Analyze the effectiveness of microcredit – MIR
A fundamental challenge for international development is the cycle of poverty rooted in the poorest nations of the world. In what we call “The development trap”, efforts to improve the quality of life and stimulate economic growth through foreign non-governmental organizations (NGOs) and multilateral agencies often achieve weak or negative results.
Microcredit loans started to gain ground in the 1990s, to try to fight against this generalized poverty. Proposed by Professor Muhammed Yunus’ Comilla model at the Grameen Bank in Bangladesh, microcredit describes the establishment a large network of small-scale loans as a means of providing small loans to vulnerable citizens without requiring collateral. This is intended to improve the financial stability and quality of life of borrowers, and in turn, that of their communities. In principle, these loans should be offered at a low interest rate, ensuring a certain profit for the lender while giving priority to the impoverished borrower. This promotes a social incentive for borrowers to take out loans, while mitigating risk for lenders by spreading the cost over many borrowers. For several decades, microcredit has been widely regarded as “a silver bullet”For poverty reduction, Yunus being awarded a Nobel Prize of Peace for his model in 2006. However, in practice, the long-term impacts of microcredit to alleviate poverty have been limited.
Raise the status of women
These initiatives primarily target women and provide them with the capital needed to create small businesses and new employment opportunities for their communities. Give money to women has proven effective in investing more in their education and health while empowering them to achieve independence. It is well documented that that women acquire capital, they spend more of their income on their household than men, which has a more positive impact on their families and the local economy. Interestingly, the incentive to provide microcredit to women was largely inspired by the spread of feminism and the resulting promotion of women in the workforce in the 1970s.
When money is put into women’s hands, they also benefit from increased decision-making roles within the household, from budgeting to sending their children to school to family planning. According to the Women’s Opportunity Fund, a group of Balinese widows received loans and started a pig farming business, eventually becoming a major pig feed cooperative providing food to their village. Another client in Ghana reported:
“He [her husband] gives me more value from the loan. I know, because now he gives me all his winnings [….] Before, my husband would beat me when I asked him for money. Now, even if he doesn’t earn enough every day, I can work, we don’t have to suffer.
These advances have also spurred greater macroeconomic benefits. The redistribution of wealth thanks to micro-credits led to an increase in the average salary in these communities, as small entrepreneurs were able to expand and hire other locals. However, this growth was limited, as many unskilled entrepreneurs eventually found themselves in a huge debt and with little prospect of loan repayment. Exacerbated companies these barriers by raising interest rates which, in turn, lowered the demand for labor and all other hopes for business expansion. Gradually, the idealization of microcredit has diminished.
The hidden face of microcredit
In theory, the microcredit model seemed ideal for reducing poverty, at least according to the UN, which declared 2005 the “International Year of Microcredit”. Despite the praise of his early years, in 2012 multiple whistleblowers who had previously worked in the microfinance industry emerged. They exposed unethical behavior, including excessive interest rates, poor customer selection and general employee incompetence. As companies colluded to raise interest rates on loans, profits for lenders increased and benefits for borrowers declined. This exposure led to the downfall of microcredit as it became evident that companies favored profit over the prospects of vulnerable borrowers.
In the late 2000s, the positive reputation of microfinance lending within the international development community began to fade as the negative impacts on borrowers and their communities became evident. In one editorial for the New York TimesYunus, who originally created his model to offer an alternative to “shark-loans”, criticized the shift from nonprofit banks to “programs that seek to profit from the suffering of the poor”. At root of this problem was excess credit, which left many unskilled entrepreneurs with significant debt. With high interest rates and rigid loan repayment schedules, lenders were assured of short-term profitability while exploiting impoverished borrowers. In 2010, this became so extreme that the indian state government Hyderabad was forced to issue an order to shut down all microcredit institutions nationwide; business owners who had used microcredit faced massive debt and severe pressure to repay their loans, and more than 200 suicides by borrowers have been reported.
Ethical support for loans as a development strategy has disappeared, as small entrepreneurs effectively subsidize the richest and largest clients of these lending companies. Given the emergence of this surprising debt trap for the world’s most vulnerable, it is clear that the current structure of microcredit is ineffective.
The future of development
The good news is that changes in implementation strategies can be made. For these changes to be positive, development agencies will need to promote the involvement of local people in their solutions. University of Myanmar anthropologist Adam Kiš postulates that “Culture eats strategy for lunch,” suggesting the need to understand the historical traditions and social dynamics that have determined people’s lifestyles. Impoverished people must be able to express themselves and participate in their development process. Loan allocation, interest rates and repayment plans need to be redesigned to better serve the borrower and the community they are targeting; most often foreign intervention has failed.
Notable economists like Jeffrey Sachs and Rohini Pande presented economic development alternatives, including free savings accounts and increased access to digital financial services. In practice, the elimination of fees associated with opening a savings account in Kenya has led to a raise the number of clients, their overall savings and levels of investment in the market. In terms of digital financial services, traditional economic theory suggests that the full potential of markets can only be realized when participants have full access to information to make rational decisions. Digital programs promote this thanks to faster information and service for customers, even in remote areas. Addressing these considerations would yield better long-term market and development returns.
Reducing global poverty is imperative to achieving the United Nations 2030 Sustainable Development Goals. In its current state, microcredit is ineffective and often counterproductive for long-term progress in developing countries. development. Looking to the future, we need to revisit techniques endorsed by NGOs and multilateral agencies such as World vision and the The United Nations, prioritizing the prosperity of borrowers for the benefit of lenders. For the sake of development, the microcredit model must be restructured to fulfill its vocation.
Edited by Emily Jones