11. Microcredit: easy to say, but...

Controversies and critics of microcredit

Authors: Peter Futo, Marton Gosztonyi, Mehdi Hasan

Microcredit has many critics who are ready to point out the deficiencies of the poverty alleviation instrument.

A selection of critical statements on microcredit is as follows:

· The aim of microcredit cannot be attained. Microcredit programs do nothing to change the structural conditions that create poverty. Microcredit alone cannot eradicate poverty: there are no historical examples of nations that climbed out of poverty with the help of small entrepreneurs financed by credit. Microcredit is based on an attractive but false premise that poor people can make themselves richer with the help of credit. Microcredit serves predominantly households close to poverty line, while most microcredit programmes deny this financial service to the poorest of the poor. Microfinance could actually harm to the cause of poverty reduction by diverting attention and resources from the much more important state coordinated policy interventions, financial institutions and investment strategies. The benefits of microcredit are short term. Microcredit generates income and creates business opportunities only for a small number of lucky individuals.

· Donor dependence and too high interest rates. Evidence shows that unless there is a big injection of government or aid funds, microfinance institutions have to charge very high interest rates. Social microfinance schemes are in most cases not self-financing, are not sustainable without subsidy. Therefore interest rates frequently soar to 50% and even higher.

· Incomplete implementation. Many microcredit schemes offer credit without training, which leads to failures of the small business projects of the beneficiaries. Women in particular face significant barriers to achieving sustained increases in income and improving their status. Microcredit can improve women’s position in the society only if it is accompanied by complementary support such as training, marketing, literacy, social mobilization, and other financial services. However, most microcredit programmes cannot offer these support activities.

· Deviations from the original aim. Microcredit is too often misused for everyday consumption or for extraordinary expenses such as weddings, funerals or education and health fees.

· Debt trap. Microcredit frequently leads to permanent indebtedness of the same household to the same microcredit institution.

· Forced entrepreneurship. In many places becoming indebted through microcredit and starting an enterprise is the only way out from hunger. However, not everyone is an entrepreneur.

· Dangers of group lending. The group pressure over each other’s repayment may easily create conflict among members of self-help groups.

· Generates too much competition. Microfinance is not very successful at creating prosperous small businesses in the long run. If a business idea works and is accessible to poor people, too many entrepreneurs join in, and compete against each other, which leads overcrowding of the marketplaces.

Discussion points:

Whom should we believe? Should we accept the arguments in favour of microcredit, or rather the critical statements of the opponents?
Which critical remark was the most thought provoking?

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A mikrohitelezés ellentmondásai és kritikája (HUN)