“The key to ending extreme poverty is to enable the poorest of the poor to get their foot on the ladder of development . . . the poorest of the poor are stuck beneath it. They lack the minimum amount of capital necessary to get a foothold, and therefore need a boost up to the first rung.”[1]
-Jeffrey Sachs
Part One: Introduction
It truly is the best of times, yet also the worst of times. Despite the economic turmoil which continues to make headlines, Forbes states that the number of billionaires around the world has reached a record 1,826 in 2015, with 290 newcomers added to the list since 2014.[2] However, while the globe’s elite prosper, many remain firmly entrenched in the grip of poverty. Not only have groups like the Organisation for Economic Cooperation and Development (OECD) noted that the gap between the rich and the poor continues to widen,[3] but the United Nations reports that half of the world’s population subsists on less than $2.50 a day.
On the surface, many people seem to care, with the United Nations, development NGOs and rich philanthropists like Bill and Melinda Gates all committed to combating poverty in a myriad of ways. Foreign aid is still thought of by many as one of the most effective tools, but just as the world’s billionaires continue to rise, so too does the number of developmental aid critics. For example, in her book entitled Dead Aid,Dambiso Mayo in describing the impact of foreign aid in Africa states:
At the end of it all, it is virtually impossible to draw on Africa’s aid-led development experience and argue that aid has worked. The broader consequences of the aid model have been ruinous…Donors, development agencies and policymakers have, by and large, chosen to ignore the blatant alarm signals, and have continued to pursue the aid-based model even when it has become that aid under whatever guise, is not working. Even when aid has not been stolen, it has been unproductive. The proof of the pudding is eating, and ever so clearly the preponderance of evidence is on this side. Given Africa’s current economic state it is hard to see how any growth registered is a direct result of aid. If anything, the evidence of the last fifty years points to the reverse-slower growth, higher poverty and Africa left off the economic ladder.[4]
While other scholars like Roger C. Riddell would counter Moyo’s negative account of foreign aid by stating that development aid has been shown to work, even he would concede that “overall, the contribution that aid makes to aggregate development is lower than the public has been led to believe,”[5] and that the results are even less promising when contrasting the short-term benefits with long-term ones.[6]
If the critics are right and foreign aid does not work (or at the very least has had mixed results), is there another way to uplift the poor? If not an external solution that is largely based on a top down approach, what about one that comes from within and from the bottom up? Moving away from traditional developmental approaches like foreign aid, Dr. Mohammed Yunus would innovate a twentieth century model which sought to empower the poor from the ground up: microcredit.
Modern microcredit is essentially the extension of relatively small loans to people who would not otherwise have access to it, generally from some of the most developmentally challenged countries around the globe. The thought is that by lending small amounts to those who could not follow the traditional model due to their lack of collateral and/or other financial impediments, they would have the means to set-up a self-run business. Although such an unconventional model built largely on good faith seems questionable, the Grameen Bank, one of the pioneering microcredit institutions founded in Bangladesh, along with other major microcredit institutions began reporting repayment rates as high as 98 per cent.[7] Unfortunately, some of the lustre around microcredit began to fade as more sceptics questioned its effectiveness at reducing poverty, arguing that it has actually been detrimental to those it means to empower (especially women). Are the critics right, is microcredit simply a developmental illusion? If not, why has there been such a varying degree of results within the microcredit regime? This piece seeks to undertake a critical examination into both the ongoing debate between the proponents and detractors of microcredit, and the underlying factors which account for the variation between successful and unsuccessful microcredit initiatives. It is argued that the variation of results are due in large part to inefficiencies in many contemporary microcredit lending models. More specifically, although some critics argue that the microcredit model is flawed in that they contend that high interest rates and loan funds spent on consumption lead to microcredit failure,[8] it is argued that the model is structurally sound and unfavourable results are the product of avoidable implementation strategies. Furthermore, it is argued that defects in microcredit performance measurement have also distorted microcredit’s true impact, further exacerbating the divide between successful and unsuccessful microcredit lending initiatives. After examining the history of microcredit in order to provide sufficient background for analysis and case specific examples from Bangladesh and around the world it becomes apparent that the mixed results pertaining to microcredit success is mainly due to rigid and inefficient operation, which in turn leads to a deviation from the tenets of microcredit resulting in high interest rates, misuse of funds, predatory practices, and in some instances a greater entrenchment into poverty.
Part Two: Microcredit Background
Although the terms microfinance and microcredit seem interchangeable, it is important to note the difference between them. According to Sadegh Bakhtiari, microfinance is essentially “the provision of a broad range of financial services to low-income micro enterprises and households,” including “savings, loans, insurance, leasing, money transfers, and others.”[9] Microcredit on the other hand, “emphasizes the provision of credit services to low income clients, usually in the form of small loans for micro enterprise and income generating activities.”[10] Put another way, microfinance is an assortment of financial services available to low income individuals whereas microcredit is a type of financial service where small loans are made to low income individuals, often to pursue entrepreneurial endeavours. With respect to the latter, many of these loans are often provided collateral-free to groups of individuals who are then jointly liable for the dual purpose of fostering income generation and thus reducing poverty, while binding people together to help ensure repayment.[11]
While one may assume that microcredit lending is a fairly recent concept given the increased attention it has received in the second half of the twentieth century, authors Aiden Hollis and Arthur Sweetman highlight in their work entitled Microcredit: What can we Learn from the Past? thatits roots actually go back hundreds of years.[12] From English lending charities to the to the German Raiffesisen, the authors trace the history and modus operandi of the various forerunners to modern microcredit. Hollis and Sweetman also evaluate the relative success and failure of these initiatives while synthesizing which organizational structures were likely to be produce successful results:
It would not be appropriate to apply the lessons from this brief review of historical microcredit organizations to modern situations without due regard for the many differences in cultures and institutions between historical Europe and modern less developed countries…It would be equally inappropriate, however, to ignore the valuable knowledge about sustainability that historical MOs (microcredit organizations) can teach us. The failure of so many microcredit schemes in the last 30 years might perhaps have been avoided had they been more closely modeled on the systems that worked in Europe in the last century.
The most striking conclusion emerging from this review is that depositor-based MOs tend to last longer and serve many more borrowers than MOs finance by donations or government loans.[13]
In addition to the link they draw from depositor based microcredit initiatives, the authors also found that lowering administration costs,[14] increasing local education,[15] and providing savings avenues for lenders,[16] were all positive steps microcredit institutions could undertake to ensure initiative success. However, before getting into a detailed analysis of microcredit lending models, perhaps it would be prudent to first examine the background of modern microcredit in order to provide sufficient context for the discussion.
The environment that helped to foster the rise in modern microcredit was largely the result of failures in traditional development strategies and the unfulfilled promise of uplifting the impoverished peoples of the world.[17] Complicating matters for the world’s poor was the fact that even if they had the entrepreneurial will to succeed, self-reliance was difficult. Various restrictions and high lending rates from the formal sector severely hindered loans to low income earners with little to no collateral from institutions like central banks, commercial banks, savings banks, social security schemes, and insurance companies.[18] Many developing nations also have an informal sector which consists of individual money lenders, relatives, friends, landlords, or other acquaintances normally within the ambit of the rural poor. On the surface, this sector maybe more attractive to prospective (collaterally challenged) borrowers, but itis not without limitation. As Bakhtiari states:
A common feature of many rural communities is that much of the local information does not flow freely; it tends to be segmented and circulates only within specific groups. Usually the informal credit market is based on local and thus limited by wealth constraint and the covariant risks of the local environment.[19]
Coupling the aforementioned limitations of the formal and informal financial sectors with the fact that the impoverished still need basic financial services to help manage their assets and generate income to improve their situation, the situation is quite dire. If traditional forms of development like foreign aid have had limited results, and domestic financial systems are at best limited (and at worst predatory and ineffective), what is the next step?
Against this backdrop and in the face of a severe Bengali famine in 1974,[20] Dr. Muhammed Yunus searched for a solution that would not only limit foreign dependence, but would address many of the shortcomings of the domestic financial sectors. Shortly after completing a Ph.D. in economics, Dr. Yunus returned to his home country of Bangladesh. Instead of the taking the more traditional route and joining the financial sector, he joined the University of Chittagong’s economics department and initially pursued a career in academia.[21] Shunning the idea of becoming a banker and distraught over the starving and impoverished, Dr. Yunus desperately sought to make use of his training in economics, which until that point had been nothing more than “fairytales” and “utterly useless”.[22]
In his quest to eradicate poverty, his fortunes changed in 1976 during a visit to the impoverished village of Jobra.[23] He noticed that many villagers had a solid business making bamboo furniture, but much of their revenue was siphoned away by money lenders charging interest at usurious rates.[24] In response, he lent $27.00 of his own money to forty-two villagers and found that small loans had a positive impact on the lives of the poor.[25] He came to the conclusion that even without giving up any collateral, the poor worked to pay back their loans at rates even higher than the 60% rates charged by traditional commercial banks, simply for the opportunity to have a livelihood.[26] Dr. Yunus had found a viable way to help the less fortunate, by helping them to help themselves.
After securing a credit line from the Janata Bank with himself as the guarantor, Dr. Yunus began the large scale adaptation for his loan project in Jobra.[27] By 1983, the project transformed into a formal banking institution known as the Grameen Bank (Village Bank) that specialized in giving small (micro) loans to the impoverished, throughout Bangladesh.[28] As Katherine Esty highlights in her work entitled Lessons from Muhammad Yunus and the Grameen Bank, most pilot projects encounter turbulent times when attempting to scale. However, Yunus’ endeavour steadily expanded throughout Bangladesh, going from 86 branches and 58,000 borrowers in 1983 to 2,800 branches and seven million borrowers in 2010.[29] Even more astonishing is that while Bengali women once made up only 2% of bank borrowers,[30] under Yunus’s model 98% of the borrowers are women,[31] the repayment rate of these microloans has been estimated at 98%,[32] and the vast majority of current funds (95%) provided by Grameen is derived from the depositors of the bank.[33] With statistics like these, it is should come as little surprise that the microcredit model has been replicated in over 100 countries around the world,[34] with its reach even extending into many developed nations like the United States and Canada.
However, the microcredit model has been challenged by numerous critics who have gone as far as to suggest that microcredit plunges the poor further into poverty, rather than alleviating them from it.[35] Beginning first with Bangladesh and then examples from around the world, these claims along with the (empirical) evidence will be examined to determine their merit. It is hoped that this investigation will uncover the true factors which account for the difference between successful and unsuccessful microcredit initiatives.
Part Three: Microcredit and Bangladesh
In order to understand what is meant by a successful microcredit initiative, one must first know what is meant by “success”. As previously examined, microcredit loan repayment rates have been reported as approximately 98% within the Bengali context.[36]However, while this statistic appears to indicate tremendous success with respect to loan repayment, it does not directly indicate that these microloans have served their true purpose of to uplifting the poor out of poverty. More specifically, although one could assume that borrowers repaying their loans is the result of a successful entrepreneurial endeavour made possible by the microcredit loan, all the repayment truly indicates is that the loan was paid back. And while proponents of microcredit might argue that repayment of the loan indicates that the entrepreneurial investment is successful, which is why repayment resulted instead of default, logic of that nature is purely circumstantial as one could argue that repayment funds were generated by nefarious means or through the advent of new loans (i.e. a new loan to pay back the old loan). As such, in order to determine the impact microcredit has had on poverty alleviation, more direct evidence is required.
In making the case for microcredit, Dr. Yunus has emphasized not only loan repayment rates, but that 5% of Grameen Bank loan borrowers get out of poverty every year.[37] While loan repayment rates could be considered circumstantial evidence that might only indicate a tenuous correlation between high loan repayment rate and successful microcredit initiatives (where success is more than just a rewarding business but uplifts borrowers out of poverty), the 5% statistic cited by Dr. Yunus, if true, would be a powerful indicator of microcredit’s ability to alleviate poverty. The only question is where does that figure come from and how valid is it?
A review of the microcredit literature traces this 5% statistic to a joint research project of the Bangladesh Institute of Developmental Studies (BIDS) and the World Bank with key findings outlined in a paper written by Pitt and Khandker[38] (along with a book published by Khandker in 1998) which popularly disseminated these findings throughout the field and supported the claim that, “microfinance programs promote investment in human capital (such as schooling) and raise awareness of reproductive health issues (such as use of contraceptives) among poor families”.[39] Moreover, this study also found support for the claim that microcredit is a tool of female empowerment as it was found to increase annual household consumption by a significantly higher amount then men. As Pitt and Khandker state, “annual household consumption expenditure, the most comprehensive measure available of program impact, increased 18 taka for every 100 additional taka borrowed by women from these credit programs, compared to 11 taka for men.”[40] As such, Khandker summarizes that these findings, “shed light on the role of gender based targeting and its impact on household and individual welfare, finding that microfinance helps women acquire assets of their own and exercise power in household decision making.”[41]
However, due to the fact that the results were challenged by critics and that Khandker himself admitted that the impact studies highlighted in 1998 were “sensitive to the method applied”, in the 2005 paper entitled Microfinance and Poverty: Evidence Using Panel Data from Bangladesh Khandker examined whether the results could be substantiated in another period and with another method, namely via panel data analysis.[42] More specifically the study looked at the long-term impacts of microlending to determine whether the earlier results found in 1991-1992 (and reported in the 1998 piece by Pitt and Khandker) could be sustained overtime and what impact (if any) it had on aggregate poverty.[43] Not only is Khandker’s work considered a seminal piece in the field of microcredit even by critics,[44] it is also relevant to this piece as it attempts to substantiate the claim that microcredit does indeed alleviate poverty. In so doing, the Khandker piece not only counters the position of many microcredit critics, but can also help provide new lines of inquiry or clues for what accounts for the variation between successful and unsuccessful microcredit initiatives.
As previously stated, the 2005 Khandker study examined whether the positive microcredit program impacts found in 1991-1992 could stand the test of time and be replicated by another method known as panel data analysis. As such, in 1999 field surveyors in Bangladesh revisited the 1,769 households that were engaged in the 1991-1992 three rounds of data collection concerning microcredit impact. However, because many of the households had split and grown to 2,599 and because the 2005 study would rely on panel data to measure the impact from microcredit participation, the sample was restricted to the households that were interviewed in both periods and this represented a figure of 1,638 households.[45] The results of the study found some interesting developments regarding household participation rate in the program and who was borrowing. With respect to the former the study found that from 1991-1992 to 1998-1999 the participation rate had more than doubled (25.9 v. 52.5) and in regards to the latter, while male participation rate had declined, the female participation rate had skyrocketed. As Khandker states:
Summary statistics for individual and household-level borrowing and consumption outcomes show that while average male borrowing for participating households declined from 3,472 taka (Tk) to Tk 2,483 in real terms, or by 28.5 percent over the seven year period, average female borrowing for participating households increased by 94 percent in real terms. This suggests that microfinance programs provided loans mainly through female members of poor households, with female borrowing on average accounting for 82 percent of microfinance borrowing in 1998/99, up from 63 percent in 1991/92.[46]
While the aforementioned finding regarding the large amount of microcredit participation would seem to fly directly in the face of critics that are of the position that microcredit does little to help women escape poverty,[47]high participation rates would seem to refute the critics if it only could be demonstrated that microcredit actually reduced poverty. Fortunately for proponents of microcredit, Khandker’s 2005 study did just that.
After analysis of the impact assessment data using the 1998-1999 follow-up survey to the 1991-1992 survey, not only did data on consumption and the consumption poverty line demonstrate that, “that moderate poverty in the sample villages declined overall by 17 percentage points between 1991-1992 and 1998-1999 and extreme poverty by 13 percentage points,”[48] but it also reported poverty reduction for participants amounted to a 1.6 percentage point annual reduction in moderate poverty and a 2.2 percentage point annual reduction in cases of extreme poverty.[49] In addition, the study also found that there was a poverty reduction benefit to both program participants and non-participants at the aggregate level microfinance reduces poverty by about 1.0 percentage point and extreme poverty by 1.3 percentage points a year.[50] Finally, it was found that these microlending initiatives can account for approximately 40% of the overall reduction in moderate poverty with its positive impact found to be even higher (though slightly) with respect to extreme poverty.[51]
Although other studies like those presented by M. Jahangir Alam Chowdhury et. al. (The Impact of Micro-credit on Poverty: Evidence from Bangladesh)[52] and Jonathan Murdoch (The Microfinance Promise)[53] are empirically driven and highlight the positive impact microcredit can have on poverty alleviation, according to some, the Khandker study remains perhaps the most comprehensive and reliable study undertaken to date.[54] In fact, the president of Freedom from Hunger, which is itself a global microfinance group, describes Khandker’s work as the “one major study of microfinance on poverty that stands out.”[55] However, simply because it is a seminal piece in the field, this fact does not mean that other scholars and critiques have not tried to undermine its findings. For example, in their 2009 piece entitled The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence, authors David Roodman and Johnathan Murdoch undertook a critical examination of the impact of microcredit on the poor of Bangladesh and did so via a replication study that applied the same methods to the same data set as some of the most influential studies in the field of microcredit, including the Pitt-Khandker and Khandker studies, in order to test whether the previous results related to microcredit could be verified in a different period.[56] In the comparative politics context, this undertaking by Roodman and Murdoch is similar to the re-examination by Oskarsson and Ottosen of Michael Ross’s seminal resource curse piece Does Oil Hinder Democracy[57] with their critical follow up entitled Does Oil Still Hinder Democracy?[58] Just as Oskarrson and Ottosen sought to challenge the findings of Ross by demonstrating that the findings were substantially less valid when set in a more contemporary time period, Roodman and Murdoch also attempted to challenge the ground breaking literature of their own field by stating from the outset that their replication exercise performed years after Khandker’s study demonstrates that the evidence from his and other previous studies is weak. Moreover, they promise that their evidence will demonstrate that there is little to support the idea that microcredit works. As they state, “30 years into the microfinance movement, we have little solid evidence that it improves the lives of clients in measureable ways.”[59]
However, despite their bravado and hefty promises, by the end of their analysis the authors ultimately appear to fall short in their attempt to meaningfully undermine the results of Khandker’s work within the field. More specifically, Mark Pitt responds to these criticisms by stating that all of the critiques levelled by Roodman and Murdoch can be systematically rendered ineffectual and “readily refuted.”[60] In addition, after an analysis of their work it would seem that all the Roodman and Murdoch study indicates is that at best the evidence in previous studies is simply not as strong as it could be, however they cannot refute many of the prominent findings found in said studies. For example, in relation to one particular study they examine in conjunction with the Khandker pieces they state:
“Morduch (1998) disseminated the idea that microcredit helps families smooth their expenditures, lessening the pinch of hunger and need in lean times. In our view, nothing in the present paper contradicts those ideas. We assert however, that decisive statistical evidence in favor of them is absent from these studies and extraordinarily scarce in the literature as a whole.”[61]
After lacking the coup-de-grace against microcredit that their study promises, Roodman and Murdoch conclude by essentially calling for more studies in the field and cite that the main difficulties for studying the effects of microfinance are due to a lack of “clean” quasi-experiments and an absence of more randomized studies.[62] This can hardly be considered the empirical blow against microcredit that critics had hoped for.
If the positive association between microcredit and poverty reduction made by Khandker and others is as legitimate as the results seem to indicate, one wonders what further conclusions can be drawn? Most obviously, it would appear that it validates the assertions made by Dr. Yunus and other microcredit proponents surrounding microcredit’s standing as a self-help development tool and its ability to alleviate poverty.[63] However, confirming that microcredit can work in practice illuminates a peculiar puzzle because of the various microcredit shortfall cases highlighted by critics. These examples of microcredit failures forwarded by critics include not only failed initiatives which have done little to eradicate poverty, but consequences that have actually harmed the marginalized people it was meant to uplift, particularly impoverished women. In essence, if microcredit, especially in the Bengali context, has been proven to work so well, how can it also produce results which support the opposite conclusion? Is it simply a matter of fortune, that in a vacuum and all things being equal, some initiatives will fail and some will succeed no matter what, or are there underlying factors which indicate a propensity for microcredit success? Perhaps a closer examination of microcredit at the more micro-level will help solve the puzzle.
In a 2010 piece by Jason Cons and Kasia Paprocki entitled Contested Credit Landscapes: microcredit, self-help and self-determination in rural Bangladesh, the authors examined the microcredit experiences by borrowers in a rural northern village of Bangladesh known as Arampur.[64] The purpose of the study was to help the ongoing debate in the field of microcredit and more specifically to, “explore the implications of using community-based research and engagement strategies to re-centre the debate over credit within locales that are the target of microcredit institutions (MFIs).”[65] The authors felt this exercise was important because it was a rare opportunity to engage with the recipients of microcredit and uncover some of the voices behind the statistics. As the authors of the study state it, “provides critical insights into the ways that the cultural and economic effects of microcredit are experienced, suffered and contested in particular contexts.”[66] With respect to the field work at the heart of the investigation, it essentially consisted of community-based oral testimony undertaken by community researchers who conducted interviews of 150 recipients of microcredit loans in Arampur (a number which represents approximately 10% of the village’s total households).[67] Although the undertaking is perhaps not as robust as it could have been had the field work engaged with a greater number of Arampur residents, there are still some very interesting conclusions. Perhaps most notable is that the lived experiences of the residents are often in contrast to the idealized vision of many microcredit institutions and this situation creates new and exploitative development scenarios which in reality results in microcredit failing the impoverished.[68]A vivid example of this is provided on page 644 of their work:
Yet more notable than the persistence of mohajans (rural money lenders who can charge upwards of 100% interest) is the intertwining of MFIs and rural moneylenders into a single system…As one borrower explained, ‘If I owe 1000 taka but I don’t have any money to make my payment, I go to the mohajan to repay the NGO loan. After repaying the NGO loan, I take another loan from them to repay the money I took from the mohajan…But while this may constitute a manipulation of the credit system in Arampur, it ultimately deepens cycles of debt and dependency not just on microcredit, but on the mohajans themselves.[69]
While the aforementioned is a disappointing reality at the ground level, it appears that inflexibility surrounding late payments during the annual period of food insecurity (known as Monga) and/or lack of emergency funds when one is sick can have even greater consequences:
Where MFIs could provide emergency grants, temporary loan forgiveness or subsidized food, they stick to rigid repayment structures. Indeed many residents seemed bitterly to suggest that Monga provided a way for MFIs to further indebt them…These pressures lead to regular shortfalls, which, in turn, often lead to unauthorized, though tacitly accept, asset confiscation. One woman, a landless labourer, shared a story of such a confiscation. She had been ill and unable to work to earn a day wage. She asked for a week long extension in her payment schedule and was refused. ‘Then they sent a message to other field officers in town to seize my husband’s rickshaw. When they found him, they stopped him, and told him that he could get the rickshaw back when he repays the instalment. Then it was even harder! We had nothing to eat, and yet we had to somehow find the money to pay them back.’[70]
The preceding lived experiences of microcredit borrowers illuminate some interesting realities. Namely that by not being flexible in times of emergency need, microcredit initiatives actually serve to undermine the quality of life of the very people it is meant to uplift. However, when the initiatives deviate too far the theoretical model when implemented in practice such as when unauthorized confiscations and local moneylenders are tacitly allowed into the equation, even more devastating consequences can occur.
Despite the pitfalls that these lived experiences have brought to the forefront, Cons and Paprocki are still very much behind the idea of microcredit as a development tool, however despite their enthusiasm one of the critical points they wish to make is that it is imperative that the realities of microcredit are accounted for and addressed in the practical sense in order to ensure the best chance of initiative success for all recipients.
In a more recent paper entitled Can Microcredit Worsen Poverty? Cases of Exacerbated Poverty in Bangladesh, a similar conclusion to that of Cons and Paprocki is made by the authors of that piece. The study at the heart of the paper examined the impact of microcredit based on the experiences drawn from a pool of 320 women.[71] More specifically, although it was found that the majority of the sample had attained positive results from microcredit, 18 of these women did not and this study sought to focus on these negative experiences (relayed via in-depth interviews) to uncover the underlying factors which account for this less than favourable result.[72] In the end the authors had uncovered four key sets of circumstances in which microcredit loans exacerbated poverty among borrowers:
- Long periods between start-and revenue generation from the investment
- Financial setbacks or losses incurred during the initial stages of business
- Use of loan money to meet unforeseen contingencies/emergencies; and
- Use of loan money for day-to-day consumption or one-off, ‘luxury’ expenditure[73]
After highlighting these results the authors conclude by stating that while microcredit has been proven successful in the majority of cases with respect to reducing poverty, that the ‘poorest of the poor’ are susceptible to adverse effects due largely to pre-existing conditions of poverty resulting from the reality of their circumstances.[74]
This piece by ATM Jahirudin et. al. is notable for several reasons. Not only does it confirm that variation occurs in terms of microcredit ability to have a positive impact on poverty alleviation, much like the Cons and Paprocki piece the authors find that certain realities, which normally are invisible in most microcredit studies that do not take into account lived experiences, are circumstances that hinder microcredit from being successful in some cases. Moreover this study also comes to the conclusion that in order for microcredit to have the best overall chance of success that certain administration changes must be undertaken. As the authors state:
Given the particular nature of the circumstances in the which these adverse impacts occur, some modifications to microcredit arrangements, at the operational level, are likely to reduce the incidence of microcredit worsening poverty….In order to deliver clear benefits to the poorest of the poor, it is imperative that microcredit lenders and their international funding agencies devise policies that ensure not only that the operations of the microcredit lenders remain at some distance from the central structures and relations of the market economy, but also that they focus principally upon guiding and empowering borrowers to succeed in small business enterprises, the latter being a key component of poverty alleviation, the stated goal of microcredit.[75]
After analyzing the literature to this point it would appear that although microcredit initiatives do have tremendous success in alleviating poverty in general, that variation in terms of results is still present within the field. However, what the contemporary literature demonstrates is that the variation is not due to chance, but rather that circumstances exist amongst certain (vulnerable) groups which preclude them from utilizing microcredit in the manner it was intended. Although these findings are important, perhaps more illuminating is that the literature seems to advocate a greater and more active role for microcredit administrators in order to ensure efficient and effective implementation of the microcredit model. In sum, the variation between success and failure in terms of microcredit’s ability to alleviate poverty seems to be premised on active and engaged microcredit lending rather than some deficiency in the (theoretical) microcredit model, at least in the contemporary Bengali context.
While the global perspective is examined in the next section of this piece, at this stage of the analysis it is perhaps appropriate return to the work of Hollis and Sweetman in order to evaluate how well the contemporary suggestions for improving the viability of microcredit lending programs measure against lessons from the past. As previously stated, in their historical analysis Hollis and Sweetman found that microcredit lending institutions that were intimately and actively connected with their borrowers (demonstrated via the depositor based microcredit institutions) had a stronger correlation with success. As they state:
That this is the case should hardly be surprising: organizational theory-and intuition- strongly predict that institutions require strongly correctly aligned incentives to be successful. MOs with depositors benefited from having interested parties overseeing the operations and withdrawing their deposits when problems began to emerge. Depositors also provided information on, and monitored, borrowers, and performed administrative tasks in some instances.[76]
This statement reflects the position that the more microcredit programs are closely associated with borrowers and the more actively involved with the services they provide, the greater the benefit to the borrowers. In addition, they also state that past lessons should not be ignored because the failure of many contemporary microcredit initiatives over the last 30 years might well have been avoided had these initiatives been modelled more like the European models of centuries past that were intimately involved and provided as many practical services as possible. As they conclude:
This study also suggests that MOs (microcredit organizations) can indeed be sustainable, even financially successful, in very poor countries for long periods of time, and that the key to such success is getting the organizational structure right.[77]
After contrasting the contemporary literature and evidence surrounding microcredit along with the historical record it would appear that not only does microcredit in fact work to alleviate poverty in the majority of cases, but that improving the operational structure by tailoring the implementation strategies to the realities and needs of borrowers improves the chances that the borrowers will have a positive experience from microcredit, and in turn increases the likelihood that microcredit will achieve is primary goal of poverty alleviation at an even greater rate. At least in regards to the Bengali context this appears to be the case. The global perspective is examined next.
Part Four: Microcredit and the Rest of the World
While this piece has placed a considerable amount of emphasis to the Bengali experience, even if such consideration is warranted given modern microcredit’s genesis within Bangladesh and the fact that Bangladesh still remains home to more microcredit institutions than any other country,[78]a more complete picture surrounding what accounts for the variation in microcredit success can be attained after considering the global perspective.
In his piece entitled Microfinance And Poverty Reduction: Some International Evidence Sadegh Bakhtiari examines the impact of microcredit in a variety of countries around the World including Indonesia, Thailand, India, and the Philippines. After analyzing the data Bakhtiari concludes that not only does microcredit contribute to poverty reduction in general, but that microcredit institutions that continue to evolve and adapt to the needs of their borrowers while also providing additional financial services like savings accounts for instance, offer further benefit to loan recipients and lenders alike.[79] For example in relation to the Bank Rakayat in Indonesia (BRI) he states:
Since 1984, BRI has evolved into a major microfinance provider. Massive staff retraining in the new microbanking culture, with its new financial services and incentives schemes, was of crucial importance. Its 3,700 local units serve some 29.8 million savings accounts and 3.1 million borrowers (Dec 2001). With non-targeted loans from $5 to $5000 at rural market rates of interest and unrestricted deposit services, it reaches out to vast number of the poor and non-poor. Making good use of a start-up liquidity injection, it has fully replaced external funds with local savings since 1989.[80]
The preceding passage is interesting because not only does it further demonstrate the link between microcredit success and adaptable microcredit institutions that provide a variety of practical financial services, but it provides an example of how microcredit institutions can be viable long term without a dependence on subsidies. Through microsavings (savings accounts) and other financial services these banks can draw new loans and revenue streams thereby becoming self-funding and independent. This strategy regarding the provision of financial services like savings accounts for long-term sustainability beyond subsidies is also something that had been echoed by Hollis and Sweetman.[81]
Building on the concept of practical and adaptable institutions, in her work entitled Transaction Costs in Group Microcredit in India Savita Shankar examines the problem of high interest rates and what (if anything) can be done to prevent rates (which are supposed to be low according to the microcredit model) from rising. In terms of methodology, the case study method was utilized because according to the author, “the study required in-depth insight on the processes being followed within a microfinance institution (MFI),”[82]and three established MFIs who engaged in microcredit via the group lending model were examined.
In terms of notable results, although the study concurred with the existing literature with respect to transaction costs being a major contributor to high interest rates on microcredit loans, the results of the study indicated that, “the key drivers of direct transaction costs are field worker compensation and number of groups handled per field worker.”[83] Not only do these findings rest transaction costs and corresponding (high) interest rates at the feet of the MFIs, but that transaction costs if properly managed could keep rates stable and in so doing, help guard against microcredit initiative failure due to loan payment default. More specifically, while the author agrees with the existing literature concerning the correlation between high interest rates and failure and that transaction costs are a major driver of interest rates, she nonetheless highlight that there is much that MFIs can do in the face of these challenges if prudent:
Based on the above findings, implications are drawn for MFIs. It is suggested that MFIs, in order to reduce direct transaction costs, should increase the number of groups per square kilometer, as this will save both field worker time and conveyance cost. MFIs should examine the possibility of reducing the collection frequency and the impact it could have on repayment. The ways in which field worker productivity could be improved are by utilizing them better during the day hours when they are not in the field and kinking their incentives to profit from their portfolio rather than merely to number of groups formed and repayment levels.[84]
In addition to the proactive changes suggested for MFI, Shankar also has a message for policymakers regarding what they can do to help in the area of interest regulation and information campaigns:
The study also has implications for policymakers. Policymakers need to take into account transaction costs when examining the interest rates charged by microfinance institutions. The regional variation in transaction costs that the study has found is an important factor that suggests that no uniform view can be taken on the rates charged by MFIs in different regions. In order to spread microcredit to newer areas, Government funded information campaigns could help in bringing down group formation costs there by attracting MFIs to these areas.[85]
These conclusions made by Shankar are of tremendous importance to the field of microcredit. Not only do they reiterate previous findings that the chances of microcredit success are improved by ameliorating the operational aspect of microcredit, but that policymakers also have a hand in guiding this operational aspect and should not defer their responsibility to the microcredit institutions.
Finally, in their work entitled Determinants of Repayment in Microcredit: Evidence from Programs in the United States authors Nitin Bhatt and Shui-Yan Tang examine four prominent microcredit programs in the United States in order to determine under what circumstances is loan repayment most ensured.[86] This microcredit piece is different than others in the field because while most investigations center on the developing world, this piece examines microcredit impact in the first world setting. However as the authors note, although the places are different many of the results appear to be the same in many respects.[87] After examining the evidence from their four cases studies the authors conclude that higher levels of education and proximity to the lending agency increase a borrower’s chance of loan repayment.[88] While higher levels of education are something more common in the first world, should microcredit institutions of the developing world offer practical business education seminars in conjunction with loan distribution this would appear to put both types of recipients on an even playing field as the criteria used to gauge effective education level in the study related mostly to rudimentary business training and book keeping.[89]
In terms of other conclusions made in this study, the authors of this piece, much like the authors of so many other pieces examined, advocated for proactive and adaptive microcredit institutions that not only provided financial services besides loans, but that also design and implement strategies designed to maximize success and minimize loan default.[90] These strategies include (but are not limited to): ensuring low transaction costs (perhaps akin to the recommendations made by Shankar), ensuring the homogeneity of borrower groups under the group lending model, and implementing effective (but not overly punitive) sanctions in cases of non-repayment.[91]
After examining the microcredit studies which center on places outside of Bangladesh a few noteworthy conclusions can be made. Not only do the authors endorse microcredit as proven development tool that can effectively uplift the poor out of poverty, but they demonstrate with compelling evidence that microcredit initiatives can be most successful with efficient, yet adaptive, implementation strategies and operation. As such, this literature appears to be in accordance with the literature of the previous section, namely the body of work which focussed on microcredit in the Bengali context and the historical lessons garnered from microcredit initiatives of centuries past. In addition, while all of the literature appears to primarily connect successful microcredit initiatives with dynamic implementation strategies that are adaptive to the practical needs of the poor, in essence one can conclude that the difference between microcredit success and failure is often attributable to model operation. As such, while many critics would attribute microcredit failure to high interest rates and funds spent on consumption, the evidence seems to indicate that these are symptoms of what is truly the root cause of the problem; inefficient microcredit implementation and operation. By extension this root cause is also accountable for the variation between successful microcredit initiatives which alleviate poverty and those that do not. Before proceeding to concluding remarks, this piece would be remiss if it did not cover one final element concerning microcredit, that of performance measurement. In addition, to poverty alleviation another goal of the program has been that of women’s empowerment. While the data appears to be robust concerning microcredit’s potential to empower women, several critiques have highlighted that microcredit not only does not help women it makes them subject to a greater incidence of domestic violence.[92]However, in their piece entitled Microcredit and Domestic Violence in Bangladesh: An Exploration of Selection Bias Influences authors Ashish Bajracharya and Sajeda Amin address these criticisms head on. By using a sample of married women from the 2007 Bangladesh Demographic Health Survey (BDHS) (N=4,195) the authors utilized propensity score matching (PSM) in order to determine the level of selection bias in this relationship.[93]After analyzing the empirical evidence what the authors concluded was that although previous studies have linked microcredit with an increased level of domestic violence against women by speculating that microcredit membership increases conflict between husbands and their wives who now have access to microcredit loans, when one adjusts for selection bias using the PSM analysis there appears to be no significant difference in terms of domestic violence between microcredit participants and non-participants.[94] As such these conclusions not only reinforce the position that microcredit is indeed a tool of female empowerment, but it also highlights the need for adequate performance measurement techniques to gauge the true effectiveness of microcredit’s impact. Therefore it is only logical to conclude that that effective microcredit implementation and operation strategies encompass some degree of reliable performance measurement.
Part Five: Conclusion
After examining the background history and a wide array of literature pertaining to case specific examples from Bangladesh and around the world it indeed becomes apparent that the mixed results pertaining to microcredit success is mainly to due to rigid and inefficient implementation and operation which in turn leads to a deviation from the traditional microcredit model and high interest rates, misuse of funds, predatory practices, and in some instances greater entrenchment into poverty. In addition, what the examination has also revealed is that microcredit has been proven to be effective in alleviating poverty in the majority of cases when applied in a manner consistent with the changing needs of borrowers. Does microcredit always work, or will implementing effective operational strategies prevent microcredit failure across the board? Perhaps not, but what the evidence does suggest is that there is a distinct link between unrealistic and impractical implementation strategies made by certain microcredit institutions and microcredit initiative failure. As such, not only will increasing the level of practical efficiency as it pertains to microcredit operation increase the likelihood of microcredit success, it will also lead to minimize the overall variation in the field by closing the gap between successful and negative results. After an analysis of the literature, the provision of financial services like savings accounts, efficient management of transaction costs, emergency loans in times of emergency, business education programs, and effective performance measurement tools are all part of an exhaustive list of strategies microcredit institutions can utilize (and that policymakers can and should enforce) that will increase the chances that microcredit initiatives will be successful, both in terms of return on investment and, more importantly, alleviating poverty.
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[4] Moyo, Dambisa. Dead Aid (New York: Farrar, Straus and Giroux, 2009), p. 27-28
[5] Riddell, RC 2014 “Does foreign aid really work? An updated assessment”, Development Policy Centre Discussion Paper 33, Crawford School of Public Policy, The Australian National University, Canberra., p. 1
[7]Cons, Jason and Kasia Paprocki. “Contested Credit Landscapes: microcredit, self-help and self-determination in rural Bangladesh” Third WorldQuarterly, Vol. 31, No. 4, 2010, pp. 641
[9]Bakthiari, Sadegh. “Microfinance and Poverty Reduction” International Business & Economics Research Journal, Volume 5, Number 12 (DECEMBER 2006), pp. 65
[11]Chowdhury, M. Jahangir Alam et. al. “The Impact of Micro-credit on Poverty: Evidence from Bangladesh” Progress in Development Studies October 2005, pp. 298
[12] Hollis, Aidan and Arthur Sweetman. “Microcredit: What can we Learn from the Past?” World Development Vol. 26, No. 10, 1998, pp. 1875-1891
[17]Bakthiari, Sadegh. “Microfinance and Poverty Reduction” International Business & Economics Research Journal, Volume 5, Number 12 (DECEMBER 2006), pp. 65
[20] Hossain, Farhad ed. et. al. Microcredit and International Development (New York: Routledge) 2014, p. 13
[22] Esty, Katherine. “Lessons from Muhammad Yunus and the Grameen Bank” OD Practitioner, Vol. 43 No. 1, 2011, pp. 25
[23] Yunus, Muhammad. Banker to the Poor: Microlending and the Battle Against World Poverty (New York: Public Affairs Books) 2007, p. 43
[24] Rahman, Rafiqur and Qiang Nie. “The Synthesis of Grameen Bank Microfinance Approaches in Bangladesh” International Journal of Economics and Finance, Nov, 2011, Vol.3(6), p.208
[25] Esty, Katherine. “Lessons from Muhammad Yunus and the Grameen Bank” OD Practitioner, Vol. 43 No. 1, 2011, pp. 25
[27] Yunus, Muhammad. Banker to the Poor: Microlending and the Battle Against World Poverty (New York: Public Affairs Books) 2007, p. 57
[28] Dowla, Asif. “In Credit We Trust: Building Social Capital by Grameen Bank in Bangladesh” The Journal of Socio-Economics 35 (2006), pp. 105
[29] Esty, Katherine. “Lessons from Muhammad Yunus and the Grameen Bank” OD Practitioner, Vol. 43 No. 1, 2011, pp. 25
[32]Dowla, Asif. “In Credit We Trust: Building Social Capital by Grameen Bank in Bangladesh” The Journal of Socio-Economics 35 (2006), pp. 110
[33] Rahman, Rafiqur and Qiang Nie. “The Synthesis of Grameen Bank Microfinance Approaches in Bangladesh” International Journal of Economics and Finance, Nov, 2011, Vol.3(6), p.208
[34] Yunus, Muhammad. Banker to the Poor: Microlending and the Battle Against World Poverty (New York: Public Affairs Books) 2007, p. ix (introduction)
[35]Hossain, Farhad ed. et. al. Microcredit and International Development (New York: Routledge) 2014, p. 3
[36]Cons, Jason and Kasia Paprocki. “Contested Credit Landscapes: microcredit, self-help and self-determination in rural Bangladesh” Third World Quarterly, Vol. 31, No. 4, 2010, pp. 641
[37]Roodman, David and Jonathan Murdoch. “The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence” Centre for Policy Development Working Paper No. 174, June 2009, p. 1
[38] Roodman, David and JonathanMurdoch. “The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence” Centre for Policy Development Working Paper No. 174, June 2009, p. 2
[39] Khandker, Shahidur R. “Microfinance and Poverty: Evidence Using Panel Data from Bangladesh” The WorldBank Economic Review Vol. 19, No. 2, 2005, pp. 266
[40] Pitt, Mark M. and Shahidur R. Khandker. “The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter? The Journal of Political Economy Vol. 106, Issue 5, October 1998, pp. 988
[41] Khandker, Shahidur R. “Microfinance and Poverty: Evidence Using Panel Data from Bangladesh” The WorldBank Economic Review Vol. 19, No. 2, 2005, pp. 266
[44] Roodman, David and JonathanMurdoch. “The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence” Centre for Policy Development Working Paper No. 174, June 2009, p. 2
[45]Khandker, Shahidur R. “Microfinance and Poverty: Evidence Using Panel Data from Bangladesh” The WorldBank Economic Review Vol. 19, No. 2, 2005, pp. 271
[47] Schuler, S.R. & Hashemi, S.M. (1994). “Credit programs, women’s empowerment, and contraceptive use in rural Bangladesh” Studies in Family Planning, 25, 65-76
[48] Khandker, Shahidur R. “Microfinance and Poverty: Evidence Using Panel Data from Bangladesh” The WorldBank Economic Review Vol. 19, No. 2, 2005, p. 282
[52] Chowdhury, M. Jahangir Alam et. al. “The Impact of Micro-credit on Poverty: Evidence from Bangladesh” Progress in Development Studies October 2005, pp. 298-309
[53] Murdoch, Jonathan. “The Microfinance Promise” Journal of Economic Literature Vol. XXXVII (December 1999), pp. 1569-1614
[54] Goldberg, Nathanael. “Measuring the Impact of Microfinance: Taking Stock of What We Know” Grameen Bank USA Publication Series December 2005, p. 19
[55] Roodman, David and Jonathan Murdoch. “The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence” Centre for Policy Development Working Paper No. 174, June 2009, p. 3
[57] Ross, Michael L. “Does Oil Hinder Democracy?”. WorldPolitics, vol. 53, no. 3 (April 2001), pp. 325-361
[58] Oskarsson, Sven and Eric Ottosen. “Does Oil Still Hinder Democracy?”. Journal of Development Studies, vol. 46, no. 6 (2010), pp. 1067-1083
[59]Roodman, David and Jonathan Murdoch. “The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence” Centre for Policy Development Working Paper No. 174, June 2009, p. 4
[60] Pitt, Mark M. “Response to ‘The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence’” The Journal of Development Studies, 2014, Vol. 50, No. 4, pp. 605
[63] Esty, Katherine. “Lessons from Muhammad Yunus and the Grameen Bank” OD Practitioner, Vol. 43 No. 1, 2011, pp. 27
[64] Cons, Jason and Kasia Paprocki. “Contested Credit Landscapes: microcredit, self-help and self-determination in rural Bangladesh” Third WorldQuarterly, Vol. 31, No. 4, 2010, pp. 637
[71] Jahiruddin ATM et. al. “Can Microcredit Worsen Poverty? Cases of Exacerbated Poverty in Bangladesh” Development in Practice, Volume 21, Number 8, November 2011, pp. 1111
[76] Hollis, Aidan and Arthur Sweetman. “Microcredit: What can we Learn from the Past?” World Development Vol. 26, No. 10, 1998, pp. 1888
[78]Cons, Jason and Kasia Paprocki. “Contested Credit Landscapes: microcredit, self-help and self-determination in rural Bangladesh” Third WorldQuarterly, Vol. 31, No. 4, 2010, pp. 642
[79] Bakthiari, Sadegh. “Microfinance and Poverty Reduction” International Business & Economics Research Journal, Volume 5, Number 12 (December 2006), pp. 69
[81] Hollis, Aidan and Arthur Sweetman. “Microcredit: What can we Learn from the Past?” World Development Vol. 26, No. 10, 1998, pp. 1875-1891
[82] Shankar, Savita. “Transaction costs in group microcredit in India” Management Decision Vol. 45 No. 8 2007, pp. 1331
[86] Bhatt, Nitin and Shui-Yan Tang. “Determinants of Repayment in Microcredit: Evidence from Programs in the United States” International Journal of Urban and Regional Research Vol. 26.2 June 2002, pp. 361
[92] Schuler, S.R. & Hashemi, S.M. (1994). “Credit programs, women’s empowerment, and contraceptive use in rural Bangladesh” Studies in Family Planning, 25, 65-76
[93] Bajracharya, Ashish and Sajeda Amin. “Microcredit and Domestic Violence in Bangladesh: An Exploration of Selection Bias Influences” Demography, (2013) 50: pp. 1819
