Microcredit, poverty and defaulters
Saturday, 21 July 2007
Ripan Kumar Biswas
"THE seeds of poverty are in the broader vein, not in the persons while poverty is imposed on some people artificially and to change that, institutions and policies must have to be changed," said the 2006 Nobel Peace prize Laureate Dr. Muhammad Yunus and the recipient of 2007 Nichols-Chancellor's Medal and an accompanying prize of $100,000 from Vanderbilt University in Nashville, U.S.A on May 10, 2007.
In his speech to graduating seniors at the university Alumni Lawn, Prof. Yunus said: "The system we built is responsible for poverty and if we do not want to change it, it will never get changed."
The Nobel Peace-Prize Awarding Committee awarded the 2006 Nobel Peace Prize to Muhammad Yunus and Grameen Bank, declaring that microcredit is an ever more important instrument in the fight against poverty.
Most of us know about micro credit and how it operates. The micro-credit institution offers small loans to a group of individuals without collateral and peer pressure and observation secure the proper utilisation and return of the money.
Microcredit began in the 1970s in Bangladesh when the Grameen Bank began giving small loans to those too poor to be eligible for credit from other banks.
Success stories of micro-finance in Bangladesh made rounds throughout the world and development experts, including international institutions, extolled the achievements of Bangladeshi NGOs (non government organisations).
In view of the wonderful successes and experiences of micro-credit operations in Bangladesh, there is no doubt that micro credit is not only the newest silver bullet for alleviating poverty but also a major boon to turn poor people into a global strength. Then, why we are still receiving such news about suicides and frequent arrests due to not paying back the loan or interest.
According to a brief news item published in a Dhaka-based Bengali daily, Rishi Dhiren Kumar, an inhabitant of Lalitadaha village of Jessore Upazilla and a loan defaulter of various micro credit organisations like Grameen Bank, Asha, Brac and Dipti, committed suicide on Friday, July 13, 2007 as he was not able to pay back the interest.
Whereas in an another news, Manoranjan Roy, the 85-year old man from Nilphamari, Bangladesh, was jailed for failing to pay back a small amount of agricultural loan. However, everybody was happy to hear the news about the Army Chief of Bangladesh, General Moin U Ahmed, being touched by the plight of the man, having himself paid the money that made the court set Manoranjan free.
All of us must agree that there is, of course, no way to encourage the default culture. But do we ever care to take such an initiative so that these poor people become successful entrepreneurs like their other fellows rather become defaulters?
May be it is less important here to talk about these defaulters. Rather, the successes of microcredit initiative -- one of the most powerful tools to address global poverty -- is more a befitting theme. According to Dr. Yunus, micro-credit can make Bangladesh free from poverty by 2030. But questions arise when someone commits suicide or the police arrest defaulters in the birthplace of the microcredit movement.
A microcredit client is an entrepreneur in the literal sense. He/she raises the capital, manages the business, and takes home the earnings. But the entrepreneurs who have become heroes in the developed world are usually visionaries who convert new ideas into successful business models.
Although some microcredit clients have created visionary businesses, the vast majority of such clients are caught in subsistence activities. They usually have no specialised skills, vision, creativity, persistence and so they must compete with all the other self-employed poor people at entry-level trades.
Poverty alleviation cannot be defined only in economic terms. It is also concerned about addressing a much broader set of needs. Amartya Sen, the Nobel Prize-winning economist, eloquently argues that development can be seen as a process of expanding the real freedoms that people enjoy.
Many studies in recent years have shown that risks like sickness, natural disasters and over indebtedness are a critical dimension of poverty, and that very poor people rely heavily on informal savings to manage these risks.
Whereas it might be expected that microfinance institutions would provide safe, flexible savings services to the population, but they are found to be very slow to do so. Some experts argue that most microcredit institutions are overly dependent on external capital.
Debate is also generated by the constraints faced by vulnerable groups -- like the case of people with disabilities in accessing mainstream microcredit facilities. There is a need to adapt, more effective policies and practices towards more inclusive models.
Higher rates of interest, charged by the microfinance organisations, do also tend to make their clients poor at first place. Lower interest rates will get them out of poverty. If we ask ourselves why a poor man/woman or his/her family is poor? The answer is their fathers and grandfathers were poor. Why were their grandfathers poor? Because there might have been a draught some time, the crops were severely damaged or someone in the family had serious illness and the grandfathers had to take loan from the 'shark'.
The loan sharks charged them exorbitant rate of interest which they were not able to repay. Eventually they were evicted out of their land. They lost means of their livelihood. They were thrown out of the main flow of the economy. And the result is poverty.
The perceived risk of default associated with lending to the poor, often asset-less families and the costs associated with loan management, have been responsible for interest rates charged by many lenders to be as high as 40%. Such realities raise the question of credit dependency and entrapment in cyclical debt for the rural poor. They also further raise questions about the impact of such a vast amount of debt on the financial stability of Bangladesh's economy.
In Bangladesh, microcredit is often regarded as a, if not the, central tool in many projects related to poverty alleviation, class mobility, and rural development. Numerous organisations -- governmental, non-governmental, and private sector -- have begun to shift emphasis away from other projects with the intention of entering the microcredit arena.
It is to be noted here that social, cultural, and political freedoms are desirable aspects of any strategy for poverty alleviation, and such freedoms also facilitate individual's income growth. Services such as public safety, basic education, public health, and infrastructural facilities help nurture these freedoms and increase the productivity and employability of the poor, and thus their income and well-being.
Indeed, in rural Bangladesh, the terms -- microcredit and NGO -- are all but synonymous. In a recent registration drive in Bangladesh, no fewer than 5,000 NGOs applied for approval to become microcredit lenders. This massive proliferation of microcredit organisations and the vast number of options for families seeking microcredit loans have also raised a number of critical voices and concerns.
In rural Bangladesh, it is not uncommon for families to hold five or more microcredit loans from different organisations. Often these loans are taken out to pay back other loans, rather than to purchase assets.
However, seeing this increasing number of microcredit organisations, the present interim government of Bangladesh has declared that those organisations with portfolios of fewer than 1,000 lenders currently need not register themselves or seek special government permission to begin lending operations.
From a business perspective, giving loan to somebody without credit history would seem like business suicide. But for some reasons, reality is far different. Some 500 million poor world-wide have reportedly benefited from some $6.0 billion in microloans, which aficionados want to ramp up to $300 billion.
No doubt that microcredit is but one tool to overcome the obstacles to economic and governmental systems that act as a barrier for people around the world to meet their basic needs
Actually the real problem in Bangladesh is not its lack of personal indebtedness but the opposite is revealed by the recently published the Index of Economic Freedom. The bad economic policies of the government which include huge barriers to trade, overbloated state-owned enterprise, unionisation, heavy taxes on foreign investment, a high tax burden, and some of the world's worst political violence and official corruption have been cited as the reasons for Bangladesh's lower ranking in the index.
However, the government, microfinance organisations, businesses, and civil society in Bangladesh do need to step up efforts to provide basic services that improve the employability and productivity of the poor. This is what is alleviating poverty in China, Korea, Taiwan, and other developing countries. Otherwise, Bangladesh will miss the opportunity of lifting people out of poverty sooner than later.
The writer is a freelancer based in New York and can be reached at e-mail: [email protected]
"THE seeds of poverty are in the broader vein, not in the persons while poverty is imposed on some people artificially and to change that, institutions and policies must have to be changed," said the 2006 Nobel Peace prize Laureate Dr. Muhammad Yunus and the recipient of 2007 Nichols-Chancellor's Medal and an accompanying prize of $100,000 from Vanderbilt University in Nashville, U.S.A on May 10, 2007.
In his speech to graduating seniors at the university Alumni Lawn, Prof. Yunus said: "The system we built is responsible for poverty and if we do not want to change it, it will never get changed."
The Nobel Peace-Prize Awarding Committee awarded the 2006 Nobel Peace Prize to Muhammad Yunus and Grameen Bank, declaring that microcredit is an ever more important instrument in the fight against poverty.
Most of us know about micro credit and how it operates. The micro-credit institution offers small loans to a group of individuals without collateral and peer pressure and observation secure the proper utilisation and return of the money.
Microcredit began in the 1970s in Bangladesh when the Grameen Bank began giving small loans to those too poor to be eligible for credit from other banks.
Success stories of micro-finance in Bangladesh made rounds throughout the world and development experts, including international institutions, extolled the achievements of Bangladeshi NGOs (non government organisations).
In view of the wonderful successes and experiences of micro-credit operations in Bangladesh, there is no doubt that micro credit is not only the newest silver bullet for alleviating poverty but also a major boon to turn poor people into a global strength. Then, why we are still receiving such news about suicides and frequent arrests due to not paying back the loan or interest.
According to a brief news item published in a Dhaka-based Bengali daily, Rishi Dhiren Kumar, an inhabitant of Lalitadaha village of Jessore Upazilla and a loan defaulter of various micro credit organisations like Grameen Bank, Asha, Brac and Dipti, committed suicide on Friday, July 13, 2007 as he was not able to pay back the interest.
Whereas in an another news, Manoranjan Roy, the 85-year old man from Nilphamari, Bangladesh, was jailed for failing to pay back a small amount of agricultural loan. However, everybody was happy to hear the news about the Army Chief of Bangladesh, General Moin U Ahmed, being touched by the plight of the man, having himself paid the money that made the court set Manoranjan free.
All of us must agree that there is, of course, no way to encourage the default culture. But do we ever care to take such an initiative so that these poor people become successful entrepreneurs like their other fellows rather become defaulters?
May be it is less important here to talk about these defaulters. Rather, the successes of microcredit initiative -- one of the most powerful tools to address global poverty -- is more a befitting theme. According to Dr. Yunus, micro-credit can make Bangladesh free from poverty by 2030. But questions arise when someone commits suicide or the police arrest defaulters in the birthplace of the microcredit movement.
A microcredit client is an entrepreneur in the literal sense. He/she raises the capital, manages the business, and takes home the earnings. But the entrepreneurs who have become heroes in the developed world are usually visionaries who convert new ideas into successful business models.
Although some microcredit clients have created visionary businesses, the vast majority of such clients are caught in subsistence activities. They usually have no specialised skills, vision, creativity, persistence and so they must compete with all the other self-employed poor people at entry-level trades.
Poverty alleviation cannot be defined only in economic terms. It is also concerned about addressing a much broader set of needs. Amartya Sen, the Nobel Prize-winning economist, eloquently argues that development can be seen as a process of expanding the real freedoms that people enjoy.
Many studies in recent years have shown that risks like sickness, natural disasters and over indebtedness are a critical dimension of poverty, and that very poor people rely heavily on informal savings to manage these risks.
Whereas it might be expected that microfinance institutions would provide safe, flexible savings services to the population, but they are found to be very slow to do so. Some experts argue that most microcredit institutions are overly dependent on external capital.
Debate is also generated by the constraints faced by vulnerable groups -- like the case of people with disabilities in accessing mainstream microcredit facilities. There is a need to adapt, more effective policies and practices towards more inclusive models.
Higher rates of interest, charged by the microfinance organisations, do also tend to make their clients poor at first place. Lower interest rates will get them out of poverty. If we ask ourselves why a poor man/woman or his/her family is poor? The answer is their fathers and grandfathers were poor. Why were their grandfathers poor? Because there might have been a draught some time, the crops were severely damaged or someone in the family had serious illness and the grandfathers had to take loan from the 'shark'.
The loan sharks charged them exorbitant rate of interest which they were not able to repay. Eventually they were evicted out of their land. They lost means of their livelihood. They were thrown out of the main flow of the economy. And the result is poverty.
The perceived risk of default associated with lending to the poor, often asset-less families and the costs associated with loan management, have been responsible for interest rates charged by many lenders to be as high as 40%. Such realities raise the question of credit dependency and entrapment in cyclical debt for the rural poor. They also further raise questions about the impact of such a vast amount of debt on the financial stability of Bangladesh's economy.
In Bangladesh, microcredit is often regarded as a, if not the, central tool in many projects related to poverty alleviation, class mobility, and rural development. Numerous organisations -- governmental, non-governmental, and private sector -- have begun to shift emphasis away from other projects with the intention of entering the microcredit arena.
It is to be noted here that social, cultural, and political freedoms are desirable aspects of any strategy for poverty alleviation, and such freedoms also facilitate individual's income growth. Services such as public safety, basic education, public health, and infrastructural facilities help nurture these freedoms and increase the productivity and employability of the poor, and thus their income and well-being.
Indeed, in rural Bangladesh, the terms -- microcredit and NGO -- are all but synonymous. In a recent registration drive in Bangladesh, no fewer than 5,000 NGOs applied for approval to become microcredit lenders. This massive proliferation of microcredit organisations and the vast number of options for families seeking microcredit loans have also raised a number of critical voices and concerns.
In rural Bangladesh, it is not uncommon for families to hold five or more microcredit loans from different organisations. Often these loans are taken out to pay back other loans, rather than to purchase assets.
However, seeing this increasing number of microcredit organisations, the present interim government of Bangladesh has declared that those organisations with portfolios of fewer than 1,000 lenders currently need not register themselves or seek special government permission to begin lending operations.
From a business perspective, giving loan to somebody without credit history would seem like business suicide. But for some reasons, reality is far different. Some 500 million poor world-wide have reportedly benefited from some $6.0 billion in microloans, which aficionados want to ramp up to $300 billion.
No doubt that microcredit is but one tool to overcome the obstacles to economic and governmental systems that act as a barrier for people around the world to meet their basic needs
Actually the real problem in Bangladesh is not its lack of personal indebtedness but the opposite is revealed by the recently published the Index of Economic Freedom. The bad economic policies of the government which include huge barriers to trade, overbloated state-owned enterprise, unionisation, heavy taxes on foreign investment, a high tax burden, and some of the world's worst political violence and official corruption have been cited as the reasons for Bangladesh's lower ranking in the index.
However, the government, microfinance organisations, businesses, and civil society in Bangladesh do need to step up efforts to provide basic services that improve the employability and productivity of the poor. This is what is alleviating poverty in China, Korea, Taiwan, and other developing countries. Otherwise, Bangladesh will miss the opportunity of lifting people out of poverty sooner than later.
The writer is a freelancer based in New York and can be reached at e-mail: [email protected]