[Virginia] A Movement for Microcredit

From The Cavalier Daily

Inspired by a semester in Argentina, fourth-year College student promotes third-world economic policy

Jessica Van Atta, Cavalier Daily Associate Editor

Fourth-year College student CynthiaMangum traveled to Argentina in spring 2005 for a semester abroad and discovered something that compelled her to extend her stay through the summer. This "something" was microcredit. At the end of her semester course, she was required to do a field study, and Mangum chose this as her subject.

"I was studying a lot of the secondary impact on the family and the spillover effect into other sectors of society," Mangum said.

Microcredit falls under the general heading of microfinance, according to Mangum. Basically, it is a way to lend money to people of poor standing who would not otherwise qualify for a loan. The official definition established by the Microcredit Summit of 1997 defines these programs as offering "small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families."

Mangum said in developing countries many people may have talents or abilities that can be used in a market but do not have the necessary capital to fund their trade.

"They don't have access to financial services," she said.

Without access to funds, according to Mangum, these people cannot create their product because they cannot acquire the supplies they need.

Mangum described microfinance as an institution that benefits both the clients and the business.

"There are three billion poor people, which is a huge untapped market," she said. Microcredit "is not charity -- it is giving them something to lift themselves out of poverty."

According to Mangum, one way by which microcredit helps people is by advising them on how to keep inventory on their materials and sales to help their businesses grow. Mangum said this success also helps many developing countries as a whole, especially where the informal sector is over half the national economy.

Sociology Prof. Rae Blumberg has worked with microcredit in 15 different countries. She elaborated on how microcredit works and what its impact is on society.

Blumberg said microfinance emerged in the late 1970s and early 1980s as a new way of trying to get resources to the poor in the third world.

"By that time it had already been known that the types of credit programs for them were failures," Blumberg said. "These were subsidized credit -- which sounds like a great idea. They used low interest, but all failed because they had flaws."

Blumberg said in these failed programs, credit would trickle up, meaning the money ended up mostly in the hands of the more privileged instead of the extreme poor. She said giving money a lower-than-market rate of interest was a giveaway.

"Money was not captured by the needy target group, but rather the better off," she said.

She added that those programs benefiting the wealthier citizens had "showpiece" poor people, which were made visible during program evaluations so the programs would be continued.

Another problem with subsidized credit, according to Blumberg, is the wealthier people in the programs who would test whether donors were serious about punishment by withholding payments to see if anything happened.

"These people found out that the programs were essentially charity and so they stopped paying," Blumberg said. "The abysmal repayment rate was not worth it any longer, so the programs were terminated."

But the next credit projects succeeded.

The first organizations to take on microcredit were the Grameen bank, founded by Muhammed Yunus, and Accion.

"Yunus believed the poor was credit worthy and that there was an unmet need," Blumberg said. "He figured a system with money he himself borrowed, and the poor repaid. He put together solidarity groups of five people who mutually guaranteed each other's loans."

Blumberg said these are short-term working capital loans, and they may be somewhat subsidized.

"It opened a whole new horizon for getting credit to the poor," Blumberg said.

Mangum and Blumberg both described how microfinance impacts society. They said it has a big effect on the family, especially on the woman's role.

"Women tend to be better spenders," Mangum said.

Mangum said with their financial success, women have a greater say in the family and spend their money on what they want, which often includes taking care of children, food and household objects.

Blumberg has a gender stratification theory which states that enhancing a woman's economic power not only improves her own standing in her family and in her community, but increases the "wealth and well-being of nations."

While microfinance may seem a subject primarily of interest to economic and business-oriented people, it has drawn in people from other disciplines such as Mangum and Blumberg. Sociology and psychology are important aspects of the institution, according to Darden graduate student Michael Kuntz.

Kuntz said the interdisciplinary characteristic of microcredit has both positive and negative results. He explained that microcredit can draw the interest of many different kinds of people at the University. In fact, Mangum and Kuntz have set up a new club at the University about microfinance, and hope to see and talk to people from all sorts of academic backgrounds.

"Cynthia [Mangum] really wanted to raise money for a particular microfinance fund in Argentina, where she worked over the summer," Kuntz explained. "That was her motivation."

Kuntz thought of making this idea more of a network -- something sustainable that would continue after both had graduated.

"It brings people together, such as Darden and undergraduates and professors," Kuntz said. "This new network, besides bringing people into contact with each other, exposes people to something outside the college bubble and also helps students get involved, without them having to 'reinvent the wheel every year.' The path is already set."

There is, however, a negative side of microcredit being interdisciplinary, according to Kuntz.

"You have a 'looser' subject," Kuntz said. "Since so many subject areas are involved, there is overlap and you can't apply the same set of tools for analyzing as in one subject area."

Kuntz said he is interested in working with microfinance on a long-term basis.

"For me, it's a career interest," Kuntz said. "I want my work to have some sort of purpose -- microfinance is one of the few areas that addresses poverty in emerging markets in a way that's not a charity."

As Kuntz explained, microcredit does not provide handouts of money, but is an actual business that profits the people who are doing the business as well as those accepting the loans.

"It's a great relationship to set up between the business and the people -- it gives the people respect," Kuntz said.

Mangum agreed that microcredit stimulates positive relations.

"You can see the difference it's making," said Mangum. "There are banks who are lowering their interest rates because they are competing to serve these people, for their business."

As stated by Blumberg, microcredit has proven "one of the fastest and most successful developing business practices."