that sought creation of self-employment opportunities through bank credit for almost two decades, a very large number of the poor continued to remain outside the fold of the formal banking system.

NABARD had been set up in 1982 under an Act of Parliament as a development bank to provide and regulate credit and other facilities for the promotion and development of agriculture, cottage and village industries, handicrafts and other allied economic activities in rural areas with a view to “promoting integrated rural development and securing prosperity of rural a

Rural development, special schemes and rural banking could not tackle the widespread poverty in rural areas. Research indicated that existing banking policies and procedures were perhaps not suited to the immediate needs of the very poor. What they really needed was better access to these services and products, rather than cheap, subsidised credit. The priority of the rural poor appeared to be consumption credit, savings, production credit and insurance. Consumption needs included credit for short periods for emergent needs, which were usually met by informal sources at exploitative interest rates, as poor borrowers were unable to offer banks any security for small consumption loans. Banks in turn faced constraints due to the high transaction costs involved in processing small amounts to borrowers scattered in rural areas, as well as concerns related to loan recovery.

Against this background, a need was felt for alternative policies, systems and procedures, savings and loan products, complementary services, and new delivery mechanisms which would fulfil the requirements of the poorest, especially of the women members of such households. The Grameen Bank in neighbouring Bangladesh had already proved a successful model of microlending in South Asia. The self-help group model, pioneered by the Grameen Bank, emerged as a viable strategy to tackle these issues – both for borrowers as well as banks.

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Scale of micro-credit in India

There are several micro-finance implementing organisations in the government as well as non-government sectors. Leading national financial institutions like the Small Industries Development Bank of India (SIDBI) (http://www.sidbi.org/) , the National Bank for Agriculture and Rural Development (NABARD) and the Rashtriya Mahila Kosh (RMK) (http://www.rmk.org/) have played a significant role in promoting micro-credit. Small Industries Development Bank of India (SIDBI), an apex financial institution for the promotion, financing and development of small-scale industries in India, has launched a major project christened SIDBI Foundation for Micro Credit (SFMC) (http://www.sidbi.com/english/products/sfmc/sfmc.asp) as a proactive step to facilitating accelerated and orderly growth of the micro-finance sector in India. SFMC is expected to emerge as the apex wholesaler for micro-finance in India, providing a complete range of financial and non-financial services such as loan funds, grant support, equity and institution-building support to retailing Micro Finance Institutions (MFIs) so as to facilitate their development into financially sustainable entities, besides developing a network of service providers for the sector.

In order not to equate micro-finance with credit for micro enterprises but also include savings, consumption loans, housing loans and insurance services, the task force on micro-finance set up by NABARD came up with a definition which has become the definitive one. “Micro-finance is provision of thrift, credit, and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas, for enabling them to raise their income levels and improve living standards.”

With over 11 million poor households accessing banking services including micro-credit through their 700,000 Self-Help Groups (SHGs), the SHG-bank linkage programme led by NABARD in India claims to be “the largest and fastest-growing micro-finance programme of the world”. Today, over 2,800 NGOs and 30,000 branches of 500 banks are associated with the programme.

The size and types of implementing non-government organisations (NGOs) range from very small to moderately big organisations involved in savings and/or credit activities for individuals and groups. These NGOs adopt a variety of approaches, and tend to operate within a limited geographical range. A few like PRADAN, ICECD, MYRADA (http://www.myrada.org/), SEWA (http://www.sewa.org/) operate on a larger scale and have been successful in replicating their experiences in other parts of the country; they also act as resource organisations. While a few lending organisations do lend directly to borrowers, most rely on self-help groups (SHGs) to provide the linkage with borrowers.

In the absence of accurate data to assess the size of the market, players in the micro-credit sector have resorted to rough estimations. Given that there are 75 million poor households in India, of which 60 million are in rural areas and 15 million in urban, estimates of the size of the market vary from setting an average financing requirement of Rs 2,000 per poor household to Rs 6,000 in rural and Rs 9,000 per urban household. This works out to a MF demand of around Rs 50,000 crore. And this does not include housing which can be estimated at another Rs 1,000 crore annually.

The growth and activity of MF agencies and NGOs -- which are usually the medium of finance dispensation and administration -- should be viewed against the backdrop of this huge market potential. By current estimates there are more than 2,000 NGOs involved in helping banks identify self-help groups to lend to under NABARD's Self-Help Groups-Bank linkage programme alone (http://www.nabard.org/oper/oper.htm). According to published figures, the bank loans disbursed under this programme in fiscal 2002 were Rs 545.4 crore to around 240,000 SHGs. The average loan size per Self-Help Group was Rs 22,240.

Other agencies, like the Swayamsidha Project launched in 2001 under the Department of Women and Child Development are garbed in the language of ‘women’s empowerment’ rather than in economic terms (http://wcd.nic.in/chap7.htm). Swayamsidha, or the Integrated Women’s Empowerment Programme (IWEP), no more than a recast Indira Mahila Yojana and Mahila Samriddhi Yojana, has the lofty aim of “holistic empowerment of women through awareness generation, economic empowerment and convergence of various schemes” through the formation of SHGs. The scheme, which aims to benefit almost 10 lakh women through 53,000 SHGs, has an outlay of Rs 116.30 crore, funded by the World Bank.

With micro-credit becoming financially viable, even commercial banks like ICICI and international banks like Citibank and Rabobank have entered the field. The benefits to the borrower in purely commercial set-ups need further evaluation.

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Micro-credit, poverty reduction and empowerment

The main benefits of micro-credit appear to be: reduced vulnerability of the poor to adverse circumstances, increased consumption in the same group, and empowerment of women (http://www.unitus.com/wwd_borrowerprofs.asp).

The major spin-off of the micro-credit movement at the grassroot level has been the fact that women have used this system to come out and join a mainstream activity in the village. In many areas, particularly where there has been support from NGOs or strong SHGs, women have gained a voice and been able to use this space to come out of their traditional roles into a more ‘proactive’ male space. In many instances, gender and caste subordination has been questioned. Women have been able to mobilise capital, and in the process have acquired skills that have enhanced their economic, social and political power. This positive growth has usually been where SHGs are linked with NGOs that have facilitated training and capacity-building with additional inputs.

However, despite the spread of micro-credit programmes and their growing popularity with policymakers, hard data is somewhat lacking. There is little standardisation across studies as to how to define critical processes and measures of success. The definition of ‘poverty’, and especially ‘reduction in poverty’, tends to vary from study to study. ‘Women’s empowerment’ is another very nebulous term. Many terms and processes are redefined on an ad hoc basis each time a new study is conducted. Much of the literature on the subject of micro-credit appears to be at the stage of observation and anecdotal evidence.

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The flip side: Problems of micro-credit

Micro-credit has certain inherent weaknesses, often overlooked in the hype about its purported benefits.

Difficulties of micro-enterprise: The gender dimension
One of the most fundamental problems with micro-credit programmes is the difficulty in actually turning a profit on the loans. In the first place, borrowers must bear not just the cost of the loan and interest payments, they must also invest a significant part of their time in group activities mandated by their programmes. The loans usually finance some type of traditional ‘women’s work’ (such as papad-making or weaving and sewing) which is not seen as fit for men to do. This leads women to rely on their female children for supplemental labour, and thus female children are under increased pressure to stay out of school so that they can help contribute to the family income. Studies have found that women value wage employment over credit because of stability and a collective workspace which provides information and solidarity. The status and material benefits of income wage employment are more likely to promote economic and social empowerment as women have a greater degree of control over the money they earn in employment. (http://www.prospect.org/print/V14/5/polakow-suransky-s.html)

Also, all investments may not return a profit. In this event the money to repay the loan must come from reduced consumption or borrowing from some other source, usually on worse terms. Activists in Rajasthan have demonstrated how women take loans from village moneylenders at exorbitant rates to pay off loans from SHGs. Another problem is the capture of the loans by male relatives. In some cases, male relatives use female borrowers as fronts to get relatively low interest loans. These loans may or may not be used to benefit the family, and the female borrowers rarely see any benefit at all. And yet, the women are still held responsible for repayment of the loans (http://www.indiatogether.org/women/finance/macrohype.htm).

In fact, the chances of a female-headed enterprise succeeding at all are often quite small in situations where women do not have access to -- leave aside control of – markets. In fact, as micro-credit programmes become more successful and hand out more loans, more people enter the local marketplace as micro-entrepreneurs. Nan Dawkins Scully of t he Women's Micro-credit Accountability Network (WOMAN) writes that “the cumulative effect of rising costs, declining demand, and competition from both cheap imports and increased entrants into the sector leads to shrinking profits in informal-sector trade”. In other words, the initial success of micro-enterprises can lead to subsequent over-competition problems, especially when international trade liberalisation is factored into the equation. A few micro-entrepreneurs in a given area may be able to turn a profit. A large number probably cannot. A related problem is the durability of poverty reduction. Infusions of cash in almost any amount are bound to have some effect on the poverty-stricken borrowers. But this does not necessarily mean that the effect will be permanent ( http://www.ieo.org/kav001.html).

“D onors and advocates consistently over-exaggerate the power of micro-enterprise credit and related assistance, while ignoring key structural issues that are far more pertinent to the long-term problem of women and poverty i.e., agrarian reform, programmes favouring export production (typically male-dominated) over subsistence crops (typically female-dominated), and trade agreements structured in the interests of transnational corporations.” The cumulative effect of rising costs, declining demand, and competition from both cheap imports and increased entrants into the sector leads to shrinking profits in informal-sector trade, says Scully.

Inability to reach the poorest of the poor
A second important drawback to micro-credit programmes is that they don’t reach the poorest members of society. The poorest have a number of constraints -- fewer income sources, worse health and education -- which prevent them from investing the loan in high-return activity. It has also been found that the poorest need tiny loans which are not cost-effective even for micro-credit programmes. This section also places the greatest demands on micro-credit training programmes, which makes the cost of lending even higher. As researcher Linda Mayoux notes, as micro-credit programmes are pressured to become more self-sufficient, the incentive to lend to such desperately poor borrowers evaporates.

Four years ago, the United Nations was blunt in a report by Secretary General Kofi Annan to the General Assembly. “A certain sense of proportion regarding micro-credit would seem to be in order,” the report said. It added that lending to the poor had to be accompanied by training, information and access to land, among other things. “In some of the lowest-income countries, lack of access to land is the most critical single cause of rural poverty,” the United Nations said. (http://www.womensenews.org/article.cfm/dyn/aid/1239/context/cover/)

Micro-credit dependency
Another possible failure of micro-credit programmes lies behind the statistics. Some researchers have proposed the idea that the high repayment rates, repeated borrowing, and low drop-out rates indicate a dependency on micro-credit programmes rather than an attraction to successful micro-credit programmes on the part of poor borrowers. Many borrowers have no alternative to borrowing from micro-credit programmes, and consequently cannot afford to default. Neither can they afford to stop borrowing or drop-out of the programmes. In order to stay in good standing with the micro-credit programme, borrowers may even be forced to resort to pawnbrokers or other alternative sources of funding. This is a significant failure, since micro-credit programmes tout themselves as more progressive alternatives to the existing systems of informal credit which could be exploitative, such as share-cropping, debt bondage, and so on. (http://www.thehindu.com/2004/07/02/stories/2004070204221200.htm)

The current wave of euphoria over micro-credit misses the salient question: Since a majority of people have neither the skills nor the inclination to be entrepreneurs, why are micro-enterprises proliferating? It has been clear for decades that the informal sector is a depository for the victims of the failure of the formal sector. As long as micro-enterprise development is offered as a substitute for meaningful social development, for employment that offers real security, for viable small-farm and enterprise production, and for fundamental changes in the economic policies prescribed by institutions such as the World Bank and IMF, it will only impede progress toward finding real answers to the very real problem of poverty in the South.

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