Understanding international development

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2.2 Micro-credit

In Chapter 11 ‘Interventions to promote livelihoods’, Case Study 4 considered how micro-credit can be used to promote livelihoods amongst low income women in the USA. Micro-credit has been regarded as a successful mechanism for income generation and poverty alleviation, particularly for women. However, there is also much debate about it and its supposed success has come under some criticism.

In Activity 10, you can listen to a podcast of a programme, originally broadcast on the BBC World Service in 2011, which discussed some of the downsides of micro-credit schemes. Search for recent information about micro-credit on the internet and to compare what you find with that podcast.

Activity 10

Timing: 1.5 hours

Question 1

Listen to the podcast on micro-credit. While listening to the podcast make notes on the arguments for and against micro-credit.

Skip transcript: Micro-credit (19 minutes)

Transcript: Micro-credit (19 minutes)

So what’s just happened is the loan officer has asked the group if they approve this new loan for a woman called Khala, it’s 6000 rupees, they’ve all shouted out that yes, they do, and now the loan is being handed over. Khala is one of the millions of women around the world who have taken out a small loan through microcredit schemes. These loans of around $100 were once hailed as a solution to global poverty, but in the Indian state of Andhra Pradesh the once booming microcredit industry is on the verge of collapse. I’ve come to India to find out why, and also to examine the mounting evidence that microcredit is not the silver bullet for eradicating poverty it has been sold as. We’ve arrived now at what is a big meeting, 300 groups represented here and the idea is that they are all meant to be talking about the crisis in loan giving, it’s a sea of coloured saris and dark black hair tied back into buns and ponytails. Under the microcredit system pioneered by the Bangladeshi economist Mohammed Yunus three decades ago, impoverished women are given loads to put into small businesses, say livestock, or a tea stall. The aim is to help generate their own income so they can eventually lift themselves out of poverty, and because the loans are mostly given to groups of five women who all guarantee each others debts, repayment rates have traditionally been extremely high – until now. In Andhra Pradesh where a third of India’s microcredit customers live, loan repayments have dropped to a fraction of their normal level, the reason – tough new legislation for microfinance institutions prompted by a spate of suicides blamed on over-lending. I’m walking through the home of Lalitha, it’s a very plain cement building and inside is her mother, Lakshmi, and her father. Lalitha killed herself because Lakshmi and her father couldn’t pay their microfinance debt, that’s what Lakshmi says. Lakshmi (translated) We made her vomit everything she’d taken, and we found she’d taken poison. Madeleine Morris Lalitha’s grandmother found the 18 year old girl first. She had been left alone in the house while her mother Lakshmi had gone to borrow money to pay off some of her three loans, worth around$1000, more than 60 times their weekly income.
Lakshmi
I went to my elder daughter’s village to get the money, I got a call from the collection agent and I told them I was coming back with it, and I got on the bus. Later I got another call saying your daughter has taken poison. A year earlier a man approached us and told us to form a group of five so we could get a loan. He told us to say we wanted to set up a vegetable business so we could get the money, he said ‘pretend you’re doing this for a few weeks in case my boss checks’, so we did what they said.
But Lalitha’s parents didn’t use the money to set up a business, instead they paid for school fees and their elder daughter’s wedding. They quickly fell behind in repayments. Shamed, their daughter took her own life. The local police investigated and found over-lending was behind Lalithas suicide and others in the district, but didn’t blame any one microcredit institution.
But despite all the controversy at the borrowers meeting women are lining up, desperate to get new loans. Today’s gathering is being run by SKS, India’s biggest microcredit company. Since the State government imposed tough restrictions on lending in response to the suicides, new loan approvals have slowed to a trickle, and a handful are being are being handed out today and Vikram Akula, its founder, is here to oversee the process.
Vikram Akula
Anytime there’s a suicide that happens in any family it’s a tragedy, and certainly when it happens to one of our members or any microfinance client, it’s a tragedy. But in our case we work in 100,000 villages with over 8 million clients, and never in our history has anything like this even been suggested. This is not to say over indebtedness doesn’t sometimes lead to suicides. In this state there have been farmer suicides that have happened because of drought and crop failure, and you know, perhaps even in some of these instances debt has contributed to this.
Dr Akula is in many ways the pin-up for India’s microcredit industry. Last year when he floated SKS on the stock exchange he raised $350 million dollars for the company, and in the process took home 13 million for himself. His pioneering vision of microcredit for profit is laid out in his new book entitles ‘A Fistful of Rice – My Unexpected Quest to End Poverty through Profitability’. Since microcredits troubles in Andhra Pradesh began the American-educated Indian has virtually stopped giving media interviews, so I feel lucky to be able to sit down with him for half an hour in the shade of a tree, not far from his borrowers meeting. Vikram Akula See, I spent the early part of my career working in the non-profit microfinance world, and basically in the filed where we were giving out loans, and what happened in the non-profit world is you simply don’t have sufficient funds to reach out o tragically the vast number of poor households we have in a country like India, and it seemed to me we had to find a way to bring capital into as many poor households as possible. Now, running microfinance in a commercial way, in a for-profit way, allowing you to tap into the capital that exists in the capital markets, was in fact the solution that I thought is a way that could make this happen. And if you look today we’ve been able to do that, we’ve mobilised you know more than 4.5 billion dollars of loans without any government subsidies, and put this into the hands of poor households. And we were able to do that because we run like a business, we have for-profit investors. Madeleine Morris So does your duty is not then become to your shareholders rather than to the people that you’re supposed to be helping? Vikram Akula We don’t think there necessarily has to be a conflict between shareholder interest and those of your customers. The way we think about microfinance is not extracting from a household that we lend to, but rather doing what’s best for them which means – finding a loan size that’s best for them, and what’ll happen is gradually over time, as the person moves step by step up the economic ladder, she starts taking larger loans, she starts doing other products such as insurance and so on, and that’s where you create shareholder values. Madeleine Morris Having seen the tragic side of debt with Lalitha’s family, I was keen for Dr Akula to show us an example of where microcredit has been successful. So we’ve come now to one of the villages where SKS does some of its work, Vikram Akula is certainly a very big hit, we’re being followed around by a whole tag team of young children and adults as well. So we’re in now one of the customers of SKS, she sells cooking utensils all made out of steel, pretty much everything you’d need for cooking and eating. There’s platters here, and we’ve got some kettle down here, and se certainly looks very well fed and happy. Vikram Akula I asked her which is her highest selling thing, and she’s pointing to these plates here, and they’re basically steel plates that you can see. So this is 150 rupees for two of them about$3US … I asked her if she’s benefitted from the work of the lending programme that we do, she says she’s benefitted quite a bit, with the investment of capital she’s been able to make the shop much larger and as a result it has become very profitable for her.
But not every micro-borrower who gets a loan turns it into a successful business. In fact in Andhra Pradesh rather than helping client to make money the microcredit industry has been accused of trapping some people in a cycle of debt by lending them more than they can repay. And that issue of over-lending is nowhere clearer than here. I’ve come to the other side of Andhra Pradesh now, it’s a village with a large community of Dalits, they used to be known as Untouchables, and they’re the lowest caste here in India and they do still tend to be very poor. And we’ve come here because a local microfinance organisation did a survey of the number of loans. Some women in this village have eight loans and the average debt of every Dalit household in this community is $1700. It really is a huge amount, particularly because many of the women’s’ livelihoods were recently wiped out by floods. Frankly they’ve got no chance of paying it back. We’re in a group. One lady’s come up to us and she wants to tell us her story. Village woman We’ve got too many loans, eight of them from different people, and we don’t even have a proper toilet in our house. We currently owe$1500. We earn $3 a day, food prices are rising and we can’t afford to educate our children. With the loans, the cost of food, the lack of sanitation, the lack of work, we can’t cope. Madeleine Morris I can tell it’s really upsetting her. Her eyes are starting to well up a little bit. Well thank you very much for speaking with us. I’ve spoken to industry insiders who’ve told us some microcredit companies have been so eager to expand they’ve actively targeted villagers who already have loans, because they know they’ll be open to taking more. The insiders also told me the lenders frequently approve loans they know aren’t going into building businesses. I’m just walking in to one lady who has invited me in to her home. She’s Lakshmi. Lakshmi (in translation) Altogether I took out seven loans. We still owe$1300. We make about \$3 a day, although I spend about a dollar a day on my medication. My husband is the one who works and earns. I can’t because of my health.
In the past ten ears when you’ve been taking out this money did you ever make any savings?
Lakshmi
We haven’t saved anything. In the past we always had enough and we broke even, but now we’ve lost everything we invested in agriculture, and we’ve got all these debts. On top of that I have to pay for medicine. So we’ve taken more loans to help us survive. I get so stressed thinking about how to pay back these loans that it’s affecting my health. We never had a problem before this year. We were always in a good position.
So the loans did improve your life but you haven’t made any savings, and now because there’s been this cyclone you are really stuck without any way of paying them back.
Lakshmi
We never thought this kind of calamity would arise.
She’s shaking my hand … Namaste …
The potential dangers of multiple lending were actually flagged as an issue a couple of years ago, before all of this started, by the then Governor of the Reserve Bank of India, he’s Y.V. Reddy, and he lives in Hyderabad now, and so I have come to see him to get his take on the current crisis.
Y.V.Reddy
While profit MFIs are in some ways like sub-prime lending because sub-prime lending essentially meant the credit was being pushed to the borrowers irrespective of their repayment capacity. So it is generally described as irresponsible lending.
Do you believe that as a general concept a micro-loan is a good idea?
Y.V.Reddy
Micro-loan should be done on a proper atmosphere, but unregulated for-profit MFIs is disastrous, it is dangerous, it is exploitative, repressive.
Such accusations about predatory lending and bad practice are starting to be taken seriously. The committee of the Reserve Bank of India recommended the industry should have a more stringent regulation. I went to speak to Alok Prasad, the head of the micro-lenders association – MFIN.
It is true that given the dynamic of steadily rapid growth there have been problems. Many of the companies have to that extent in their effort to grow very quickly, have in some measure led to the kind of thing you just now described, and I will not walk away from that reality. That has happened.
And whose responsibility is that? That surely lies with the industry, that’s their fault.
I think it’s a new industry which is learning a lot of things, but to my mind judgements made in this very hard fashion at this stage are unfair.
But the industry is not new. It’s been operating in India for nearly two decades, longer in other countries, surprisingly though it’s only in the last couple of years that large-scale randomised and controlled studies into its effect on poverty and business creation have been conducted, and they’re findings raise serious questions about microcredits power to alleviate poverty on a large scale. One was carried out here in the slums of Hyderabad by MIT – the Massachusetts Institute of Technology.
From this veranda three floors up on an unfinished building we can look out all over the Narwelliah slum and this is where Pratap Kasina’s MIT lab conducted their study into poverty.
Pratap Kasina
We used three indicators. One is women’s empowerment, the second is expenditure on child health, and the third is expenditure on the education in the household, and we found out that microcredit did not have an impact on any one of these factors.
It’s really shocking actually that 30 years into micro-finance yours is the first major study to look at its effect on poverty.
Pratap Kasina
Even more incredible is the fact that billions of dollars are going into programmes for which even this study hasn’t been conducted. I mean people sort of assume that microcredit is the silver bullet and started working with it, without any proof.
MIT is continuing its research to see if having a small loan for a longer period of time will produce a different result. I did finally track down one insider who was prepared to speak on the record – Manoj Sharma. He runs Microsave – a microfinance consultancy based in Lucknow, which believes there should be a greater emphasis on savings and insurance within microfinance, and less on credit. He explained why, as he sees it, giving loans for small businesses is not a mass solution to poverty.
Manoj Sharma
How many poor people can be entrepreneurial? And I think the answer to that lies is how many of the so called rich, and the people in the upper economic stratas are entrepreneurial? 5, 10, 15, 20 per cent? And that’s the typical percentages of entrepreneurial poor that you will get. The poor at this segment, if they were so entrepreneurial they would have come out of poverty by now.
But that is how it has been presented for the last three decades.
Manoj Sharma
Unfortunately, I mean the way microfinance begun, the way it was made out was, if we provide the poor with credit in some quantities they will be able to set up their enterprises and they will somehow come out of poverty. But if you don’t have two square meals a day, you would first think of how do I use that money for buying food.
And it does seem that some of the microfinance institutions themselves are softening their claims. Here’s Vikram Akula of SKS again.
Vikram Akula
Look, microfinance is not the silver bullet, but it is an important component to help people generate income, and that’s what we are trying to do.
OK, but again that’s not what your mission statement says. Your mission statement says you are eradicating poverty.
Vikram Akula
I mean when we were an NGO we had a certain mission statement that maybe talked about the aspiration of eradicating poverty, and now we have a different mission statement which is talking about providing financial services to the poor.
But that’s not your mission statement. On the cards which you have given me it says ‘eradicating poverty’.
Vikram Akula
At one point that is the aspiration and I do think this is one component of eradicating poverty.
And Alok Prasad of MFIN, the micro-lenders association, admits the industry isn’t clear about what impact small loans have on poverty.
What you’re asking me is that of the 35 million clients, how many have actually benefitted, and that calls for a great deal of research on the ground, over a certain period. I must confess that’s something which is not really happened completely.
Mohammed Yunus said, when he won the Nobel Prize, that microfinance was going to put poverty in the museum. Was he wrong?
Right or wrong it was more about a statement of intent.
It was a statement that the rest of the world bought in to and awarded him the Nobel Prize for.
Well, that may be a bit of a hyperbole there.
Hello sir, how much for an ice cream?
20 rupees.
I’ll have the vanilla one please. Well that’s a micro-entrepreneur who’s certainly going to do well. He’s set up his ice cream stall on the side of the lake in Hyderabad. It’s the perfect place to watch dusk fall, and that’s just happened here, and now the boardwalk is filled with couples and families strolling along and enjoying the early evening, and eating ice creams. It’s been a bit of a fraught journey in Andhra Pradesh, passions are running so high in this debate over microcredit but the sun is certainly setting on the idea that it’s going to end poverty. Perhaps in a few months time there will be a less toxic atmosphere and a more realistic set of expectations about what microcredit can actually achieve. But what is in no doubt is that poor people want access to loans, and while that remains the case, there’ll always be lenders willing to oblige.
End transcript: Micro-credit (19 minutes)
Micro-credit (19 minutes)
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Comment

The podcast paints a rather critical picture of micro-credit or micro-finance (the former tends to refer to loans while the latter may also include services such as insurance; but the terms are often used interchangeably).

On the plus side, the idea of micro-credit is to enable low income people to have money to invest in productive activity. This has worked in many cases (which have been documented by the World Micro-credit Summits that have taken place over many years).

On the down side, the podcast suggests that micro-credit is subject to the same phenomenon as sub-prime mortgages: borrowers are persuaded to take out too many loans by predatory lenders and subsequently fall into debt, unable to repay their loans. In this case, debt can have life-ending consequences.

The story is of course more complex. Poor people have little to withstand shocks in their lives and as soon as one happens through natural or human causes, they fall back on any resources they have to pay for food, clothing, education, etc. Available resources will of course include loans they have received. In addition, it is quite well known from other forms of credit provided to low income people, that credit is used for consumption as well as investment because people have so little to start with. This is the case as much in developed countries as in developing ones.

So the conclusion of the podcast is that micro-credit can contribute to poverty reduction and livelihood promotion but is not the panacea originally espoused. One of the studies cited in the podcast suggests that micro-credit does not lead to women’s empowerment, improved child health or more education in the household. However, other studies have shown how micro-credit has enabled women to form solidary groups, i.e. the benefit for some has not so much been in business but in the reduction of women’s isolation.

Thinking about micro-credit institutionally, the challenge of running such schemes on a not-for-profit basis comes through in the podcast, and is one of the reasons that the for-profit private sector has become involved. The latter is likely to make the terms and conditions of lending more stringent – in principle (although the sub-prime crisis of 2008 is not strong evidence for this!)

Question 2

When you have listened to the podcast, read ‘Indian budget projects economic growth [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] ’, from the BBC website. What are your observations about this statement from the Finance Minister in the light of the podcast you have listened to?

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Comment

Comparing your reflections on the micro-credit podcast with ‘Indian budget projects economic growth’ will also put them in the wider setting of the Indian national economy. India, like China, has been dubbed a ‘rising power’, with a rapidly growing economy. However, it still has many challenges in terms of reducing poverty which is not declining as fast in China (which accounted for most of the world decline in poverty in 2011). From your reading, you can pick up the contrasts and contradictions of economic growth and attempts to promote livelihoods through micro-credit (which the Finance Minister was planning to bail out).

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