The Purpose of Microfinance - Essay Example

Poverty is not just a of existence but it has several dimensions and complexities (Khan, 2001). Rural poverty involves climate, culture, gender, markets and public policy. The problems of the rural poor too are as diverse. Rural poverty accounts for nearly 60% worldwide and in developing countries such as Bangladesh it is as high as 90 percent. Poverty, economic growth and income distribution are interconnected. Absolute poverty can be alleviated if the mean income rises on a sustained basis and economic growth must reduce income inequality. Poverty cannot be reduced if economic growth does not occur. In fact persistence poverty can even dampen the prospects of economic growth. The poor stand to benefit when investments are made to ensure better health and education leading to increased current consumption and higher future incomes. To eradicate poverty it is also essential to understand the causes of poverty. Political instability, ill-defined property rights, discrimination on the basis of race, gender and sex, rapidly growing families without sustainable income are some of the causes of rural poverty. Macroeconomic stability and public investment in the physical and social infrastructure are the basic requirements to reduce poverty. However, at the individual level, microfinance was considered by Muhammad Yunus as the way to help the poor start an income that could eventually bring them out of the state of poverty. Microfinance, according to the World Bank, is the ‘provision of financial services’ (including saving and credit) to ‘the poor’ (Irobi, 2008). The purpose of microfinance is to engage the people in economic activities, make them self-reliant, increase employment oppurtunities and enhance their household income and wealth (Emeni, 2008). The basic idea behind starting the microfinance loan scheme for the rural poor was to provide loans to them without collateral security. This was based on trust and selflessness. According to Yunus, people do not seek charity but an oppurtunity to grow and become economically independent. To this extent, the concept of microfinance had a noble purpose the economic growth of the people and thereby the nation. Neo-liberalism is also based on the premise that human welfare can be served best when the state withdrawn from the welfarist policies (Karim, 2009). Neo-liberalism, a social and moral philosophy, has also been described as a way of governance where governing relies on calculative choices and techniques. The subjects have to act in accordance of the market principles discipline, efficiency and competitiveness. The target population has to conform to certain rules that inform and regulate behaviour. The weaker sovereignties have been exposed to neo-liberalism specially by powerful financial institutions like the International Monetary Fund (IMF) and the World Bank (Treaner, 2005). In the post-colonial economies, just as the NGOs subject their clients to act in accordance with the values of discipline, efficiency and competitiveness, the micro financial institutions also started acting like a state. They build their own policies and regulations; they started operating independently as banks in the rural areas and started investing in the rural health and education programs independent of the state. However, the basic purpose of the Grameen Bank, the pioneers who later became an institution by itself, was to alleviate poverty. Since the purpose of GB was to alleviate poverty, the success of the Bank too should be ascertained if poverty has been reduced. To what extent microfinance can help to reduce poverty would be evaluated here, based on the case of Grameen Bank. The Grameen Bank (GB) was established with the sole purpose of providing loan to those who do not possess more than half an acre of land or assets not exceeding the value of one acre of cultivable land (Wahid, 1994). In addition to providing finance, Grameen Bank also supervised and monitored the entrepreneurial activities of the borrowers so that the funds were used for the purpose it was meant for. GB encouraged savings and also advised the borrowers to enhance their living conditions. GB had started as an experimental project in 1976 but within 16 years it was operating 974 branches covering almost 30,000 villages and had disbursed a cumulative loan amount of Taka 16,119.53 million. GB could bring about a revolution in the attitude towards women and work. Wahid claims that honesty, dedication and total commitment of the GB workers are factors responsible for the success of the GB. The staff at GB is provided with twelve-month training in computerization, accounts, administration, leadership, and crisis management (Wahid & Hsu, 2000). The employees are also encouraged to adopt ‘learning by doing’ behaviour which promotes innovative ideas in the GB. After its success in Bangladesh, GB operates in more than fifty countries including the United States. GB targets a homogeneous group of the rural poor that feel comfortable with petty loans. The borrowers invest the money in small business such as cooking puffed rice, making bamboo stools or weaving floor mats. The bank comes to the doorsteps of the borrowers and the borrowers do not have to go hunting for the bank or its officials. It is believed that the rate of interest charged by GB, even though higher than the traditional banks, is much lower than the rate of interest charged by the moneylenders and hence affordable. The lending operations take place in front of the borrowers, there is no scope for corruption or high transaction costs. When repayments are good, the borrowers are given higher amounts of loan for housing, technology and crop processing. GB also insists on compulsory saving which provides a security against non-payment and also becomes a source of additional loans. The purpose of micro-credit loans is to provide a means for generating income; it is not meant for consumption. No credit checks are conducted and no collaterals wanted but to reduce the risks associated with lending, the loans are usually paid through a cooperative or a society (Richardson, 2009). The Grameen Bank in Bangladesh, pioneers in microfinance, rely on peer lending circles that exert social pressures on the borrowers to repay. The group also takes joint responsibility and no new lending takes place until all old borrowers have repaid. Thus the GB instituted group liability instead of any collateral. Wahid and Hsu found that GB had been successful in creating jobs. It has also significantly increased the productivity of its members. The farmers could afford the application of irrigated water, larger doses of fertilizers and pesticides. The housing loans have helped the borrowers to improve their living conditions. The Grameen Model has made significant contribution in bringing financial services to the poor people (Pollin, 2007). Bank accounts and insurance policies are definite ways of improving the well being of the poor, which GB has been able to achieve. They have targeted women as borrowers which has brought them out of the historical shackles as they now feel empowered. By creating borrowing groups of five women, GB has been able to revolutionise the traditional regulation of collateral required for borrowing. The growth of the microfinance sector has been phenomenal since the perceived success of the GB in Bangladesh. Worldwide, there are now some 10,000 microfinance institutions lending to about 40 millions borrowers worldwide (Pollin, 2007). However, the Grameen Model has limited capacity to fight global poverty, specially when the policy setting is dominated by neo-liberalism. The developing world adopted neo-liberalism as the economic model in the late 1970s and this is precisely the time that GB began operations. Neo-liberalism focuses on eliminating inflation rather than expanding job oppurtunities. The developing economies have had a protectionist attitude as they do not open their economies to imports or multinational investors. These factors have increased inequality and not brought about any reduction in poverty. Hence, even though GB started with the focus on reducing property, these other factors prevalent in the developing nations like Bangladesh, only countered their efforts. The GB mission had several positive and innovative characteristics such as group lending to reduce the risk of defaults and extending loan without any collateral. It was initiated as a challenge to traditional banking (Grameen Communications, 2010) but the lending rates by GB and other micro-financial institutions far exceed the affordability. This does not mean to imply that the loans should be extended without charging any interest. If the rate of interest is zero, these loans are taken as grants and there is little interest to repay them. According to Cook and Bryce (2008) microfinance loans should be granted to those in moderate poverty and not to those in absolute poverty as they would not be able to pay even the interest. The microfinance loans are usually given on a short term basis and the rates of interest are usually high ranging from 42 to 48 percent – much higher than the rates charged by the mainstream banks. The rate of interest is kept high due to the perceived risks of non-repayment and the administrative costs (Anyanwau, 2004). Such high rates of lending amount to exploitation of the rural poor, who have no alternative but to take funds at these rates. These rates may be lower than the rates that moneylenders charge but they are extremely high and exploitative. No explanations of taking care of the risks involved or the high cost of administrations, would justify the high rates of interest. It is like binding the borrowers under discipline and leaving them with no choices. It may also be argued that lower rates would not be of interest to profit-seeking bankers but then it goes against the very principle of providing microfinance – to help alleviate the poor. The purpose was not to make profits but to alleviate the poor, which seems to have well been forgotten. The loan recovery rate of GB is supposed to be high – as high as 95 percent (Pollin, 2007) or even 98.24% (Muhammad, 2009). If that be so, why is the Bank unable to maintain the efficacy of its fast expansion (Wahid & Hsu)? However, the accuracy of this report has been disputed by a report from Wall Street Journal in 2001. There are reports that rather can declare the borrowers as defaulters, GB allows them to roll over the loans or stretch out their repayments. Even this strategy goes against the principle of microcredit loans. The purpose is to make them generate savings and improve their living conditions, which is not fulfilled when they are unable to even to pay their instalments. Wahid and Hsu contend that the operating costs were so high that they needed outside funding to cover the cost of lending. GB is not a viable profitable institution because its operating costs are higher than the operating income. The bank had to raise the rate of interest and also charge a small surcharge for the Group Savings Fund. The GB borrower crosses the poverty line after taking 8-12 cycles of loan which should be brought down to 4-6 cycles. Unemployment in Bangladesh was the main cause of rural poverty and it is often argued that jobs can be created wither by wage employment or by generating self-employment (Wahid, 1994). The income generated by the GNB borrowers was so low that they could hardly reinvest these to generate self-employment. Even savings become difficult for the poor with low income and with higher propensity to consume. If the rate of interest was lower and the repayment installments small, this could have enabled the borrowers to save some amount every month and build up their reserves. Poverty is not about individual behaviour but poverty has structural causes. To alleviate poverty, structural change has to occur which has not been possible through the implementation of the GB or any other micro credit banks. Merely providing income support only pushes the poor deeper into poverty because they find no incentive to put in harder work. The solution to poverty according to the neo-liberals is to be able to make the poor work harder, get educated, have fewer children and accept and work with responsibility (Feiner & Barker, 2006). The micro credit programmes have not been able to change the structural conditions of globalization. Poverty can be reduced if there are laws to protect the land rights or offer subsidies in health and education expenditure. In Vietnam, to reduce poverty, land reforms help to eliminate the landlord class (Muhammad, 2009). These type of structural changes can help alleviate poverty. However, such schemes have not been implemented alongside with providing finance for income support. The women may have been able to generate income merely based on home handcrafted products but these are in the informal sector with little regulation. Md. Yunus has claimed in 2006 that 56% of its borrower families have crossed the poverty line by 2005 and the micro credit outreach is very high in Bangladesh (Muhammad, 2009). The ten indicators of poverty considered were size of loan, amount of savings, housing condition, furniture in the house, provision of pure drinking water, sanitation and warm clothing, education of the children. However, elsewhere the figures claimed by GB differ from the claim of Md. Yunus and the GB website. There does not appear to be any consistency on these claims. Beck and Odgen (2007) find that the microfinance institutions have not been able to achieve their goal of reducing poverty. Through an intensive study of 150 carefully selected micro credit programmes, it has been found that despite increase in school enrolments, better nutrition and increased household incomes, poverty has not reduced. Ninety percent of the micro loans are used to fuel current consumption. The income generated is not used to establish themselves in the long run. In Bangladesh, in 2001, approximately one in every four household had a micro loan but this has made no difference to the country’s relative development performance. When the societal well-being was measured, Bangladesh ranked 136th on the UNDP’s Human Development Index (HDI) and after 15 years of micro credit loans, it has slid down to the 137th position. Micro credit programs can actually be harmful and plunge the poor into deeper debts. GB may have achieved success as a bank that has been able to register profits but certainly not as an institution that has been able to reduce poverty. The micro credit programs claim to be ideology-free and are meant to simply help the poor but the institutions merely work to make profits (Batemen and Chag, 2005). The concept just happened to originate when private finance and support was needed specially in the developing countries. Neoliberals have only made the poor further dependent on this supportive finance instead of making them independent and self-supporting. Had they aimed to make the poor independent, it would have reduced the power and freedom of the elite. Microfinance as portrayed in such a way that it was the only way out of poverty for the individual as well as the community. Micro entrepreneurship backed by microfinance has also allowed several progressive policies (such as land ownership reforms and social welfare programmes) to be removed from the political and policy agenda. In the developing countries, the country governments used microfinance to ‘flexibilise’ the labour market and to disempower labour, which are important neoliberal objectives. Neoliberals wanted to impr5ess upon the society that development is an independent individual activity and should not call for state intervention. Neoiberals could project that microfinance was indeed helping to alleviate poverty without distorting the structures of power and wealth. This situation only led to furtherance of poverty instead of fulfilling the purpose for which it was initiated. Thus it can be seen that no change has taken place as far as poverty reduction is considered. This requires structural changes which the neoliberals have been careful not to distort. Merely quoting figures of the number of borrowers and the amount of funds disbursed does not mean eradication of poverty. It has made them further dependent on microfinance despite having an income. Poverty reduction measures should not have discrimination against sex but women have been the focus of the microfinance programmes. Poverty cannot be reduced if economic growth does not take place and no economic growth has taken place. Only the rich have become richer – those with private funds have become entrepreneurs lending microfinance only to amass profits. The mainstream banks to venture into microfinance if they find it a profitable venture. The health and education sector has not received any impetus for growth and these are precisely the reasons that the developing countries have not progressed at a fast pace. Microfinance schemes have not been able to solve the problems of rural poverty. References Anyanwu, C. M. (2004). Microfinance Institutions in Nigeria: Policy, Practice and Potentials. Retrieved March 26, 2010 from http://www.g24.org/anyanwu.pdf Bateman, M., & Chag, H. (2005). The micro finance illusion. Retrieved March 26, 2010 from http://www.econ.cam.ac.uk/faculty/chang/pubs/Microfinance.pdf Beck, S., & Odgen, T. (2007). Beware of Bad Microcredit. Harvard Business Review. Retrieved March 26, 2010 from http://hbr.harvardbusiness.org/2007/09/beware-of-bad-microcredit/ar/1 Cook, M., & Bryce, J.S. (2008). A Model of a Micro-Credit Institution. Journal of Applied Business and Economics Emeni, F.K. (2008). Micro Finance Institutions (MFIS) in Nigeria: problems and prospects: questionnaire survey findings. Journal of Financial Management & Analysis, 21 (1), 69-76 Feiner, S.F., & Barker, D.K. (2006). Microcredit and Womens Poverty. Dollars & Sense; Nov/Dec2006, Issue 268, p10-11, 2p Grameen Communications. (2010). What is Microcredit? Retrieved March 26, 2010 from http://www.grameen-info.org/index.php?option=com_content&task=view&id=28&Itemid=108 Irobi, N.C. (2008). MICROFINANCE AND POVERTY ALLEVIATION. Retrieved March 26, 2010 from http://ex-epsilon.slu.se/archive/00002849/01/Irobi_N_080923.pdf Khan, M.K. (2001). Rural Poverty in Developing Countries. International Monetary Fund. Retrieved March 26, 2010 from http://www.imf.org/external/pubs/ft/issues/issues26/index.htm Muhammad, A. (2009). Grameen and Microcredit: A Tale of Corporate Success. Economic & Political Weekly. XLIV (35), August 29, 2009 Pollin, R. (2007). Microcredit: False Hopes and Real Possibilities. 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