A critique of the role of microcredit
Tuesday, 30 November 2010
Gopal Sengupta
Does anybody really think that they didn't get what they wanted to get because they didn't have the talent or the strength or the endurance or the commitment? There is no easy walk to freedom anywhere, and many of us will have to pass through the valley of the shadow of death again and again before we reach the mountaintop of our desires.
There is no passion to be found playing small -- in settling for a life that is less than the one you are capable of living. There is no such thing as part freedom.
There is nothing like returning to a place that remains unchanged to find the ways in which you yourself have altered. We must use time wisely and forever realise that the time is always ripe to do right. As an internee at Project Genesis in Montreal, my personal impressions have struck myself where Bangladesh and other developing countries are leading to?
From micro-credit loan programmes to education to strategies of water-treatment, NGOs have found a niche for themselves in the gap between society and state, seeking to promote the welfare of the people through grass-roots initiatives and development programmes. In a country where the unemployment rate hovers around 40 per cent, NGOs also provide job opportunities to a lucky few. In short, NGOs play an indispensable role in partnering with the international aid community to bring much-needed resources to the country during times of devastation, as well as implementing health education and literacy programmes. NGOs in Bangladesh are participating in grass-roots legal reform to target and empower the most vulnerable portions of the population, in the hopes that such reform will provide at least a satisfactory solution to disputes where none was previously available.
Despite the success of NGOs in improving access to justice for women and the poor, the question remains when and how the government will assume responsibility for perpetuating such reforms on both the national and local level. Economist Mritiunjoy Mohanty observed while access to microcredit serves as a useful complement to the survival strategies to poor household, it is not a strategy of poverty alleviation and growth. The microcredit movement, of which Dr. Yunus and the Grameen Bank have been leading pioneers, makes two important contributions to development practice:
First, to demonstrate that creditworthiness and collateral do not go hand in hand and therefore, it is possible to delink the two, and secondly, it is possible to use a collectivist ethos and group solidarity to minimise the risk of loans being made to persons with high-risk propositions or of their being utilised for purposes other than that for which they are contracted (moral hazard), and to use peer pressure to ensure that repayment schedules are met. Therefore, it has established that lending to the poor who have little collateral but their labour is a viable practice, that providing even a modicum of access to financial resources, by lowering under-employment of labour and diversifying their sources of income generation, makes a difference to the ability of poor households to cope with some kinds of adverse shocks, and that for very poor households this additional income and diversification are a precious buffer in remaining out of poverty. Therefore, given that formal credit channels are lumpy and overly conservative in their risk assessment procedures, it is possible to argue that provision of micro-credit may be a useful complement to the overall strategies of employment generation and poverty alleviation, helping to improve the stability of consumption levels and income flows of poor households.
Perhaps an unintended consequence of the microcredit movement, which, for practical reasons was designed to be delivered through women's groups, has seen its impact on the status of women. In Bangladesh in particular and in other countries where microcredit has been successful, it has given poor women, particularly in rural areas, a sense of urgency they lacked before. In a world where institutional structures tend to perpetuate the inequalities of class, caste, race and gender and as a result women are invariably left holding the short end of the stick, even this small step is not to be dismissed or sniffed at. However, it is equally important to note that whereas access to microcredit serves as a useful complement to the survival strategies of poor households, it is not a strategy of poverty alleviation and growth. When it comes to sustained growth and poverty alleviation, its main strength-small loans made available for relatively short periods of time with tight repayment cycles-becomes its main weakness. Microcredit loans are simply too small to make a difference in terms of sustained growth and poverty alleviation.
All this is to say that in the context of generating employment, sustainable livelihoods and the fight against poverty, microcredit is a palliative and not a panacea that multilateral agencies, international development NGOs and donor governments would make it seem. For sustained growth and poverty alleviation the answers are still old-fashioned - asset accumulation and employment generation. Even mainstream development finance is slowly coming to grips with this relative ineffectiveness of microcredit-led strategies, and to that extent microcredit is yesterday's story.
Be that as it may, as we join the Nobel Committee in noting the pioneering work done by Dr. Yunus and the Grameen Bank, it is worth recording that neither is the only pioneer in Bangladesh in providing the poor with a modicum of access to financial resources. There are other NGOs that have walked, struggled and prospered down the same path, most famously Grameen's contemporary from the 1970s, the Bangladesh Rural Advancement Committee or BRAC. To draw attention to the role of other NGOs involved in microcredit is not to take away from the catalytic role Dr. Yunus and the Grameen Bank played both at home and abroad in furthering the microcredit movement.
It is however to situate this role in particular and that of NGOs in general in the specific developmental context of Bangladesh. If Bangladesh's political birth was difficult, institutionalisation of democratic politics has perhaps been even more so, the country having had to carry simultaneously the burdens of political and social reform. Burdens under which it frequently collapsed only to rise up, dust down the most recent failure and slowly move forward to reach a point where today it has a reasonably functional political democracy, even though of late it has appeared fragile, seemingly unable to chart a path from political confrontation to dialogue.
In such a politically charged atmosphere, coping with myriad challenges, both natural and man-made, and the lack of administrative capabilities and delivery mechanisms that Bangladesh started out with were even more keenly felt.
This meant that the provision of what are normally regarded as public goods often fell through the cracks. It is this lack and vacuum that the NGOs filled, in a very diverse range of areas, from microcredit to education and from health to agricultural extension, aided in no small measure by reasonably steadfast international donors. If Bangladesh has moved from being an international basket case to a resilient economy, capable of coping with adverse environments and slowly but steadily climbing the human development ladder, some credit should go to its myriad NGO sector. If the NGO sector in general has played a salient role as a delivery mechanism for public goods in the Bangladeshi context, it has raised important questions as well for both the country and development strategy. How sustainable (except for the super-large ones like BRAC and Grameen) is NGO intervention without international donor support? Are the NGOs to be seen purely as delivery mechanisms or are they vehicles of accumulation as well? Does NGO intervention shape in some ways the accumulation process? In the context of democratic political and economic governance structures how accountable are they?
And if they are, who are they accountable to? Is NGO intervention in Bangladesh a particular response to a particular situation or are there generalisation aspects?
And if there are, how cost-effective are these? These are questions Bangladesh is slowly beginning to ask itself. Other economies and societies would do well to ask themselves the questions before emulating either the microcredit strategy or the NGO strategy or both unquestioningly.
The writer is an internee, Project Genesis, Montreal, Canada.
e-mail: gopalsengupta@aol.com
Does anybody really think that they didn't get what they wanted to get because they didn't have the talent or the strength or the endurance or the commitment? There is no easy walk to freedom anywhere, and many of us will have to pass through the valley of the shadow of death again and again before we reach the mountaintop of our desires.
There is no passion to be found playing small -- in settling for a life that is less than the one you are capable of living. There is no such thing as part freedom.
There is nothing like returning to a place that remains unchanged to find the ways in which you yourself have altered. We must use time wisely and forever realise that the time is always ripe to do right. As an internee at Project Genesis in Montreal, my personal impressions have struck myself where Bangladesh and other developing countries are leading to?
From micro-credit loan programmes to education to strategies of water-treatment, NGOs have found a niche for themselves in the gap between society and state, seeking to promote the welfare of the people through grass-roots initiatives and development programmes. In a country where the unemployment rate hovers around 40 per cent, NGOs also provide job opportunities to a lucky few. In short, NGOs play an indispensable role in partnering with the international aid community to bring much-needed resources to the country during times of devastation, as well as implementing health education and literacy programmes. NGOs in Bangladesh are participating in grass-roots legal reform to target and empower the most vulnerable portions of the population, in the hopes that such reform will provide at least a satisfactory solution to disputes where none was previously available.
Despite the success of NGOs in improving access to justice for women and the poor, the question remains when and how the government will assume responsibility for perpetuating such reforms on both the national and local level. Economist Mritiunjoy Mohanty observed while access to microcredit serves as a useful complement to the survival strategies to poor household, it is not a strategy of poverty alleviation and growth. The microcredit movement, of which Dr. Yunus and the Grameen Bank have been leading pioneers, makes two important contributions to development practice:
First, to demonstrate that creditworthiness and collateral do not go hand in hand and therefore, it is possible to delink the two, and secondly, it is possible to use a collectivist ethos and group solidarity to minimise the risk of loans being made to persons with high-risk propositions or of their being utilised for purposes other than that for which they are contracted (moral hazard), and to use peer pressure to ensure that repayment schedules are met. Therefore, it has established that lending to the poor who have little collateral but their labour is a viable practice, that providing even a modicum of access to financial resources, by lowering under-employment of labour and diversifying their sources of income generation, makes a difference to the ability of poor households to cope with some kinds of adverse shocks, and that for very poor households this additional income and diversification are a precious buffer in remaining out of poverty. Therefore, given that formal credit channels are lumpy and overly conservative in their risk assessment procedures, it is possible to argue that provision of micro-credit may be a useful complement to the overall strategies of employment generation and poverty alleviation, helping to improve the stability of consumption levels and income flows of poor households.
Perhaps an unintended consequence of the microcredit movement, which, for practical reasons was designed to be delivered through women's groups, has seen its impact on the status of women. In Bangladesh in particular and in other countries where microcredit has been successful, it has given poor women, particularly in rural areas, a sense of urgency they lacked before. In a world where institutional structures tend to perpetuate the inequalities of class, caste, race and gender and as a result women are invariably left holding the short end of the stick, even this small step is not to be dismissed or sniffed at. However, it is equally important to note that whereas access to microcredit serves as a useful complement to the survival strategies of poor households, it is not a strategy of poverty alleviation and growth. When it comes to sustained growth and poverty alleviation, its main strength-small loans made available for relatively short periods of time with tight repayment cycles-becomes its main weakness. Microcredit loans are simply too small to make a difference in terms of sustained growth and poverty alleviation.
All this is to say that in the context of generating employment, sustainable livelihoods and the fight against poverty, microcredit is a palliative and not a panacea that multilateral agencies, international development NGOs and donor governments would make it seem. For sustained growth and poverty alleviation the answers are still old-fashioned - asset accumulation and employment generation. Even mainstream development finance is slowly coming to grips with this relative ineffectiveness of microcredit-led strategies, and to that extent microcredit is yesterday's story.
Be that as it may, as we join the Nobel Committee in noting the pioneering work done by Dr. Yunus and the Grameen Bank, it is worth recording that neither is the only pioneer in Bangladesh in providing the poor with a modicum of access to financial resources. There are other NGOs that have walked, struggled and prospered down the same path, most famously Grameen's contemporary from the 1970s, the Bangladesh Rural Advancement Committee or BRAC. To draw attention to the role of other NGOs involved in microcredit is not to take away from the catalytic role Dr. Yunus and the Grameen Bank played both at home and abroad in furthering the microcredit movement.
It is however to situate this role in particular and that of NGOs in general in the specific developmental context of Bangladesh. If Bangladesh's political birth was difficult, institutionalisation of democratic politics has perhaps been even more so, the country having had to carry simultaneously the burdens of political and social reform. Burdens under which it frequently collapsed only to rise up, dust down the most recent failure and slowly move forward to reach a point where today it has a reasonably functional political democracy, even though of late it has appeared fragile, seemingly unable to chart a path from political confrontation to dialogue.
In such a politically charged atmosphere, coping with myriad challenges, both natural and man-made, and the lack of administrative capabilities and delivery mechanisms that Bangladesh started out with were even more keenly felt.
This meant that the provision of what are normally regarded as public goods often fell through the cracks. It is this lack and vacuum that the NGOs filled, in a very diverse range of areas, from microcredit to education and from health to agricultural extension, aided in no small measure by reasonably steadfast international donors. If Bangladesh has moved from being an international basket case to a resilient economy, capable of coping with adverse environments and slowly but steadily climbing the human development ladder, some credit should go to its myriad NGO sector. If the NGO sector in general has played a salient role as a delivery mechanism for public goods in the Bangladeshi context, it has raised important questions as well for both the country and development strategy. How sustainable (except for the super-large ones like BRAC and Grameen) is NGO intervention without international donor support? Are the NGOs to be seen purely as delivery mechanisms or are they vehicles of accumulation as well? Does NGO intervention shape in some ways the accumulation process? In the context of democratic political and economic governance structures how accountable are they?
And if they are, who are they accountable to? Is NGO intervention in Bangladesh a particular response to a particular situation or are there generalisation aspects?
And if there are, how cost-effective are these? These are questions Bangladesh is slowly beginning to ask itself. Other economies and societies would do well to ask themselves the questions before emulating either the microcredit strategy or the NGO strategy or both unquestioningly.
The writer is an internee, Project Genesis, Montreal, Canada.
e-mail: gopalsengupta@aol.com