Page last updated at 13:06 GMT, Monday, 24 January 2011

Microcredit 'not the silver bullet' for poverty

By Madeleine Morris
BBC News, reporting for World Service Assignment and Newsnight

Watch Madeleine Morris' Newsnight film in full

Microcredit, where small loans are given to impoverished women to invest into generating their own incomes, was once hailed as the solution to world poverty.

The United Nations declared 2005 the Year of Microcredit, and in 2006 the Bangladeshi economist Muhammad Yunus and the Grameen Bank he founded were awarded the Nobel Peace Prize.

At the time Mr Yunus said microcredit could create a world where poverty could only be seen in a museum.

Mohammad Yunus
Muhammad Yunus and Grameen Bank were awarded the Nobel Peace Prize.

But a crisis in the microloan industry in India, as well as a number of recent academic studies, have called that claim into question.

In the state of Andhra Pradesh, India's microcredit hub, debt repayments from the state's nearly eight million micro-borrowers have dropped to around 20%, prompted by a government crackdown on the industry after a number of suicides allegedly linked to over lending.

Insufficient scrutiny

Of wider, global significance, a study of micro lenders in the slums of Hyderabad, capital of Andhra Pradesh, conducted by the Massachusetts Institute of Technology (MIT), found access to microcredit had no impact on three poverty indicators - women's empowerment and expenditure on child's health and education - over the 18 month period it tested.

Although microcredit has existed for more than three decades, this study, published in 2009, was the first major randomised, controlled and peer-reviewed study of the impact on poverty.

The MIT study surveyed 7,000 households in 104 slums, half of whom had access to microloans, and half who did not.

Assessing how many clients have actually benefitted calls for a great deal of research on the ground over a certain period. I must confess, that's not something which has really happened
Alok Prasad, CEO of India's microfinance association, MFIN

Randomised and controlled trials are seen as the most accurate method of impact testing, because they eliminate the problem of selection bias, where clients of microfinance institutions (MFIs) may be systematically different from non-clients.

"It's incredible that billions of dollars are going into programmes for which studies haven't been conducted," says Prathap Kasina, a research manager for MIT, based in Hyderabad.

"People assumed microcredit was the silver bullet and started working with it, without any obvious proof."

According to CGAP, an independent centre for microfinance research, more than $21bn has been invested internationally in microfinance.

Sixty-nine percent of that amount, which excludes money committed internally within a country, was committed by public donors and investors such as the World Bank and government aid departments.

Plans to expand

The World Bank and the UK's Department for International Development (Dfid) are currently planning to fund an expansion of microfinance within 39 countries in sub-Saharan Africa within the next five years.

I took out 100,000 rupees ($2,200) in seven loans. I took one for my daughter's wedding and another when my husband had a heart attack."
Indian micro borrower Susila

The MIT study did find a small increase in the number of new businesses created by households with access to loans - seven per 100 compared with five per 100 in the control group.

Mr Kasina says MIT is continuing its research to test whether a longer exposure to small loans will produce a different result.

However, Alok Prasad, the CEO of India's microfinance association, MFIN, admits he does not know what proportion of India's 30 million micro borrowers have benefitted from loans.

"We are talking about an industry that has grown very rapidly in the last five years, an industry of about 30 or 35 million clients."

"[Assessing] how many clients have actually benefitted calls for a great deal of research on the ground over a certain period. I must confess, that's not something which has really happened."

When asked about Muhammad Yunus's statement that microcredit could put poverty in a museum Mr Prasad concedes: "There may have been a bit of hyperbole there."

'Lack of entrepreneurs'

Manoj Sharma, of the Indian microfinance consultancy Microsave, believes the reason microcredit has not been the poverty killer it was once touted as, is because although the poor want and deserve access to credit, the very assumption they will invest that in productive businesses is wrong.

Microfinance customers in rural Andhra Pradesh
Andhra Pradesh, India's microcredit hub has almost eight million borrowers

"The answer to how many of the poor are entrepreneurial lies in asking how many of the rich are entrepreneurial - 5%, 10%, 15%, 20%?"

"That's the typical percentage of entrepreneurial poor you will get. If the poor were so entrepreneurial they would have come out of poverty by now."

He adds that many people who take out microloans, such as Vijaya and Lakshmi, use them for household expenses, health and education, and to smooth between lean and plentiful periods.

"And there is value in that. But if you really want financial inclusion to happen for poor families, then a range of financial services such as savings and insurance need to be provided. Just like they are provided to you and I."

Multiple loans

The Dalits, members of India's formerly "untouchable" Hindu caste, who live in the village of MM Puram in Andhra Pradesh are a vivid example of how microcredit can go wrong.

"I took out 100,000 rupees ($2,200) in seven loans," says Susila "I took one for my daughter's wedding and another when my husband had a heart attack."

"I still owe 80,000 rupees, but I earn 150 rupees a day ($3) and all the money I earn I spend on his medicines," she adds.

According to a survey last year, the average household debt to microcredit companies in Susila's Dalit community is $1400 (£1,000). Some households owe as much as $3,000.

Most women in MM Puram work as wage labourers in the fields. During harvest time they earn $3 (£2) a day. When there is no harvest, they earn nothing.

Susila's neighbour Lakshmi also took out seven loans, but now finds herself unable to repay the 60,000 rupees ($1,300) she owes.

For 10 years she borrowed from micro-lenders to invest agriculture and her home.

Unlike most Dalit homes in the village she has electricity in her government-built, two-roomed cement shack, but she never put any money aside into savings or insurance, and when floods washed away all her crops last year, she found herself with no income, and health problems.

Like all the Dalit women of MM Puram, she says she appreciated the loans, as they made her life easier.

However, far from being the solution to poverty, microcredit has trapped Lakshmi, Susila and their friends into a cycle of debt.

Madeleine Morris's radio documentary on microfinance in India is running on this week's edition of Assignment on the BBC World Service.

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