Teaching Microcredit: overcome Eurocentric perspective in development education
2. Millions of tiny things make up a huge thing
The initial model of microcredit provision
Authors: Péter Futó, Márton Gosztonyi, Mehdi Hasan
The Grameen model. In Bangladesh in 1976, a project implemented by a professor of economics, Muhammad Yunus addressed the problem of poor people lacking access to banking services. With his graduate students in Chittagong University, he designed an experimental credit programme to serve the poor. The novelty of this approach was that borrowers did not have to offer or deposit any property for guaranteeing the repayment of the loan – in other words this was a loan scheme without collateral. At the same time, he has done a thorough research on how poor people use small loans for entrepreneurial purposes, and whether they are able to repay the loans.
Launch of Grameen Bank. Through a special relationship with rural banks, the project disbursed and recovered thousands of loans. The model was successful, it has proven that poor people are creditworthy, and it spread rapidly to hundreds of villages. In spite of the apparent success of the programme, at the end of the demonstration phase, mainstream banks refused to take over the project, and did not apply the model. They feared it was too expensive and risky. Eventually, through the support of donors, the Grameen Bank was founded in 1983 and applied the microcredit model. The Bank now serves more than 4 million borrowers. The initial success of Grameen Bank also stimulated the establishment of several other giant microfinance institutions in Bangladesh.
The microcredit becomes a success story. Today thousands of microcredit institutions operate in virtually every country of the world. The microcredit movement is a promising innovation in reducing poverty and economic development. The UN declared 2005 the “International Year of Microcredit”. The idea and implementation of microcredit won the 2006 Nobel Peace Prize for Bangladesh’s Muhammad Yunus and the Grameen Bank – a Prize not generally given for work in economic development.
The difference between social and commercial microcredit. Microcredit institutions working on a non-profit basis and having the main priority of helping the poor, are called social microcredit organisations. The Grameen model is part of the social microcredit movement. Most social microcredit institutions in the world are NGOs, cooperatives or other not-for-profit organizations. On the other hand, microcredit institutions working with collateral, asking for high interest rates and aiming for profit, are called commercial microcredit institutions. Their clients are rarely poor, rather they offer loans predominantly for lower middle class businesspersons. These organisations are viewing their financial services as profitable businesses. Commercial microcredit can be offered both by non-profit organisations (e.g. small business development foundations) and banks.
Strategies for ensuring repayment. In the social microcredit movement lenders operate in an environment with no collateral and limited information about borrowers. If the creditworthiness of some borrowers is low, the sustainability of the microcredit scheme is risky. In the absence of collaterals, many social microcredit schemes have experimented with group-based contracts, where a small group of borrowers jointly take responsibility for the repayment of all members of the group. Such groups are usually composed of people of the same socio-economic background. In the Grameen model a possible scenario of group lending goes as follows. Groups of five prospective borrowers are formed. In the first stage, only two of them are eligible for, and receive, a loan. The group is observed for a month to see if the members are conforming to the rules of the bank. If the first two borrowers repay the capital sum plus the interest over a period of fifty weeks, other members of the group become also eligible themselves for a loan. Because of these restrictions, there is substantial group pressure to repay the debt of every individual in time. In this sense, collective responsibility of the group serves as collateral on the loan.
The role of women in the Grameen model. Another innovation of the Grameen model is that they target predominantly women. At Grameen Bank, for example, 97 percent of clients are women. Evidence suggests that when women retain control of microloans, they spend more on the health, security, and welfare of their families. Research shows that microcredit increases women’s bargaining power within the home, the role of women in the community will be enhanced, their awareness of social and political issues will be improved, and their professional mobility will be facilitated. It also increases their self-esteem.
Learning the good practices. Following the initial experiments, microcredit programs throughout the world improved upon the original methodologies and have proven that poor people, especially women, had excellent repayment rates. The poor were willing and able to pay interest rates that allowed microcredit institutions to cover their costs. Impact studies have shown that access to microcredit and micro-saving services, by themselves, can help poor households to improve their livelihoods, to build an enterprise and to increase their productivity in agriculture, craft or services. The success of the Grameen model has encouraged the growth of many more microcredit institutions in Latin America, Africa and Asia. Some have copied the Grameen model, while others adapted it to their circumstances. Today the microcredit movement is one of the most promising recent advances in economic development, serving approximately 150 million households worldwide. In particular, microcredit has created jobs and entrepreneurial opportunities for millions of unemployed young people in developing countries.
One example is Indonesia. In this South East Asian country of 250 million inhabitants the microcredit movement was highly successful in supporting small businesses, as demonstrated by the four millions micro, small, and medium enterprises founded by microcredit organizations, and which have led to the creation of eight million jobs. From the early 1990s, the original Grameen concept– microcredit provided to establish or expand income-generating projects– started transforming into the much wider concept of microfinance, meaning the supply of a whole range of financial services to the poor, including microcredit, micro-insurance and micro-savings as well.
Can the Grameen model be applied in developed countries? There are some issues to be considered for transferring the Grameen model across countries and societies. This model was specifically designed to work in environments with poor economy and weak institutional qualities. Group lending did not function in more developed countries, and in recent years also in developing countries has been replaced by other arrangements. Small businesses of developing countries must satisfy much more requirements of the existing regulations, in order to function, compared to developing countries. For example the requirements of food safety, environment protection, fire protection or labour regulations are more complex in Europe, and this can substantially reduce the possibilities of establishing a small temporary business, with or without microcredit.
Involvement of governments and international organisations. By the late 1990s the microcredit model had established itself as an effective and generously funded international development policy. Different governments, international organizations and donor agencies adopted microcredit in their development strategy. For the last two decades microfinance - but in the first place microcredit - has received considerable attention from governments, international development organisations and international financial institutions.
The term “international financial institutions” means institutions that have been established by more than one country. Examples of large international financial institutions are the World Bank and the European Investment Bank. The World Bank Group was established in 1944 to rebuild post-World War II Europe. Today, the World Bank functions as an international organization that fights poverty by offering developmental assistance to middle-income and low-income countries, by giving loans and offering advice and training in both the private and public sectors.
Discussion points:
- Is there a need for a microcredit programme in your county? Why?
- In what form, under what conditions would a microcredit programme feasible in your country? Why?
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Attività - Microcredito nel tempo (ITA)
A mikrohitel első modellje (HUN)
