Microcredit is effective for women in self-employment

from The Hindu

D. Murali & G. Padmanaban

When working on poverty eradication, the first message that we must communicate is that poverty is not hopeless, says Mr Eric Thurman, co-author of ‘A Billion Bootstraps’ (www.tatamcgrawhill.com).

“People should not be trapped in horrible lives of deprivation. Microcredit can help. Currently more than 100 million families around the world are improving their lives thanks to microcredit. That number needs to be many times larger. The number is growing, but the acceleration can and should be much faster.”

Think about the poverty at its most basic level, he urges. “Economic poverty has only two root causes, a lack of income or a lack of assets. Some people are so poor that they lack both. Poverty diminishes as incomes or assets rise.”

The essential of ‘how to combat deep poverty’, therefore, is to help people increase their incomes and assets, explains Mr Thurman, during the course of an e-mail interaction with Business Line.

“Microcredit is a proven way to increase income. Anything else that will increase income is also a good idea. At times, creating factories has added to people’s incomes. Educating children improves the likelihood that they will earn more as adults. Skills training can help adults increase their income. You can also reduce poverty by helping people acquire assets. In Central America I know of a program that helps peasants gain ownership of small plots of land to farm. That small asset brings tremendous advance in the standard of living of the family.”

Excerpts from the interview.

What is microcredit? How relevant is to current economic situation?

The idea is actually quite simple. Compare finance for extremely poor people with financial systems you use personally. You and I depend on reliable banking services. If we could not save and borrow, it would seriously inhibit our opportunities to make income. It would also limit our purchasing power. In general, without banking, we could not live nearly as well. Microfinance is simply bringing banking services in smaller amounts to people who have never had access to any kind of financial services. This enables them to begin improving their lives.

What is the difference between microcredit and microfinance?

The overall term is microfinance. That includes all kinds of financial services from savings to loans or insurance. Microcredit usually refers to just the tiny loans. It is a popular term because most programs have a lending program as the primary activity.

Why do microcredit programs always have to target women?

Programs do exist that predominantly serve men. Most lending programs include some men. There are many good reasons, which we discuss in more detail in ‘A Billion Bootstraps’, why women are the majority in microcredit programs.

One reason is that when paying jobs are available, they tend to go to men. For women to earn money, they often must rely on self-employment. That is where microcredit works especially well. One secret of success for microcredit programs is that borrowers often form groups to support one another. Women seem more inclined to work in groups. Finally, experience shows that women have higher repayment rates on their loans than men.

What is ‘intelligent giving’, a phrase that finds mention in your book?

Compare giving to investing. Imagine two people who decide to purchase investments. One sees an equity he likes, and decides, on that reason alone, to buy stock in the company. The other person looks at a variety of companies and decides to invest in the one that, after analysis, appears most likely to produce a good return on investment. The intelligent investor is the second person, the one who makes decisions based on results.

The same is true with giving. Some people are very impulsive about giving and make donations based on little or no information. This is wild speculation, whether it involves purchasing stocks or making donations. An intelligent giver, on the other hand, is someone who decides where to put his money based primarily on the results that will be achieved. This kind of thinking can be described as looking for a social return on investment.

How to reach people / community who still do not have access to microcredit?

You have two primary options: either encourage an existing microcredit organisation to expand into the community, or start a new lending program. India may be the best country in the world for either approach. Microfinance in India is growing rapidly with many excellent institutions offering services. There are plenty of well-established microcredit groups in India. Spend time with them and you almost certainly find ways to get a program running in your community.

India is a world leader in microfinance. Not only does India feature a large number of excellent microcredit organisations, it is also a world leader in sophisticated ways of financing growth of microcredit programs. Microcredit in India is attracting not only large donations, but also investments. Many lending programs in the country are such high quality and size that they are investment grade.

Microcredit works well in developing countries but not so in developed countries. Why?

Two reasons come to mind. There may be others. One factor is that the wealthier a country, the more regulations control of business activity. In many countries, if you want to sell fruit or vegetables on the street, all you need to do is put out a table with food on it and you are in business. Try doing that in Paris or London. Authorities would come after you asking, “Where is your licence? Has your merchandise passed through health inspection? Show your tax records?” The more extreme regulations in wealthier nations create large barriers for micro-businesses.

Another reason microfinance is less common in prosperous countries is that it takes so much more money to rise above the poverty line. In the US, a small family needs an income of more than $30,000 per year to move above the poverty line. A loan of a few hundred, or even a few thousand, dollars is not going to throw off that much profit. A business that produces $30,000 or more in net income per year is probably not a micro-business. It would be more of a small business. Those businesses certainly need and deserve financial services, but usually at a larger scale than microfinance.

Microcredit organisations charge higher interest rates than normal banks? How is it justified?

It is costly to deliver and service small loans. Keeping good records of a massive number of tiny transactions makes tracking repayments an expensive process. The amount charged for interest and other fees needs to be enough so the lending program can pay its own costs, and in some cases, a little extra as yield to those who are loaning funds to the organisation.

In fact, there are often two completely different types of loans involved in microcredit. In many cases, the money offered to poor people as loans comes from several sources. The organisation making the loans probably has an amount it has accumulated from previous donations. In addition, it may be taking bulk loans from the government or investors. Those loans require interest payments to those who provided the funds. That interest cost must also be calculated into the amount of what is charged to the small borrower.

Are these charges to poor people usurious or abusive in any other way?

Generally not. Having talked with borrowers all over the world, they tell me that their first concern is availability of loans. That is a far bigger concern for them than the cost of the loans. If the rates charged seem high, remember that the only other way to borrow, if any is available, is far worse, such as a money lender who charges 50 per cent interest a day or someone who requires extreme collateral such as putting a family member into bonded labour!

How can the common public initiate or support or contribute for microcredit program in their community?

The best way to help will depend on the community. Each situation is slightly different. I suggest talking with local government officials to make certain the regulations and enforcement are friendly and encouraging to micro-businesses. In many countries, the government provides desirable space for open air markets so micro-businesses can have stalls to sell their products. Further, be sure to talk with microfinance groups already working in your community, or nearby, to find out what they suggest would help to expand the availability of financial services for poor people.

What are the situations where microcredit doesn’t fit?

There are very few places where micro-business does not occur. If someone does not have a salary-paying job, they still must make income in order to eat and feed their family. This usually means self-employment, which is essentially the starting point for micro-business.

The only time microcredit does not work, from my experience, is when you have an extreme disaster such as war, a flood or earthquake. Even then, it is surprising how soon after the tragedy that micro-loans can be helpful. The other situation when microfinance fails is when government regulations are hostile toward it.

What is the role of World Bank in promoting microcredit? How effective are its initiatives?

The World Bank loves to talk about microcredit. It set up a division called the Consultative Group to Assist the Poor (www.cgap.org) that publishes extensive information about microfinance. Unfortunately, the World Bank puts very, very little actual funding into microfinance. It should do more.

Is there anything that corporates can do for promoting microcredit?

Oh yes. They can help and it will ultimately improve their businesses as well. It is good corporate citizenship to help reduce poverty in the community where you conduct your regular business. Plus, as you reduce poverty, you increase the number of potential future customers as well.

Imagine if you were a regular bank, how could you grow your business? A well run bank has many strategies to increase business, but now several Indian banks have a new and very progressive thought: win new customers from those who are currently unbankable. By helping people who have never had financial services get them, some will continue advancing and eventually become regular customers of the bank.

While I cannot speak for banks that are supporting microcredit in India, I am optimistic that their supporting microcredit will eventually prove to be good for their main business. ICICI Bank, HDFC Bank, Citibank, and others are actively supporting microfinance in India. Non-banking corporate are as well.

Can microcredit be more effective when supporting factors such as infrastructure, education (in the locality), health (of people), and marketing (of the products/services of the beneficiaries) are given due attention? Should government policies be better oriented towards microcredit?

Poverty and wealth involve more than money. You will not regard yourself as prosperous if you do not also have freedom or good health. All of the issues you list impact prosperity or the lack of it. Government can help with many of the factors. Private efforts can help with many. You are correct in suggesting that one way government can help is to assure that its policies are encouraging for microcredit.

Do countries need to establish regulatory bodies for microcredit? Why or why not?

Financial transactions need regulation to prevent abuses. In that sense, microfinance is no different from other parts of the economy like the stock market or real estate. Regulations should be helpful, not discouraging to microfinance. In many cases, the regulations that work best are simply to include microfinance under the standard banking laws, but making helpful exceptions where appropriate.

This is in contrast to some countries where microcredit lending programs are not allowed to accept and manage savings. Unfavourable or the absence of enabling regulations will inhibit poor people from having access to financial services that would help them. China is an example of a country that should have massive amounts of microcredit, but because no enabling regulations exist, microfinance is practically nonexistent in that country.

Your views on sub-prime crisis.

One important lesson to learn from the sub-prime crisis is that it is wrong to make loans that the borrowers will not be able to repay. Giving housing loans that are bigger than borrowers can afford was wrong and we are seeing the grim consequences. Microcredit usually does just the opposite.

An important test for giving a micro-loan is whether the borrower can pay it back. If he cannot, then the loan will not accomplish its purpose of improving the borrower’s financial condition. Another important contrast between the sub-prime crisis and microfinance is that sub-prime loans were for purchases and microfinance loans are nearly always for income generation.

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Bio:

Mr Eric Thurman, CEO since 2001 of Geneva Global that supervises grant-making to more than 100 countries, mostly in the poorest half of the world, directed microcredit programs in 30 countries previously in his career. Recently named CEO of a new foundation which will manage grants both in the US and worldwide, he headed two leading microcredit organizations, Opportunity International and Hope International, before joining Geneva. The Opportunity Network works with microcredit programs in Nagpur, Chennai and Bangalore. Prior to his career in philanthropy, Thurman owned one of Chicago’s largest television production companies, Renaissance Video. Of the book on microcredit, ‘A Billion Bootstraps’, which Mr Thurman has co-authored with Mr Phil Smith, the Nobel Peace Prize winner Mr Muhammad Yunus said, “They have demystified microcredit and given it a human face, as seen through the eyes of two businessmen who are serious about achieving social objectives such as the end of poverty.”