Micro-finance institutions: effective weapon in the war against rural poverty

Khalil Umar

Ramadan 28, 1419 1999-01-16

Special Reports

by Khalil Umar (Special Reports, Crescent International Vol. 27, No. 22, Ramadan, 1419)

As the world inches closer toward the new millennium, humanity continues to be polarized into rich and poor. The rich mostly live in the industrialized countries of the northern hemisphere, while the poor mainly inhabit the developing countries of the South. Despite decades of post-colonial experimentation with various Eurocentric models of development and aid programs, the gulf yawning between the poor, on one side, and social justice, dignity, and prosperity, on the other, continues to run deep and wide.

This has led many a development practitioner to admit that the implementation of development plans and aid programs had in some cases contributed to the perpetuation of poverty in developing countries. The failure of post-colonial development models originated in part from the fact that many of their prescriptions, including those entailing the infusion of enormous amounts of foreign capital, were not geared toward the attainment of rapid, equitable and self-reliant economic growth. Little wonder then that the benefits of development and foreign aid simply failed to ‘trickle down’ to the poorest segments of society.

Notwithstanding the gloominess and pessimism of the above sketch, there is a glimmer of hope in the struggle to alleviate poverty. In many developing countries, innovative indigenous facilities providing credit to those traditionally marginalized by, and excluded from, the formal financial sector are producing sustainable increases in the incomes of some of the poorest segments of the population. Known as ‘micro-finance’ or ‘micro-credit’ institutions, these facilities are dedicated to making it easy for very poor would-be entrepreneurs to borrow start-up capital.

Micro-finance schemes are now operating in many developing countries across Asia, Africa and Latin America. Their operations emphasize ‘strategic lending,’ i.e., lending very small short-term loans to very poor micro-entrepreneurs. Loan repayment is guaranteed by group members collectively and access to future credit or loans is contingent on successful repayment. Hence, peer monitoring and the prospect of subsequent larger loans act as strong incentives for repayment.

The usual model is Bangladesh’s Grameen Bank, which makes small loans to enterprising villagers and relies on peer pressure to ensure repayment. Grameen was established in 1976 by Dr. Mohammed Yunus, an economics professor, as an action research programme to deliver bank credit to poverty-stricken villagers in rural Bangladesh. It was converted into an independent bank by government ordinance in 1983.

Today, its services reach an estimated 38,000 villages throughout rural Bangladesh, benefiting some two million families. Grameen’s success, highlighted by a remarkable 98 percent loan-repayment rate, has demonstrated convincingly that small loans to would-be village entrepreneurs are an effective means to encourage self-reliance, boosting incomes, and saving people from the throes of therelentless cycle of poverty, malnutrition, and possibly early death.

As income-generating facilities dedicated to serving the poor, micro-finance institutions reject conventional notions of ‘credit worthiness’ which make commercial banks normatively unsuited for channeling credit and other services to the poor, who by definition possess no collateral. Inspired by the contrary notion that needy people possess sufficient initiative and energy to put together small projects that could increase their income, Grameen-like institutions such as Bank Rakyat Indonesia, the Kenya Rural Enterprise Programme, and Banco Solidario of Bolivia conceive of poor people as full-fledged ‘credit worthy’ clients.

In accordance with this normative framework, micro-finance institutions developed new techniques to deliver services to some of the traditionally most excluded segments of society, notably the rural poor. One of these techniques is to seek out borrowers by basing their operations in localities close to their clientele base. Sensing that access to financial resources and services is usually more difficult for women than it is for men, many of these institutions have made a specific policy decision to target poor women.

For instance, women make up 94 percent of Grameen’s clientele. Micro-credit programs, moreover, are cognizant of the fact that the vast majority of their client base is illiterate. They, therefore, provide simple application procedures and disburse loans quickly. Most institutions prefer to disburse loans to small solidarity or peer groups comprised of three to five micro-entrepreneurs. The group divides the borrowed money among its members and assumes full responsibility for managing the loan.

The success of micro-finance programs is not without its limitations nor does it mean that humanity has finally arrived at the sunny uplands of the total eradication of poverty. From a strictly economic standpoint, credit alone is not sufficient to allow borrowers to increase their productive or commercial capacity, and in turn their incomes. No amount of credit can help poor entrepreneurs claw their way out of poverty in the absence of economic opportunity. It is the infusion of credit into an atmosphere of economic opportunity that creates greater income potential and prosperity. Without access to real economic opportunity, credit programs could become sources of indebtedness.

Moreover, micro-finance schemes alone cannot alleviate the broader, non-physical symptoms of poverty which deprive the poor of a full social existence through their effective participation in the various patterns of everyday life of society. The battle for total eradication of poverty from the lives of more than one billion poor people, therefore, requires combining micro-finance schemes with parallel, complementary programs addressing the social and cultural dimensions of want, privation, impoverishment and dispossession.

Thus micro-finance programs face the challenge of expanding their operations to include the provision of such basic services as adequate health care, drinking water, education and craft learning. These efforts would make these financial initiatives more sustainable and enhance their effectiveness.

With this in view, UNESCO signed a memorandum of understanding with the Grameen Bank in September 1995. Among other areas of collaboration, the agreement pledges the two organizations to cooperate in designing and providing basic educational and training programs in the fields of education, science and technology, and culture and communication.

In addition, granting credit to the working poor only alleviates poverty among a small part of the population. It cannot address the miseries of the overwhelming majority of the poor, that is those suffering from hunger, the aged, the ill, and the victims of natural and/or man-made disasters. Credit is of little, if any, use for these sub-groups of the poor. Their immediate needs center around securing such basic needs as food, shelter, and medicine.

Finally, even the most successful micro-finance programs would fall short of addressing the structural sources of inequity, poverty and hunger, both among and within nations. Obviously, dealing with the inequity bred by these economic and social structures requires a bolder, broader, and more imaginative programme of action.

Muslimedia: January 16-31, 1999