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Friday, 17 March, 2000, 16:35 GMT
Fighting poverty in Bangladesh
Village in Bangladesh
Micro-credit can help poor people invest in farm animals
By BBC News Online's Kate Milner

Bangladesh is preparing for the first visit by a US president since 1971, hoping it will attract more western investment to the country.

There's a screening out of the poorest people.

Professor Geoff Wood, University of Bath
During his nine-hour visit, President Bill Clinton will find out about the micro-credit system of small loans aimed at helping poor people, for example to buy a cow so they can sell milk.

It is a system supported by the president and much heralded across the world by countries keen to copy the Bangladesh model.

But in his short visit, the president will not see the whole picture. The scheme has proved very popular but there are criticisms that it fails to help the people who most need it.

Loans for the poor

The system of micro-credit started in the late 1970s when Dr Mohammad Yunus an economics lecturer at the University of Chittagong became aware of the poverty of the people living in the nearby village of Jobra.

Dr Mohammad Yunus
Dr Mohammad Yunus leant out his own money
The villagers told him if only they had a bit of money they could invest in a cow or some chickens. Banks would not lend them money, so Dr Yunus started loaning money from his own pocket and borrowing money in his own name.

After a great deal of lobbying he got sponsorship from the central bank of the country and support from the nationalised commercial banks. The project was extended and in October 1983 became an independent bank, the Grameen Bank (Village Bank).

Now, with World Bank funding, it has more than 2.3 million borrowers, 94% of whom are women.

Grameen Bank says there has been a sharp reduction in the number of its members living below the poverty line and a shift from agricultural work to self-employment in petty trading.

Contrary to the fears of the banks that poor people would be a credit risk, Grameen's repayment rates have been as high as 97%.


But the scheme is not without problems.

Professor Geoff Wood, of the University of Bath, says critical questions were potentially overlooked in the rush to repeat the success of micro-credit in other countries.

He says such programmes do not always reach the really poor and do not solve the reasons for poverty.

"The micro-credit system relies on group peer pressure to police re-payment," he says. "It's a way of reducing transaction costs.

"But it also means there's a screening out of the poorest people.

"The people who come together are assessing each other's reliability so it leads to the exclusion of the very poorest."

'Ghetto' system

Grameen Bank favours women because it believes women are better than men at handling debt and because it believes social change and economic change go together. But according to Professor Wood, the bank's policy has not necessarily improved women's lives.

"The politics of the household means when money comes in it does not necessarily benefit the women," he says. "But women have the obligation to re-pay."

Women members of the Grameen Bank
The Grameen Bank has mainly female members
Another problem, says Professor Wood, is that the loans encourage people to get involved in small scale trading rather than production. People often sell similar products which drives everyone's margins down and leads to over-crowded local trading.

"It traps poor people in a ghetto of petty trading," says Professor Wood. "Micro-credit has value, despite my criticisms, but it's not a sufficient poverty eradication scheme.

"If you want poverty eradication you need social development support, you need larger loans over longer periods - to help people graduate into processing and services market."

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