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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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