Bankrolling the poor

Microcredit brings banking services to the poor. It enables self-employment rather than entrepreneurship. Photo: Syed Zakir Hossain

Around $2 billion is currently in circulation through microcredit in Bangladesh. Since introduction, its spread has been prolific and its uptake legendary. The concept of extending banking services to the poor is now accepted as commonplace, where as only a couple of decades ago, many believed that the poor would not be creditworthy. Without a doubt, the poor have proved their trustworthiness and they are now seen as a potential marketplace for the rest of the world.
Microcredit is widely seen as a means of reducing poverty. The general assumption is that by lending money to a poor person, they are able to start a business, become an entrepreneur, be self-sustaining and may even employ other people in time.
It is commonly accepted that there are some problems in the system, particularly where microcredit is used for consumption and where interest rates are set too high, and that there is the need for tighter regulation but properly deployed, implemented, and managed, microfinance can build economically viable micro-enterprises.
The success of microcredit schemes has so far been measured largely by repayment rates and these are impressive. The largest microcredit lenders in Bangladesh regularly show repayment rates in excess of 90 percent. So do we see the evidence at a national level of the benefits that microcredit brings?
Donor funded and supported poverty reduction programmes are always accompanied by in-depth measurements of progress against a number of objectives and as with the repayment rates, these are invariably shown favourably for microcredit schemes. Many poverty reduction programmes run only for a few years until the next trend comes into vogue and as such, it can be difficult to assess real progress at a national level because the numbers of recipients involved is not sufficiently significant to make a change at the national level. This is not the case for microcredit.
Bangladesh has a very well established microcredit industry that has been operating for decades and reaches millions of people. Indeed microcredit is available in even the most remote and distant parts of Bangladesh, with thousands of NGOs running schemes and no apparent shortage of supply or demand. Surely at some point, it must be possible to correlate individual programme results with national aggregate results on poverty reduction.
Today, about 40 percent of people in Bangladesh live on less than a dollar a day -- that is about 56 million people. There are also millions of existing microcredit beneficiaries. If we take a conservative estimate of only 10 million borrowers, then this would represent about 16 percent of the total very poor population. If microcredit, by reaching 16 percent of the very poor, is really able to effect poverty reduction, then surely we should be seeing a corresponding decrease in the national poverty statistics.
From 2000 to 2007, Bangladesh has made progress towards poverty reduction at a rate of about 1 percent a year, and most of this progress is considered to come from remittance. Why can we not see the benefit of all these borrowers coming out of poverty at a national level?
In the US, approximately 11 percent of the population are entrepreneurs: it is slightly less in the UK and less again in Europe. If we were to assume that a similar percentage of Bangladeshis were entrepreneurial, then the microcredit lender statistics would indicate closer to 1.6 percent poverty reduction. Whilst still much higher than we see at a national level, maybe we are starting to see more realistic numbers by considering it in this way.
Microcredit brings banking services to the poor. Enabling the poor to have access to banking facilities is an important success but equally important is the acceptance that it does not automatically reduce poverty and we can see this very clearly at the national level. At best in many cases, microcredit enables self-employment rather than entrepreneurship and offers the recipient the chance to eek out an existence of continued uncertainty and difficulty.
Financial independence, along with education, clean water, and an access to electricity, are all components that give the poor a voice and enable economic justice. It is important to recognise that microcredit has not created economic justice.
Importantly, accepting the limitations of microcredit and the boundaries within which it works effectively will enable other methods of poverty alleviation to flourish. The search for a solution to poverty alleviation did not end when microcredit began and indeed, if we are to compare an economy of poverty with a developed economy it is clear that there is no single solution. Rather, a whole range of measures are necessary to create sustainable and robust economic activity at the bottom of the pyramid.
Throughout Bangladesh there are many subsistence farmers. There are still practices of exchange and bartering -- activities requiring no transaction with money. Banking in these circumstances is generally seen as an expensive luxury. At the very bottom of the pyramid, where the people are hungry for part of the year and where the community has insufficient purchasing power to support new entrepreneurs, there is a need for employment. The production of goods or services, which are sold outside the direct community, in the wealthier cities in the country or exported, offers a way of expanding such economies.
Employment is required within the communities in order to bring economic benefit to the whole community and ultimately to support the growth of microcredit entrepreneurs that it will likely bring. Bangladesh is ideally placed for employment creation throughout its rural areas. A relatively small country with high population density is the ideal combination.
Throughout history, it has been the creation of employment through capitalism that has created the biggest reductions in poverty. Jonathan Lewis, CEO Microcredit Enterprises, in a speech at Stanford University in May suggests that we think only of the Industrial Revolution in the 19th century probably the single biggest poverty alleviation programme of all time. Within our own generation, Chinese capitalism has lifted some 300 million people out of rural poverty.
Accepting the limitations of microcredit is the first step in considering poverty alleviation in a wider sphere. Whilst both the Industrial Revolution and the current Chinese capitalism led to notable exploitation and greed, the lessons of history teach us that the long term results are overwhelmingly positive. If we can combine capitalism with social business, then potentially, we could have the most powerful combination, drawing on the strengths of capitalism to create positive social impact.
We should be able to accept that the private sector has not only a role but also an integral place in poverty alleviation and that this would be supported by microcredit rather than driven by it.
The challenge we face currently in Bangladesh is in engaging the private sector in rural employment creation -- in demonstrating to the private sector that the benefits outweigh the risks and in creating sufficient incentives.

The writer is the chief executive officer of Hathay Bunano.


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