Critiques of Microcredit

lirolceltp by Pooja Pokhrel

---

Microcredit Movement: The Downside

---

The microcredit movement has been successful in reaching out loans to millions of poor people worldwide and directly helping in the alleviation of poverty to some extent. According to Newsweek, April 9, 2007 issue article titled "The microcredit backlash," so far about 500 million poor worldwide have reportedly benefitted from some $6 billion in microloans and is expected by aficionados to increase up to $300 billions. The United Nations declared the year 2005 as the year of microcredit and last year Muhammad Yunus, the founder of Grameen Bank received the Nobel Peace prize. Yunus predicts that " one day, our grandchildren will go to museums to see what poverty was like."

However, as some critics have observed, microcredit is far from being a succesful instrument to eradicate world poverty and not everyone is pleased with the prospect of better financial servises to the poor.

---

Sustainability

In Guatemela, it is estimated that only 300 out of nearly 25,000 microlenders have reached financial sustainibility.Even Grameen Bank is not financially sustainable. It relies heavily on subsidies. If Grameen had been a market institution, it would have suffered $34 million losses between 1985 and 1996, or it would have to rasie its loan rate to well above 50%. So the dominant issue right now is how best to bulid institutions that are genulinely market viable as versus subsidee dependent.(Microcredit or Macrowelfare: The Myth of Grameen-Mises Institute). The Townsend-Kaboski research project in Thailand informally tracked hundreds of microfinance institutions and found that in the five years before the Asian financial crises, 10% failed and a quarter stopped lending. (Survey: The hidden wealth of the poor, The Economist. London Nov 5 2005)

---

Poverty lending: a bad social policy, a bad development and a bad business

Thomas Dichter, an international aid expert who spent decades working with microfinance concludes that while some borrowers never get off the debt treadmill others use their credit on consumer goods.So microcredit rarely serves the poor. Elizabeth Littlefield, director of the Consulative Group to Assist the Poorest(CGAP), which is housed at the World Bank, says, "Microcredit, which is, after all, debt, is not most appropriate thing for all poor people. Some people are so poor that they're not going to generate any income from the loan they take." Littlefield talks about a situtaion in Afghanisthan where farmers who originally grew poppies were given loans to grow other fruits and vegetables. But they were not given any technical help or training. Littlefield argues, "In those circumstances it may make much more sense to provide grants along with tarianing taht allows people to develop business skills." Littlefield hopes that microcredit gives way to a broader field of "microfinance," which would encompass a variety of other financial services that vhave long been inaccessible to the poor.

Small credit is not a tool for the underclass to leverage its way out of want through enterprise. Skeptics say that most small businesses get started not from small amount of money borrowed from the bank but through personal savings and raising cash among family and friends. Richard Posner, a US circuit court judge and economic historian is unaware of any historical examples of nations that climbed out of poverty on the backs of small entrepreneurs financed by credit. Alex Counts, director of the Grameen Foundation, which is incharge of replicating the Bangladesh based Grameen Bank around the world, reports that only a tenth of the world's 7 million clients are true entrepreneurs who started out by borrowing $100 are now borrowing $10,000 to $20,000 whereas the rest are just making their ends meet. He says," In developing countries, where there are few jobs and no safety nets, your alternatives are to work for yourself or starve," "Not everyone is an entrepeneur but everyone is a survivor."

---

Microcredit and Women's Poverty

Many policy makers ignore the fact that poverty has structural causes, they simply believe that poverty is a problem of individual behaviour, so they deny the notion of collective responses. In fact, they believe that broad based civic commitments to increase employment or provide income supports only make matters worse: helping the poor is pernicious because such help undermines the incentive for hard work. this ideology is part and parcel of neoliberalism.

According to an article by Susan F. Feiner and Drucilla K. Barker on Microcredit and Women's Poverty in the November/December 2006 of Dollars & Sense magazine, "For neoliberals the solution to poverty is getting the poor to work harder, get educated, have fewer children, and act more responsibly. markets reward those who help themselves, and woman, who comprise the vast majority of microcredit borrowers, are no exception. Neoliberals champion the Grameen bank and similar efforts precisely because microcredit programs do not change the structural conditions of globalization-such as loss of land rights, privatization of essential public services, or cutbacks in health and education spending- that reproduce poverty among women in developing countries."

Feiner and Barker argue against the idea that the microcredit programs help women to generate income by using the borrowed funds to start a small scale business as being concentrated in the informal sector, which is highly competitive and unregulated, There are no laws that protect these workers or ensure their rights. And women make the majority of these workers in the informal sector and are heavily represented at the bottom of its already-low income scale.Microcredit encourages women to work at home doing piecework like sewing garments, weaving rugs etc.So women work long hours for very poor pay in hazardous conditions with no legal protections.

The gender division of labor in developing countries assigns men to paid work outsde home and women to unpaid labor in the house mainly domestic chores. This sometimes include hard labor such as fetching drinking water from miles away, taking care of children etc. So the very notion of accessing microcredit and working hard towards repaying loans sonds like double day job for these poor women who simply have no choice. On the one hand they can't reject loans as they see it as a hope of getting out of dire poverty and on the other hand they are already burdend with domestic responsibilities which gives them hardly any free time.

Also, microcredit programs do nothing to change the structural conditions that create poverty. A widely cited research by the Canadian International Development Agency (CIDA) reports that "Women in particular face significant barriersvto achieving sustained increases in income and improving their status, and require complementary support in other areas, such as training, marketing, literacy, social mobilization, and other financial services such as consumption loans, savings etc. The report also found out that borrowers benefit only small gains and that the poorest borrowers benefit the least. CIDA also found out a little relationship between loan repayment and business success.

It is believed that women are empowered when they have access to microcredit loans. However the evidence on microcredit and women's empowerment is ambiguous.Access to credit is not the sole determinant of women's autonomy and power. Instead it may increase conflict in household in patriarchal society where men may control how loan moneys are used. Also, the group pressure over repayment in Grameen's loan circles can just as easily create conflict among women as build solidarity.

Grameen bank's approach to banking reinforces the neoliberal idea that individual behaviour is the source of poverty and it restricts state aid to most poor and vulnerable who need the most help from the government. As microcredit is an antipoverty program that aims at individual, so it shifts the responsibility of addressing poverty away from the government. Therefore microcredit is often cited as "a privatization of public safety net prorams." The clients of K-Rep, an excellent Kenyan microfinance bank in a small town on the fringes of Nairobi say that the government stopped repairing roads, picking up rubbish and spraying for malaria. Drainage in the marketplace was plugged by uncollected garbage.(Survey: The hidden wealth of the poor, The Economist. London Nov 5 2005)

---

Other Critiques

Some argue that, "the effect of the Grameen strategy has not been to reduce poverty but only to create a debt trap for borrowers, who are being charged very interest rates, sometimes even bigger than the commercial bank interest rates."

Some economists argue that poverty is structural, and so the solutions of poverty must focus not on the conditions of individuals but on building structures like expanding the state sector to provide the rudiments of a wroking social infrastructure. This would be far more effective.

Grameen's group lendeing model aslo has its dark side. In Bangladesh, group members have occasionally resorted to aggression in pressuring fellow villagers to make weekly payments, seizing their properties or removing roofs from their homes. Alex Counts, president of the Grameen babk U.S.A. , acknowledges that the group model was "a very good idea, but it had a dark side....It brought a lot of solidarity but also brought an enormous amount of tension. If someone fell behind, people got very tense and even got hostile to each other." (American prospect Online- Giving the Poor Some Credit)

Some critics point out 5 fatal assumptions that Grameen suffers from:

• The very idea that poor should be self employed rather than work for wages is contrary to the whole history of successful economic development.

• The idea that loans are the main financial service needed by the poor, whereas they really need is savings and insurance.

• The idea that credit is what builds enterprise, whereas the truth is that entrepreneurship and management are more important.

• The idea that non-poor don't need credit, whereas the truth is revealed in market-based banking: higher incomes can handle higher debt.

• The idea that mocrocredit isntitutions can become self sustaining, whereas all experience shows that new enterprises in poor areas that are built on credit alone rarely emerge from dependency.

---

General Microcredit History | Historical Precedent | Models | Critiques of Microcredit | Benefits of Microcredit | Success Stories | Microcredit Summit Campaign | Conclusion | For More Information