Microcredit Issues and Debates
While the microcredit idea of giving small loans to the poor has mushroomed into a large global movement, it is not without its critics. Like every good innovation, there are doubters, detractors, as well as ardent supporters.
The paragraphs below highlight some of the main criticisms and/or points of debate. They are classified into three types of arguments: theoretical differences, practical disagreements over methods, and other basic questions about microcredit. We do not intend here to resolve the issues, but merely to raise them for the reader to consider.
The conflicts over microcredit as a concept go back to its early years when many bankers and economists rejected the very idea of giving loans to the poor. Such a proposition defied traditional assumptions that the poor were not worthy of loans, couldn't handle the responsibility, lacked collateral and education, etc. But, the U.S.-trained economist Muhammad Yunus (and others) broke the mold of such theories when he realized his neo-classical economics education for a Ph. D. degree did not adequately explain the complexity of impoverished communities in Bangladesh. He had been taught that the poor are lazy, and that poverty exists in the Third World because people do not work. But, he found the realities of poverty clashed with economic theory he taught, so he launched the Grameen Bank as a different model.
Most economists believe that self-interest drives all financial transactions. Microcredit argues a different paradigm-that altruism and helping others, i.e. lifting the poor out of their suffering, can also explain economic behavior. The charitable motives of NGOs like ProMujer, Yehu Bank, and others have always been explicit: They sincerely want to reduce human suffering. They are not using microcredit for self-interest purposes such as making money off the poor or gaining popularity in the media. They suggest an alternative to traditional economics that often leave the poor behind. They show another economic model where the impoverished are helped out of poverty.
Another conceptual debate is in the question of whether the best path to Third World development is large-scale, top-down funding of major projects versus small-scale, bottom-up microloans to minor players. As a theoretical matter, this debate has raged for two decades, mainly between scholars and policy-makers. For instance, as the most powerful player on the scene, the World Bank emerged after World War II to provide capital for reconstruction and development in the world economy, providing long-term credit to poor nations-mainly for building infrastructure like highways, bridges, dams, and other huge projects to modernize such countries. The theory was that by investing in large-scale developments, a nation's ability to compete in the global market would increase and the poor would gradually become better off. However, in many cases, like Brazil for instance, the theory didn't work. Mainly the rich in Brazil benefited, while the poor grew still poorer. Today Brazil is one of the most financially unequal countries on earth.
Over the past decade or so the theory supporting microfinance services to the poor at society's bottom has begun to be accepted by World Bank and other scholars. In recent years, these institutions have begun to focus more on poverty alleviation, emphasizing the issues of women, literacy, and microcredit. Thus, the World Bank has changed both conceptually and practically as the debate over microcredit has gone on. The World Bank's support for microcredit has changed, along with its theories: From a mere $2 million dollars for microlending in the late 1980s, to $35 million in 1996, then to over $100 million, and its portfolio over recent years has climbed to 4 billion dollars. It seems the debate is no longer whether or not microcredit is worthy of financial support. Instead, it's a question of how much.
On the pragmatic question of microcredit there are numerous differences in implementation and outcomes. The list of such matters is long, so only a few will be highlighted here.
Gender: Male or Female?
Should the loans go to only women, mostly women, or males and females equally? The trend over time has mostly been toward giving loans to female microentrepreneurs. The marginalization of women in the marketplace has been an age-old problem based on the notion that women shouldn't have property rights and so on. But the rise of democracy in the Third World, as well as other forces, is gradually destroying such biases. It is now known that women are a significant economic sector, especially in the informal economy, with huge potential impacts in helping a national economy to grow.
Hence, most NGOs including Grameen and FINCA, that initially and primarily gave microloans to men, now almost exclusively channel their credit to women. They do this "because it is right," as some staffers say. They also do it because women tend to be better risks, they pay their microloans back at a higher rate, and they use their profits to grow the business and/or help their children. Males often are not so responsible. However, there are new NGOs, like BASIX in India, that primarily loan to men. They argue that men can be responsible, too, and that loaning only to women upsets the traditional patriarchal structure in their culture, leading to unintended consequences, such as role loss, marital conflicts, and so forth.
Loans vs. Training?
In scanning the horizon of microcredit, there is ongoing debate about whether the NGO practitioner should only provide microloans, or whether small-business training ought to be included.
Some MFIs such as Grameen simply provide microloans. They claim that the poor are trustworthy, capable, and merely need extra capital to start or grow their business ideas. Small organizations point out that training is costly and takes time, thereby reducing the growth in poor borrowers, many of whom can't afford the time or travel costs to attend seminars, even if such training events are free.
Other NGOs argue the opposite. What good is a loan if a person can't use it effectively? They note the high rate of failure among new firm start-ups in most countries and suggest that training lessens the likelihood that the microenterprise will fail. Visayas Enterprise Foundation illustrates this position. From its inception, the emphasis has been on training and management skills first, and credit later. Such NGOs admit training is costly, but the costs of microenterprise failure and resulting inability to pay back the loan are worse.
Organizational Model: Charity or Business?
A major practical issue in the microcredit community is whether it ought to be a tool for social well-being in behalf of the poor, or a new business model. Some scholars characterize the debate as the institutionalists (pro business advocates) versus the welfarists (humanitarians).
Essentially, the charity-oriented MFI sees its mission as relieving human suffering, giving services and goods to fill basic needs: food to relieve hunger, education to combat illiteracy, medicine to reduce disease. Thus, microcredit is simply an additional offering-credit to combat unemployment. Such organizations often depend on private donors and/or government subsidies. They reject calls to become financially sustainable and independent from foundations and other sources. Instead, they argue that the poor have a human right to credit. The role of NGOs and policy-makers is to reduce joblessness and poverty, and microcredit is seen as one more tool to give the world's have-nots.
In contrast, the institutionalists argue that the welfare approach is too small and too slow. They suggest that the need for financial services by the poor has grown to some $12.5 billion by 2005, and $90 billion by 2025. Sheer charity from personal donations and foundations simply won't have the capacity to meet such a demand. Thus, microcredit needs to become part of the mainstream, operating through for-profit financial institutions that only differ from traditional banks because they target a poorer class of clients. While the welfarists dominated the movement for two decades, it seems that the institutionalists are now beginning to take the lead.
Credit and/or Other Services?
This debate centers around whether a microcredit business loan ought to be the only offering to poor individuals, or if additional services should be provided. Many NGOs claim that they should strictly focus on doing one thing-microcredit-and do it well. Their view is that organizations need to have a single, clear mission, but that many flounder by trying to offer multiple services, none of which is extraordinary.
Conversely, other practitioners hold the opposite view. In their minds, microcredit is a necessary, but not sufficient, resource for the poor. They stress the need for additional programs that, if not provided, will likely lead the poor to slip back into their earlier suffering state. Perhaps the most well-known NGO advocating this view is Freedom from Hunger, a California-based nonprofit that pioneered the provision of various services, (www.freedomfromhunger.org). Starting in 1946 to fight hunger, it shifted in 1988 to integrate microcredit with nutrition and/or education. The result was "Credit with Education," which combines microloans with such things as HIV-AIDS awareness, polio vaccinations, family nutrition, women's health, literacy, and management skills. It now services 309,000 impoverished families in sixteen of the poorest nations of Asia, Latin America, the Caribbean, and Africa via organizations like ProMujer featured in the documentary. While the integration of microcredit with other programs takes longer and is more costly, advocates feel the holistic approach greatly benefits the whole woman, not just her economic nature.
Other Practical Debates
Finally, it should be noted that there are numerous additional issues that differ between groups and experts doing microcredit. Lacking the time and space to explain them, we will simply list other issues below for the reader to pursue according to his/her interests:
- Does increasing microenterprise funding cannibalize other programs? Some worry that overemphasis on microcredit may be dangerous because it can lead to cutbacks in other forms of poverty alleviation.
- Time required to rise from poverty? Critics are concerned that microcredit takes too long to lift the poor from poverty. For example, one Grameen study reports that borrowers tend to receive loans an average of eight years before they finally move out of poverty.
- Is microcredit exploiting women? Women bear the brunt of microcredit loans, thus becoming burdened with financial debt. Too often, the woman may not even control the use of such money since the husband or other male family members may take her loan money for their own purposes.
- Marketability of microenterprise products? An ongoing debate is over whether or not products made by the poor are only sellable in weaker local markets, or if they can be distributed beyond the village to international consumers?
- Savings or microcredit only? Some NGOs offer loans only, while others first require clients to start personal savings accounts as a way to learn money management and to build their own nest egg first. Then later, when loans are offered, the poor understand something about interest rates, principal, etc.
Other Basic Criticisms
Finally, there are a number of researchers and policy-makers who argue heavily against the phenomenon of microcredit. Their criticisms are summed up below:
- Microcredit Hurts the Poor
Some of them quite forcefully claim that microcredit exploits the poor in offering them loans they never had access to before, "tempting" them with constant new offers and greater and greater debt. The adverse effects may constrain those already suffering to a lifetime of deeper and deeper poverty.
- Lack of Replicability
Another argument is that microcredit only fits the informal economy of the Third World, not industrialized nations. Such claims have assumed that replicability is just not possible in modern societies. While this was a major part of debate in the 1980s-90s, the evidence today is overwhelmingly to the contrary. Currently, there are thousands of NGOs in Europe, Canada, and the United States offering many successful models of microcredit.
- Microcredit Isn't as Good as it Claims
One of the most recent hard-hitting attacks on microcredit arose on the front page of the Wall Street Journal on November 27, 2001. Reporters claimed the movement, and Grameen Bank in particular, doesn't play by traditional accounting rules and procedures that other financial institutions use. In fact, several other large-scale MFIs, as well as Grameen, exist to empower the poor, not make high profits as mainstream banks seek. But to reporters with no training in pro-poor accounting systems of innovative microcredit programs, the system appeared ineffective and cumbersome.
In essence, they call microcredit a "great idea," damning it with faint praise and then trying to dismantle it. So the WSJ staffers completely missed, or intentionally ignored, the $3.2 billion that impoverished rural Bangladeshi females have repaid to Grameen over 20 years. Instead, they emphasized the few millions of dollars in loans outstanding when they wrote their article. Of course, since 2001, almost all that money has been repaid, and Grameen consistently has over 85 percent of its 2.5 million borrowers paying their loans in full, on time, week after week, month after month, year after year. And that occurs among clients who are mostly illiterate, impoverished, spread throughout distant rural areas without modern infrastructure, telephones, and electricity. They also suffer the ravages of natural disasters, mostly seasonal flooding, as well as civil strife and other instabilities-all factors quite different from big U.S. banks.
Part of the repayment problem the WSJ article complained about was due to the devastating Bangladesh floods that engulfed half the country for over two months. Clients' businesses were destroyed and millions of homes had water over their rooftops. So, Grameen responded with fresh loans to help victims dig out after the floodwaters receded and to get their microenterprises jump-started again.
Thus, in fact, Grameen may enjoy a better record than Citibank or Bank of America, but to outsiders seeking to diminish microcredit, no such comparisons were made in the WSJ article. Thus, they set up a "straw man" of inefficiency and poor payment rates and then knocked it down. The criticisms against Grameen and other large MFIs may continue, but the resistance, and countervailing data from the opposite side, ensure that microcredit is not about to collapse.
While the criticisms, debates, and issues over microcredit rage, the behind-the-scenes reality is that the movement is growing. Economists and other social scientists may fight over theories and concepts, but microenterprise development is increasingly being included in the curriculum of college courses on economics, as well as research journals and policies of large multi-lateral institutions like the World Bank and the United Nations.
Differences in practical applications continue to grow as NGOs experiment, invent new models, and test them. While some see this as a weakness, and wish there were one grand system that would work across cultures and diverse NGOs, others are delighted by the clashing controversies because they yield new light and understanding, better methods, and future innovation. To such individuals, microcredit embodies the very essence of creating a new social invention. Like other technologies such as the telephone and computer, all the variations that will occur over the years to come mean options for microcredit practitioners, as well as consumers.
Finally, while the enemies of microcredit seek to halt, or at least slow its course, their resistance will largely be irrelevant as the movement expands. To detractors who worry that it burdens the poor with debt, so many more microentrepreneurs explicitly seek microloans precisely so they can climb out of poverty. To those who doubt microcredit's replicability and relevance in industrial nations, about every modern country now has policies, funds, and practices for using microfinance to mitigate its own economic problems. And to hard-hitting critiques like the 2001 Wall Street Journal article, the actual facts are these: since the 2001 story claiming that microfinance is too good to be true and that institutions like Grameen don't play by the standardized U.S. rules, there are hundreds of new NGOs springing up around the globe. Grameen itself continues to outperform many traditional finance institutions. Its client growth has risen to 3.7 million borrowers, 96 percent of whom are women. It has now loaned over $5 billion and had over $4.5 billion repaid since its inception for a recovery rate of 99 percent. Beyond Grameen, the microcredit movement has grown exponentially since the 2001 WSJ article indicting it. There are now over 3,000 MFIs giving loans to some 100 million of the world's poor. Approximately 55 million are the poorest people in their countries, and 82 percent of them are women. When the impact of microcredit is expanded to include the average household family size in the Third World, microcredit has now indirectly benefited some 400 million men, women, and children.