Human Rights analysis
Right to Freedom from Poverty
Policy & regulations in reducing impoverishment
Fayazuddin Ahmad
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A village meeting of Grameen Bank borrowers. |
Decision makers during the last decade (predominantly) articulated fervour towards the role of entrepreneurship by means of micro-credit to breed economic growth and development. To understand development and formulate apt policies to advance development, it is essential that the dynamics of micro-credit based entrepreneurship in these environments be better understood. It was assumed (sometimes taken for granted) that access to credit of impoverished people would lead them to become entrepreneurs at the micro level and that would contribute, first to reduce impoverishment and secondly in ensuring expected growth for development.
Since the '50s of last century both governments and international development partners subsidised credit/micro-credit delivery to the small scale farmers of countries in the global south. This model has been strongly criticized from the early '70s and gradually international development partners and other resource providers switched interest from state intervention to market-based solutions. They forgot to count important non-finance factors like social bonding, power relations etc. which was later smartly capitalised by the Grameen Bank (GB) transforming this to “peer-group monitoring” mechanism to manage the risk, an excellent example of making economic use of the social collateral.
The GB in Bangladesh became a model to be followed internationally using micro-credit as a poverty reduction strategy. “Poor always pay back”was the key assumption of Professor Muhammad Yunusarchitect of the GB. And when it comes to women the return rate is almost 100%. GB Model of credit delivery begins with forming groups of women from similar economic background. This would work as a mutual, morally binding group that guarantees return of loan. Membership is restricted to people who has assets less than half an acre of land. Loan is a “product” offered by the GB as a financial institution. During one's tenure as a Member it is mandatory that she saves and the borrower must pay a set percentage of the loan amount in the group fund and the loan is ultimately the responsibility of the group.
After the natural disaster early this millennium the GB redesigned their model Grameen Generalised System (GGS) progressing from the GB classic system. Two other loan products i.e. housing and higher education with the former, basic, were introduced. If any borrowers face any difficulty repaying the basic loan installments as per the schedule, GGS offers an alternative opportunity in the form of Flexible Loan, a way to renegotiate the arrangement with certain conditions.
Empowerment of women has been one of the key selling lines of the GB since its inception. In a research conducted by Rina Sen Gupta and Anne Marie Goetz it has been shown that while women are getting the loans from the Grameen Bank and similar organisations, a 'significant portion' of those loans are directly invested by male relatives (although women bear the liability for repayment), and in only a few retained significant control over the business that were in their names reinforcing existing role of the women set by the patriarchy. Infusing capital into house-based enterprises keeps women out of the mainstream waged work.
One of the other evident adverse effects on women is their continued marginalization in the informal sector. Promoting women's income generation may be doing well in augmenting their incomes but in fact it could serve up a check on their worker militancy and societal conflict rising out of gender discrimination. GB did not face up to patriarchal social structure rather played safe with existing norms.
One of the inherent assumptions of the GB that everyone should be self-employed as they advocate is quite opposite to the history of economic development in any part of the world. GB's principle of credit as the only means of forming enterprises is absolutely defective in absence of management and entrepreneurship. And the most alarming is the idea that Micro-Finance Institutions (MFIs) could be self-sustained.
One of the strong criticisms of the GB is their high interest rate which in the long run puts people in the vicious cycle of debts leading towards a much worse situation compared to the one they were in before taking the first loan. It is obvious that questions will be raised when the fund (from which the loan is disbursed) is hugely subsidized from both government and non-government sources in addition to significant support from the development partners.
In 2005 the United Nations declared the year to be International Year of Micro-credit inviting “Governments, the United Nations system, all concerned non-governmental organizations, other actors of civil society, the private sector and the media to highlight and give enhanced recognition to the role of microcredit in the eradication of poverty…” (UNGA Resolution 53/197, 1998)
The GB is primarily governed by the Grameen Bank Ordinance, 1983 (Ordinance no. XLVI). In its preamble it is categorically mentioned that the GB is established “to provide credit facilities and other services to landless persons in the rural areas…” In countries like Venezuela, Mexico, Uganda, Philippines and Nepal governments have already enacted relevant laws for micro-credit. Pakistan has enacted legislations to set micro-finance banks. Recently in forms of Grameen Bank (Amendment) Ordinance 2008 GoB expanded GB's jurisdiction from rural areas to all over Bangladesh. Since 2006 we also have the Micro-credit Regulatory Authority Act issuing license to MFIs.
Pro-people policy and regulations can construct a tolerant environment for international investors to make just investments in local micro-credit institutions. Central banks should initiate exhaustive research on microfinance markets to categorize constraints on their sustainable growth and share findings with policy makers and politicians at the central, state, and local government levels.
Impact of the GB requires to be judged in terms of its role in humanizing lives of women along with the perspective of development economics. After world-wide recognition of the model now is the high time to analyze it, evaluate it for its better performance and serving its clients better. Call for a sustainable credit service is apparent. But so far there is no telling how to achieve that. One may disagree that it is better if there is a way into credit services even if they pay higher interest rate if the alternative is having no contact at all.
Process with equipped mechanisms should be prepared to monitor that the micro-credit service providers are providing services at the wanted level. This should also monitor whether the profit, earned, is truly used for the deliberated intention of service extension. Government must play a significant role in developing capacity of these institutions, monitoring market, drafting regulations and policies to ensure access to credit. Policies and regulations should be monitored to ensure their implementations.
As long as the clients are engaged mainly in few traditional enterprises- risk will be high if alike products supplied only for market which is small and by far absorbs, losing ground of probable prosperity. Ensuring updated market information and networks is also very important. Credit should be attached with viable skill expansion. Cultural alteration being more gender-sensitive should be indispensable to change the attitudes that are disinclined culturally to get into non-traditional ventures which are more worthwhile.
The financial markets are dissimilar from others as they profoundly depend on information and generate externalities that may not be effortlessly understood by market participants. Markets depend solely on the production and processing of information, absence of which may result in underinvestment in obtaining information. Feasible projects will remain underfinanced as an outcome of this gap.
Microcredit, following the GB model, is not a cure-all. It becomes more important to implement the GB model in accordance with the will and wish of its source of operation its clients the people. The challenge is now to understand the people, developing a relation, decide on their appropriate role, focus on sustainability from the services perspective, being open to constructive criticism, ready to learn from experiences and respond to these challenges to reach to its mission of reducing impoverishment.
The writer is Advocate-Researcher; as a Chevening Scholar recently completed his 2nd LL.M. in International Development Law & Human Rights from the University of Warwick, UK.
