Bangladesh – Microcredit not intended for entrepreneurs

16.09.2010 - Dhaka - Tony Henderson

The Grameen Bank is a Bangledesh organization that makes small loans to impoverished families in order to help those families establish themselves. The Grameen Bank and its founder Muhammad Yunus were awarded the Nobel Peace Prize on October 13, 2006.

Now we have the Grameen Foundation, as a Washington DC-based (USA) non-profit organisation, partnering with the likes of China Social Entrepreneurship Foundation, a very nicely worded Chinese government set up.

It has been admitted that self-finance groups have largely not been able to sustain their activities without funding – which contradicts the whole idea and begs the question of who took that survey and from what slant? In the case of Grameen’s Bangladesh operations this is untrue as in many instances groups were set up that did manage to allocate the group’s funds in an adequate way. It worked.

But, Grameen Bank was subsidising the groups by way of providing those field workers that attended to the founding of a group. It could be presumed that once launched the group would be on its own – after all, someone has to take the time to point out how it’s done. Given that, and remaining with that, volunteers can be found but early rates of development were so slow and there was so much that needed to be done – thus the input from Grameen.

The originator Muhammad Yunis tells, in his book *Banker to the Poor*, how much legwork he had to do in the first place to get things going, also, how important it was to find the appropriate person to act as field officer to start groups.

That field officer is still a vital ingredient today and the concern is, while such foundations might be excellent at getting funds and spending them which looks good on everyone’s books – what has happened to the original concept?

Essentially, while Yunis devised a workable system it was a quintessentially human system and not applicable to the much more rational demands of a cold hearted banking project where, non-profit or not, profit remains the bottom line.

Clearly, funds are floating about and as usual those already established in the field of channeling cash to and fro – and raking off a portion – see the potential of accessing the immense amounts of money that is destined for poverty reduction but which has not and likely never will, reach the poor because too many go-betweens, and that’s in the best case!

It would be better if corporations hired a helicopter and dropped a few thousand dollars over the rooftops of little villages on a random basis. Then, at least there is a fighting chance of some of the poor getting their hands on some notes.

In “Micro finance Misses the Mark” Aneel Karnani an associate professor of strategy at the University of Michigan’s Ross School of Business points out in the Stanford Social Innovation Review that:

*“Despite the hoopla surrounding microcredit, few have studied its impact. One of the most comprehensive studies reaches a surprising conclusion: Microloans are more beneficial to borrowers living above the poverty line than to borrowers living below the poverty line.”*

Apparently, this is because the poorest borrowers tend to take out conservative loans that protect their subsistence, whereas receivers with more income are willing to take risks, buy a mobile phone for instance, and that can increase income flow. But the point was to lift the poor out of dire situations into minimally sustainable situations and the rest was a bonus.

Generally, though Yunis’s style micro-credit system has worked very well, its main critics point out the relatively high interest rates charged. These might be extremely low for a microcredit organizations targeting the ordinarily poor but as a regular repayment they are too high and in fact need to be taken out of the equation. The group needs to keep all cash flow internal and cannot afford to subsidise any bank, even the Grameen Bank. That’s why the answer lies in volunteer action.

The microcredit proponents that came on the scene post-Yunis argue that these rates, although in effect high, that they are still well below those charged by informal moneylenders. But if poor recipients cannot earn a greater return on their investment than the interest they must pay, they will become poorer as a result of micro-credit, not wealthier. This has proved to be the case in many instances and thus the criticism that even the Grameen system is flawed in that people are not enabled to climb out of poverty. But was that the original claim?

A microcredit recipient is not an entrepreneur. Aneel Karnani points out that she (women receive the monies as they are more likely to use the funds for family affairs) raises the capital, manages the business, and takes home the earnings. But the “entrepreneurs” that have become models for others are usually highly motivated and not ordinary poor folk just pleased to get a chance, the former are more likely to convert new ideas into successful businesses.

The majority are firmly wedged into subsistence type activities. They usually have few specialized skills, and must compete with other self-helping poor people. They operate at too small a scale to achieve efficiencies, and so make meager earnings. This is quite contrary to the United Nations’ hype that micro-entrepreneurs produce thriving businesses that lead to flourishing economies.

The very fact of a burgeoning lowest rung that has a revamped means of making financial ends meet is absolutely helpful and should not be overlooked. There is a place, a niche and need for the principles contained in Banking for the Poor to be actively placed into society. However, that should not be confused with what’s going on between the two aforesaid foundations.

*“The fact is, most microcredit clients are not microentrepreneurs by choice. They would gladly take a factory job at reasonable wages if it were available. We should not romanticize the idea of the “poor as entrepreneurs,” says Aneel Karnani. The International Labour Organization uses a more appropriate term for these people: “own-account workers”.*

Creating opportunities for steady employment at reasonable wages is the best way to take people out of poverty as nothing is more fundamental to poverty reduction than employment.

Professor Aneel Karnani’s comments are not just about micro finance good or bad as a solution to poverty, but rather brings in a larger question of any government’s role in helping the poor. Simply and honestly, where a market fails or is imperfect, particularly with the provision of goods and services critical to human welfare, the state needs to act to rectify the situation.

Categories: Asia, Economics, Opinions

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