The
Challenges of Microcredit
By Hon. David Kilgour, Canadian Secretary
of State (Latin America & Africa)
Paper for the Meeting of Microcredit Summit
Councils, New York, NY, June 25-27, 1998
The resourcefulness
of humankind often seems to be infinite.
Even in the poorest countries – perhaps
especially in such places – the ability
of people to devise strategies for survival
is impressive. There is so much the 5.9
billion co-residents of the planet can learn
from the survival skills of its poorest
inhabitants.
To most at
this conference, this observation must seem
obvious. Yet all too often, there is a tendency
in the so-called developed world to blame
the poor for their poverty, to attribute
their circumstances to a lack of initiative.
Nothing could be further from the truth.
Those of
us who believe in microcredit and micro-business
as a means of poverty alleviation share
a fundamental belief about the nature of
poverty: the poor don’t want to be
poor and with adequate tools, they have
within themselves the means to rise above
poverty.
Two fundamental
challenges must be addressed by those who
believe that microcredit provides an important
tool in poverty alleviation:
We need to
demonstrate to the skeptical that microcredit
does work and that the poor can be a good
credit risk, and
We must find ways to adapt and replicate
successful microcredit models to address
poverty in a wider range of cultural and
social environments.
Blaming the Poor
A major barrier
to escaping poverty is the lack of sufficient
credit to purchase inventory or equipment
needed to establish sustainable small enterprises.
It arises largely from the mistaken belief
that the poor are bad credit risks, a belief
that is an outgrowth of the tendency to
blame the poor for their situation.
Lenders are
also reluctant to lend to the poorest of
the poor because such borrowers lack collateral.
Also administrative costs of such loans,
which usually involve small sums, are seen
as making them less profitable than larger
loans to fewer secured borrowers.
Microcredit
has been around long enough and provided
enough success stories to dispel these misconceptions.
Given the opportunity, many of the world’s
poorest people have the drive and street
smarts to break out of the vicious cycle
of poverty. As well, repayment rates are
often much higher among microcredit borrowers
than traditional small business loans. This
reality has enormous implications for a
wider solution to the global war against
poverty.
This is not
to suggest that every poor person is a potential
entrepreneur or that microcredit is a panacea
able to alleviate poverty everywhere and
in all circumstances. The diversity of cultures,
circumstances and of individuals makes the
situation much more complex. It also presents
our biggest challenge: how to replicate
and adapt successful experiences with microcredit
to vastly different cultural and social
circumstances.
Many have
heard about the successful Grameen Bank
of Bangladesh that has loaned money to some
of the most needy of the world’s poor
and experienced repayment rates as high
as 98 per cent. Many of us have also followed
with interest the BancoSol in Bolivia, which
began as an NGO, but was so successful it
has become a commercial bank. Not only have
such experiments provided seed money for
numerous small enterprises, but they have
also provided a savings vehicle, enabling
these banks to move towards self sufficiency.
Yet how do
we apply the lessons learned from these
experiences to impoverished communities
of the inner cities in the North? When peer
relations and sense of community are such
an integral part in the success of microcredit
programs such as Grameen Bank, how do we
apply these lessons to much more transient
neighbourhoods where community ties are
much weaker or seemingly non-existent? That
is our greatest challenge.
In travels
as Canada’s Secretary of State (Latin
America & Africa), I’ve visited
a number of successful microcredit projects
in Africa, Latin America and the Caribbean.
These come in many different forms –
some are rural and others urban. They are
large and small, and some are more formal
than others. Education levels among participants
vary greatly, as do levels of poverty. One
common element among them is that the most
successful micro-entrepreneurs tend to be
women, but men are also successful.
Boosting
Self-Esteem
The element
most common to these microcredit programs
– whether in northern Peru or western
Mali – is the sense of pride one sees
among participants. Creating or expanding
a viable business and successfully repaying
the start-up money is an accomplishment
that boosts self esteem and teaches management
skills. This benefit of microcredit, the
empowerment of individuals, is at least
as important as the financial rewards.
The most
successful projects appear to be the ones
where participants feel a sense of ownership
in what they have accomplished, both in
the individual micro-enterprises they create
and the microcredit lending system itself.
In the world of microcredit, top-down structures
simply don’t work. To throw money at
a problem from outside risks repeating the
same mistakes that have perpetuated aid
dependency for many years.
This raises
a dilemma for international donors, both
public and private, who are often required
to provide funding in initial stages. These
organizations need to be accountable and
to show that funds have been wisely invested.
Yet too much micro-management by outsiders
usually means that the beneficiaries lose
the sense of ownership that is so essential
for the success of these programs. That
is why many Canadian-assisted programs,
the Peru-Canada Fund for example, attempt
to operate at arms’ length and using
local people as much as possible.
Measuring
Success
As suggested
earlier, one of two major challenges is
to show that microcredit programs do work
and that the poor can be a good credit risk.
But how do we measure success? Repayment
rates, the success of individual micro-enterprises
established, and the ability of microcredit
programs to become financially self-sustaining
are important indicators of success. But
they are not the only ones.
More subjective,
but equally important, is the extent to
which microcredit empowers participants.
As families learn business and money-management
skills from their experience, they take
these skills with them in life. The poor,
especially women, often suffer from a sense
of helplessness and lack of self esteem.
Through peer support and by experiencing
small successes, they gain the confidence
to achieve even greater success. Financial
success in micro-enterprises not only provides
the means to repay loans, but can, in time,
provide working capital to continue and
expand a business.
It is, of
course, not enough only to provide loans
even to the most motivated borrowers. Microcredit
requires a holistic approach involving peer
support, skills training and often lifestyle
changes. The 16 decisions which borrowers
from the Grameen Bank undertake have been
criticized by some as intruding excessively
into the personal lives of participants.
It is, however, difficult for outsiders
to judge the appropriateness of such lifestyle
changes in another culture. Clearly, microcredit
has the best chance of transforming people
from poverty when it is applied in a holistic
way that recognizes that poverty itself
is a lifestyle.
Replicating
Success
The second
challenge, that of replicating the success
of microcredit programs, is the more difficult
one. As suggested, this is because there
is no single model of poverty, and global
cultures are so diverse. The peer support
provided in loan circles of Bangladesh is
more difficult to apply in a transient inner
city neighbourhood of, say, North America
or Europe.
Nonetheless,
there are common elements in most regions
of poverty suggesting that lessons can be
learned and applied elsewhere. One trend
seen in recent decades from Mexico City
to Lagos is the migration to cities from
rural areas. This has resulted in large
populations with no land to offer as collateral,
but not yet established in the cities to
which they migrate. The consequence has
been the rapid growth of the "informal
economy," as the poor devise numerous
small-scale enterprises to survive.
The growth
of the "informal economy" in the
South, is not unrelated to another phenomenon
in the North: the rise of self-employment
and home-based businesses. In this case,
it results not from migration, but nonetheless
from economic structural change. Large corporations
and government have downsized, middle management
has been trimmed, and many blue-collar positions
have moved offshore or been rendered obsolete
by technology.
In the urban
migration of the South and the shift to
self-employment in the North there is a
common factor – the need for innovative
new types of credit suited to the very small
entrepreneur. Yet in North and South alike
this has been precisely the sector that
has found it most difficult to obtain credit
from traditional financial institutions.
Paradoxically, it has been very small business
both in the North and South that has been
most successful at creating employment.
Microcredit
is not new. It has been more than two decades
since Muhammed Yunus began the experiments
that led to the Grameen Bank, and various
forms of informal, small-scale lending have
been in place almost since the beginning
of recorded time. It is common knowledge
among those of you in the international
development community. Old attitudes still
persist, especially the canard that the
poor are a bad credit risk and are to blame
for their own misfortune. Clearly we must
do more to reach the wider public and international
community with the news about microcredit’s
success.
The second
challenge, that of replicating and adapting
successful programs, also depends on better
dissemination of information. It is not
enough to speak among ourselves, although
that is a very good start. We must find
effective ways to let those who have benefited
from microcredit share their experiences
directly with other communities that are
at an earlier stage in the process.
These two
challenges then can be boiled down to another
one – the need to get the message out.
This conference and earlier ones are an
important step in this direction. Similarly,
the amount of information about microcredit
disseminated internationally by the Internet
is very impressive. But there is a need
to get this message out to the grassroots,
and to let those who have benefited from
microcredit speak for themselves. They are
the best evidence of success and the greatest
source of wisdom.
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