Microcredit theory’s concepts

The main argument of the microcredit’s creation is it’s availability for poor households that are not able to get a loan from traditional banks due to the banks’ unwillingness to bear risks and finance small microcredit loans. But there is no possibility for impoverished population to rise above subsistence without these loans. They just can’t pull themselves out of poverty without this additional capital.

In order to reduce the risks and costs some financiers use innovative contractual practices and organizational forms (for example, lending to groups,). Some finance organizations (most of them are owned by investors that have a more concern of economic and social development, than willingness of gaining profits) offer education, training, healthcare, other social services, and more loans. Targeting women is another innovation that nonprofit microfinance organizations have developed. The studies show that women spend more capital on the health, security, and welfare of their families in comparison with men lenders. Women’s bargaining power, personal interest and participation in social and political matters, and also their mobility are increased as a result of lending a microcredit. Although it just can’t overcome patriarchal means of control in developing economies. For example, a woman may have a formal access to a microcredit, but in reality they can’t have any control over received loans or the generated income. So we can make a conclusion that loans mostly encourage women in a social, but unfortunately not in an economic way.
On the opposite, commercial finance organizations usually provide only financial services and they provide no additional services to their clients. (Rahman, 1999)

Some of them do not have a direct cooperation with individual clients (for example, Indian bank ICICI), but they cooperate via small microfinance organizations instead.
Controversy of microcredits

Among the definite controversial facts about microloans the following could be named:
1. Lenders that have living standards above the poverty line, get more benefits from microloans, than lenders with living standards below the poverty line. The risks, for example like investing in new technologies, that will definitely increase income are willingly taken by microcredit lenders with more income. Poorer lenders are more conservative and usually do not pay any interest to a new technology, or labor hiring investments.

2. Microcredit appears to do more harm than good for the poorest lenders. In accordance with Vijay Mahajan’s opinion (the chief executive of Basix, an Indian rural finance institution), microcredit may sometimes even reduce the cash flow for the poorest population. The reason is simple – if a greater return on investment in comparison than the microloan interest cannot be earned by poor lenders, eventually they are not going to become wealthier as a result of a loan operation

3. The kind of business supported by microloans is another controversial issue. These poor lenders are not entrepreneurs. What are their actions regarding the funded business? They raise capital, manage the business, take the profit, but these poor microloans customers frequently do not have specialized skills that are required for success. Successful business models depend on entrepreneurs heroes that convert new ideas. The majorities of these poor people have no recourses like staff, business assets, etc., and deal at small and inefficient scale; therefore their earnings are not sufficient. They do not have entrepreneurial skills such as vision, creativity, and persistence. The majority of funded microenterprises are small. Many of them unfortunately fail and this fact contradicts the United Nations’ conclusion that micro-credit programs will impact the businesses that lead to developing economies.’ (Dichter 2006)

4. The most critical issue with microcredit is a question if it really helps decrease poverty. In general, the idea of microcredit is perceived as a noble and also as genuine innovation, which have made a positive impact to lenders (particularly to women), but the answer for that question is disputable.

5. Countries such as China, Vietnam, and South Korea have substantially decreased the level of poverty with low usage of microcredit. For example, a big part of Chinese population is employed and the poverty has declined greatly in the recent years. On the other hand a relatively small percentage of African population is employed, while the poverty has remain constant. And finally the number of employed people in India has a little bit increased and poverty has become slightly less obvious.

According to the analyzed controversies of microcredit, the best solution for a developing country is a combination of investment both in microenterprises and larger business, especially industry.
A problem with insufficiently developed public sector is crucial for many developing markets. Microcredit refers to a market-based approach of decreasing poverty. But the state has to bare the social responsibilities, build a proper social support for poor; it also should provide at least a basic education.
Nevertheless, microcredit is a very important tool for poor people living rural areas or small towns that otherwise would have no opportunity to start small, home-based businesses. In other words, I believe that a helping hand of small microloans is vital. (Sabharwal 2000)
But these loans have to be easily available, and there should be a large number of financial organizations that support the lenders on the local level and also provide some informational and consulting support. (Tripathi 2006)

At the end of this essay I would like to cite the successful results of microcredit policy in Bangladesh, stated by the Microcredit Summit Campaign. During many years it has been one of the poorest countries and although the mentioned report doesn’t insist on a direct cause-and-effect between microcredit and the progress with a poverty level, the results are surprisingly good anyway. (Pros and Cons of a new Microcredit Summit Campaign report 2011)

Almost 2 million Bangladeshi households take part in microcredit programs and according this survey a great dramatic number of families have escaped the poverty.
These are the good news for the microloans sector, taking into account it has been heavily criticized in recent years.
Two famous institutions of Bangladesh were studied and their groundbreaking efforts to end rural poverty were examined. This survey states that a real major progress in the fight with poverty can be made with microcredit policy’s support. (Pros and Cons of a new Microcredit Summit Campaign report 2011).
Easton T., (Nov. 3, 2005), Hidden Wealth of the Poor, The Economist
Pros and Cons of a new Microcredit Summit Campaign report, (Jan.28, 2011)
Bangladesh Will Send Poverty to Museum by 2030: Yunus, (Feb. 18, 2007), Financial Express
Rahman, A. (1999), Micro-credit Initiatives for Equitable and Sustainable Development: Who Pays?, World Development
Sabharwal G, (2000), From the Margin to the Mainstream. Micro-Finance Programmes and Women’s Empowerment: The Bangladesh Experience, University of Wales, Swansea (2000)
Khawari A., (2004), Microfinance: Does It Hold Its Promises?, Discussion Paper, Hamburg Institute of International Economics.
Tripathi S., (Oct. 17, 2006). Microcredit Won’t Make Poverty History, Guardian.
Dichter, T., (2006), Hype and Hope: The Worrisome State of the Microcredit Movement
Morduch J., (1998). Does Microfinance Really Help the Poor? New Evidence From Flagship Programs in Bangladesh, Harvard Institute for International Development and Hoover Institution, Stanford University
Kochhar K., (2006), India’s Pattern of Development: What Happened, What Follows?, Journal of Monetary Economics

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