Micro credit –Is it answer to

eradicating poverty?
By (gi)ULLU
-I know
(“gi” Stands for Global Indian)
Micro Finance in News BUZZZZZ…
…
• Nobel Peace Price for 2006 was awarded to the Grameen Bank in
Bangladesh and its founder Muhammad Yunus, a pioneer of the micro credit
movement.
• ICICI Bank plans to make loans of as little as $100 to 25 million rural clients
in five years. Indian Finance Minister P Chidambaram too is a supporter of
micro credit.
• The United Nations designated 2005 as the International year of Micro credit
• Dubai-based Legatum Capital announced it would pay $8.4m for a minority
share in Intellecap, an Indian adviser that focuses on microfinance
• Suddenly, it appears, everyone is jumping on the micro credit
bandwagon.
• Core concept of Micro finance
– that the poor are bankable,
– that women are better borrowers than men and
– that lending is best done to groups, so that peer pressure ensures repayment
 Micro Finance and India
• Leading Indian microfinance groups
– SKS Microfinance (Sequoia, the Silicon Valley venture capital company that backed Google, invested $11.5m in SKS Microfinance )
– Share
– Spandana
– Basix
• Two most important models of microfinance delivery in India today
– the SHG Bank Linkage Programme (SBLP)
– the Microfinance Institution (MFI) model
• Number of microfinance borrowers in India 36.8m (2006)
• Outstanding loans distributed by Indian microfinance institutions
increased 76 per cent to about $766m in 2006-2007.
• Repayment rates of about 98 per cent
• http://ifmr.ac.in/cmfMSUsdc/index2.html
 So what is Micro-Credit ?
• Credit of <$100 USD for self employment.
• UN on it’s website declares Micro-Credit
as loans which “micro entrepreneurs use
,as small as $100, to grow thriving
business and, in turn, provide their
families, leading to strong and flourishing
local economies"
(Hmm!!! Is this the case ?)
• Challenges
– Companies which are looking for short term
goals will be disappointed
– Lack of experience
 Micro Credit - really an effective
tool for eradicating poverty ?
• In the current global economic climate, micro
credit as a poverty alleviation tool, by itself,
is analogous to giving a man a fishing pole,
and telling him to go fish--in the wake of a
giant trawler whose net spans the horizon.
– Micro credit often yields non-economic benefits such
as increasing self-esteem and social cohesion, and
empowering women.
But, that is not enough; the key issue is whether
micro credit helps eradicate poverty.
Point of View about Micro
Credit –
read at your own risk
 Features in Micro-credit
• High Interest Rates – generally greater than
20% and 100% interest rates not unheard of.
(Example:Grameen Bank, for example, charges
20 percent on income-generating loans )
• Lending Money to women –Is it women
empowerment ?
• micro credit, at best, can lead to micro-
solutions
• Medium size loans available but no takers.
Why ?
 Some Points
• The problem lies not with micro credit but rather with micro enterprises

– The United Nations' declaration that micro entrepreneurs use loans to grow
thriving businesses leading to flourishing economies is hype

• Entrepreneurs Vs Labor

– Even in developed countries with high levels of education and infrastructure,

about 90 per cent of the labour force are employees rather than
entrepreneurs

• Skills

– Self-employed poor usually have no specialized skills and often practice

multiple occupations

• Scale & Productivity

– Many of these businesses operate at too small a scale.

– A study points that the median business operated by the poor has no paid staff; most
of these businesses have very few assets as well.
– With low skills, little capital and no scale economies, these businesses operate in
arenas with low entry barriers and too much competition; they have low productivity
and lead to meager earnings that cannot lift their owners out of poverty.
 Channels in India
• Channels for delivering micro-credit
– Self Help Groups (Ela Bhatt)
• Andra Pradesh is a good example where SHG’s have been
very active. SHG’s acts a conduit for Micro Finance Channel
– Lending has to be supported by skills up gradation
and support systems

• ICICI Banks users

– Sugar companies
– Seed producers
– Input companies
– NGOs and micro credit institutions
 Alternate Idea
• Solution
– Jobs, not micro credit, is the solution- Example China

– Rather than lending $200 to 500 women so that each can buy a
sewing machine and set up a micro enterprise manufacturing
garments, it is much better to lend $100,000 to an entrepreneur
with managerial capabilities and business acumen and help her
to set up a garment-manufacturing business employing 500
people

– The business can exploit economies of scale, deploy specialized

assets, and use modern business processes to generate value
for both its owners and employees