Microcredit Under The Microscope

Wanted: microlenders who empower the poor rather than maintain them on the treadmill of debt.

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.