Microcredit, a magic wand to fight poverty or profitable business at the cost of the poor?
– A multi-series blog with proponents and critics of micro finance by sabriye tenberken
- A springboard to get out of poverty
“Things are never as complicated as they seem. It is only our arrogance that prompts us to find unnecessarily complicated answers to simple problems.” (Muhammad Yunus, Nobel Peace Prize laureate and founder of Grameen Bank)
The goal of Muhammad Yunus is to combat poverty using a simple formula. And indeed, it is a truly simple solution: give the poor a loan and they will pull themselves out of their misery. Does this work?
Having read extensively about Microcredits, the following analogy comes to mind: My little 14 months old niece Mira has recently discovered a wonderful game. She empties a wooden box, places herself inside and calls for my brother to take the attached rope and pull her through the apartment. So far so good. But what if my brother is not around? Then she takes the rope in her own hands while sitting in the box and tries to pull herself forward. That does not lead to success. Well, Mira quickly finds out that with some wiggling and shaking she may be able to move a few Inches forward. Real progress however, can only be done with a “locomotive”. The Box without my brother is not a “self-runner.”
When I explained this analogy to Selassie from Ghana, a 2018 kanthari graduate and by then a fiery defender of microcredits as a miracle weapon against poverty, he begins to laugh out load. “Of course, you think like that …!” Then he stops and after a moment of silence, to my surprise, he adds: “But actually, I do feel, your analogy is quite right.”
In this blog I write about conversations that I had with kanthari alumni, who are familiar with giving out micro credits or who were themselves beneficiaries of the same. I will point out unquestionable stories of success, but I also have a critical look. Finally, I will describe an alternative concept that has been exercised by several kanthari alumni.
But first, here what I came to know through the call with Selassie.
We both remember our extremely heated debates in which he, Selassie accused me of doubting or even ignoring essential means of defeating poverty. Back then I countered that micro finance might be able to address symptoms of injustice, but that the idea of handing out Micro loans is a neoliberalist, self-serving methodology which is neither able to create sustainable social change nor suitable for stopping climate change.
Today, two and a half years later, we both have cooled down a bit, and he tells me about concrete experiences from his work. I have to admit, I am positively surprised, because the examples he cites and the methods he describes are logical and convincing.
Selassie is the founder and director of Eyata, an organisation that focuses on single women in rural areas of Ghana. they receive an intensive training in fashion design, financial literacy, and business administration. In doing so, they learn how to create unique products and how to sell the items to a broader audience. They learn everything from budgeting and accounting, and thus they are well prepared to manage microcredits. Once they understand the ins and outs of micro finance, they will become successful borrowers who can return their credits on time with interests. And this gives them the opportunity to apply for a follow-up loan.
A few examples: Emmanuela is single and in her twenties. She loves sewing and is passionate about developing modern designs for dresses and suits. But due to financial reasons, she never had the opportunity to enroll in a tailoring training. At Eyata, she learned both tailoring and fashion design, and additionally, she was prepared to develop a business idea and finance it through microcredits. Through the first loan, she acquired a sewing machine. Within a short time, she was able to pay back and she received the follow-up loan with which she could build a small shed. This shed serves as a tailoring unit and at the same time as a small shop. She already has an employee and can comfortably live from the monthly income.
Another example is Grace. She is a bit older and has three children to look after. She had kicked her violent husband out and thus had to work hard to make ends meet. In the meantime, she was able to help with the tomato harvest. This kept her and her children afloat. But once the harvest failed, there was nothing left for Grace to fall back on. Through Eyata she found her passion. She is very creative, designs colorful wedding dresses and from the left over cloth she sews shopping bags.
During the Covid lockdown, she did not remain idle. She made fashionable masks out of different fabrics, which were also popular by city dwellers. Today she can send 3 children to school. The micro-credits granted helped her out of trouble.
“Grace reminds me of my own mother.”, Selassie says, “She, too would have had it easier through microcredit.”
Growing up, Selassie himself had experienced great poverty. His mother was divorced and had to take care of two children and this without any job nor education. Like Grace, she harvested tomatoes and through the help of her siblings she was able to make sure that Selassie and his sister could attend school.
Selassie remembers how both siblings were mocked at school. Their uniforms were old and torn and they had no decent shoes. Often, they had to go to school barefoot. They couldn’t bring anything for lunch either, so they stared with empty stomachs to the other children’s treats. He remembers some classmates even singing mock songs, making fun of their hungry looks.
Whenever he could, he hid in the library, which was an hour’s walk from his home village. Instead of hanging out with the other boys, he studied hard and achieved excellent school degrees. By the time he came to the kanthari Institute, he had already set up an organisation that linked single mothers to microcredit lenders. Here in kanthari he got the tools to expand his project and he was familiarized with the aspect of social change. In many heated debates, he had to defend his method, and to a certain extent he was able to convince us that his help through microcredits for already entrepreneurial minded women is like a seed on fertile ground.
“Our childhood was overshadowed by feelings of shame. We felt guilty about being poor. My mother and we would have benefited greatly from the opportunities that I today give to single mothers.”
- The Grameen Bank
“I believe that we can create a poverty-free world because poverty is not created by poor people. It has been created and sustained by the economic and social systems that we have designed for ourselves; The institutions and concepts that make up that system; the policies that we pursue.” (Muhammad Yunus)
Muhammad Yunus, born in 1940, grew up in a Muslim Family with 9 children, in a village near the town of Chattigong. At that time, this region belonged to India, then it became East Pakistan and from 1971 it is part of the independent country Bangladesh.
In the sixties, he received a scholarship and studied economics at the VanderBilt University in Nashville Tennessee, USA.
In the early 70s, he returned to his hometown and became a professor of economics. The professorship alone seemed not to satisfy his curiosity. He went out to the poor and recognized their dilemma. He saw them as prisoners of poverty, as they had no means of being financially supported by loans from banks. Yunus started an experiment. He himself lent money to women who were able to realize a long-desired business idea. The conditions he set were that they would join together in liability groups or “solidarity circles” to support each other. An important rule was that they should not buy luxury goods from the loans, and they had to refund the borrowed sum with interest within a set time frame. The idea became a success: The loans were repaid on time and the women were able to start small businesses, which also made them financially independent of their husbands.
His initiative resulted in the nowadays globally known Grameen bank which was founded in 1983. It is a for profit company that is owned by the poor themselves and this bank gives out microcredits, especially to women, for business ideas. The borrowers don’t need securities for their loans.
The Grameen Bank as well as Muhammad Yunus were awarded with the Nobel Peace Prize in 2006. As a result, microcredits became a “holy cow” in the field of development.
But the idea of lending small loans to the poor dates back to the 19th century. In Ireland as well as in Germany (here given by Friedrich Wilhelm Raifeisen) micro funds were mainly granted to farmers. The decisive difference, unlike the modern microcredit scheme, back then these loans were provided free of interest.
But let us first look at the process of handing out microcredits:
Micro loans are between 25 and 1000 US$. They function as a gateway to self-employment, but only if certain conditions are met:
- An MFI, a micro-financial institution must be established. Often these are already existing NGOs that are deviating from the non-profit sector to be transformed into micro-banks with a new objective. Now, that these organisations are seen as profitable, retail investors and larger financial institutions can invest. They like to do so, because the return rates with 95 to 100% are much higher in comparison to regular bank loans. How such a high rate is possible, will be addressed in the next week’s blog post.
- Where possible, liability groups would have to be formed. They are also called “solidarity circles”. The members of such a circle ensure that all other members return the loans in time so that follow up loans can be higher. How solidaric these solidarity circles are, will be examined in next week’s blogpost.
- The applicant needs to explain for what the money will be used. The MFI then determines the instalments, the interest rate, and the corresponding time frame within which the loan must be refunded. A business idea is a requirement. Televisions, radios and/or any other luxury items cannot be purchased from these loans.
- The entire sum must be repaid with interest. The interest rate varies usually between 20 to 35%, which is much higher than loans from regular banks. The amount is justified due to the fact that the employees of the MFI are supposed to provide intensive support to the groups.
- The borrowers are advised by the MFIs, they receive introductory seminars and they are assisted in the preparation of their business plans.
I believe that all this is a good approach and, in many cases, carried out with care, it will certainly help those who are anyway entrepreneurial and responsible.
But what if the global call for scaling and growth interferes?
As soon as investors spot see growth opportunities which translate in US$, greed may be part of the deal. And then the whole idea gets out of control, the worldwide praised solution becomes the actual problem. The tailored training, the individualized advice and the care that is supposed to be given by an MFI, gets lost. When scaled, the extra care is no longer seen as a necessity, but as an additional needless cost. Thus, the ‘locomotive’ is detached, and Mira’s wooden box stands still. Only when she tries awfully hard, shaking and struggling, does the box move forward ever so little. But is this enough to fight poverty?