Microcredit and serving the poor

Yunus M. established the Grameen Bank, which is the most well-known microcredit

organization, after he concluded that “people are poor because they have no money”. Redefining poverty as the victimization of the poor placed the fault on societal structures and institutions rather than on the poor themselves. This paved

the way for Yunus’ M. Grameen Bank to offer financial services to the poor. Because the poor simply do not have money, Yunus M. set out to prove that they are not risky borrowers or prone to default on loans. Rather, when provided with funds, he predicted they would invest in income-generating projects to improve their standard

of living. Yunus’ M. new perspective on poverty has forced the financial world to consider the social good and even the profitability of lending to the poor (McMillan C., and Hanley M. 2003:2).

Sunita P. (2003:9-21) describes that one of the misconceptions amongst practitioners is that an MFI targets the poorest of the poor, the landless, those

without assets, and the destitute. However, the study has demonstrated that for an MFI such a client profile will not ensure returns and increase profits. It is precisely such a beneficiary profile that is unattractive and and thus the client is unlikely to become a potential borrower. The changing policy environment puts more pressure on and competition for the scarce resources between the poorest of the poor and the

‘not-so-poor’.

Yunus M. (2007:69-96), the founder of Grameen Bank in Bangladesh and the originator of the concept of microfinance, believes that 5% of Grameen Bank’s

clients exit poverty each year. However, there are surprisingly few credible estimates of the extent to which microcredit actually reduces poverty. A recent study concluded by the Bangladesh Institute of Development Studies and the World Bank in Bangladesh provides a strong indication that Microcredit does help the poor in consumption smoothing as well as in asset building. Thus, the continuing intense debate about the impact of microfinance on poverty reduction is not surprising (Anis C. 2009:1-6).

Jonathan M., and Haley D. (2002:31) argue that microfinance has proven to be an effective and powerful tool for poverty reduction. Like many other development tools, however, it has insufficiently penetrated the poorest strata of society. The poorest emerge from the vast majority of those without access to primary health care and basic education; similarly, they are the majority of those without access to microfinance. This shows that, for the poorest, losing access to microfinance is highly related to the exclusion of all types of basic social services.

Related to exclusion of the poor, Hasan M., and Iglebaek M. (2004:3-7) point out that many NGOs think it is impossible to reach the hard-core poor. Using the Grameen and other conventional models, only a few NGOs are trying to evolve different methodologies for reaching the poorest of the poor. While the group and standardized financial services system were introduced to bring the poor people, including the poorest, together in the same platform, the reality was that the extreme poor were being left out and this exclusion increased over time.

Others like Hulme D., and Mosley P. (1996:119-221) give limited evidence that microfinance increases income. Nevertheless, they also show that the impact highly depends on the level of income. Specifically, the poorest borrowers seem not to benefit from a sufficient income increase. To the contrary, Khandker R. (2005:265- 266) found that access to microfinance contributes significantly to poverty reduction and that this is especially true for poor women. Not only participants seem to benefit, but the whole local community.

Navajas S., et al. 2000:335-346 stated that a growing body of evidence suggests that very poor households are excluded from accessing microfinance programmes. According to these authors, increasingly extremely poor people are seen to be dropping out of credit programmes after having failed to keep up with repayment instalments. Some critics also question the efficacy of microcredit in reaching extremely poor people. They argue that, while micro-credit has contributed positively to the wellbeing of poor people in general, it has failed to reach the poorest of the poor. Most microfinance institutions tend to serve not the poorest of the poor, but rather those near the poverty line.

Other researchers see ‘targeting’ by microfinance programmes as being effective in

reaching the poorest of the poor. Even a well-designed microfinance programme is unlikely to have a positive impact on the poorest unless it specifically seeks to reach them through appropriate product design and targeting (Wright G.1999: 41). Experience has shown that unless there is a targeting tool, the poorest will either be missed or they will tend to exclude themselves because they do not see the programmes as being for them, do not have the correct clothes, etc., (Navajas S., et al. 2000:335-346).

Zoom (2004:1) describes three different ways that the issue is being approached.

1. Those who think that microfinance cannot really reach the poorest in a sustainable way;

2. In contrast, those who believe that such a thing is possible and can be accomplished at a large scale;

3. Finally, those who admit that it is not an easy task, but underline that research on innovative measures to consolidate microfinance services for the poorest must be maintained.

The first group denies that there is a demand while the second approach offers the opposite perspective: there is a strong demand for microcredits from the poorest. The intermediary approach considers that the poorest can profit from microfinance services as long as innovative models to facilitate their access continue to be developed. The approach also believes that subsidies play an essential role in developing sustainable mechanisms to reach the poorest (Zoom, 2004:1).

Related to reaching the ultra-poor, Fazle H.A (2000: 8-13) stated that it is a lesson learnt through experience that all the poor do not benefit from microfinance programmes. A question is very often raised: “if the microcredit programmes have not reached the poorest of the poor, how effective are they for poverty alleviation?”

Fazle H.A (2000: 8-13) explains that two decades of microfinance experience have generated the learning that NGOs are not unable to bring all poor in their fold, but that microfinance with its present structure and components is not necessarily the way out for the poorest. Experience also suggests that normal microfinance programmes cannot attract the extreme poor. Special programmes with start-up support, training in marketable skills, credit, and essential health care can be a useful development package for this group. It has also been observed that if safety nets and wage employments are provided, the ultra-poor could be attracted toward credit facilities.

Moreover, Fazle H.A (2000: 8-13) stated that there are many complex reasons why poor and low-income customers do not seek or are not offered more access to microcredit services. In some cases, there is a latent demand that innovative financial service providers can bring out. In other cases, the financial products or delivery methodologies currently being offered cannot satisfy the demand. In all cases, poor and low-income people want financial services that match their needs to better manage their households and businesses. Their requirements are practical

and convenient, affordable, flexible, permanently available, reliable and safe financial services.

Thus, analysing the effects and impacts of microcredit in general and the loan

interest rate ‘only’ in particular is not easy. It calls for further empirical, comprehensive, and contextual studies, a major interest of this study.