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Show MlGROGREDIT IN INTERNATIONAL DEVELOPMENT Jeff Merchant highly decentralized and localized. Each person finds a way to utilize their own culture and improve the likelihood for success (Guzzetta, Lusk, and Stoesz 1999). Perhaps more importantly, microcredit is able to adjust to class. Microcredit has a powerful ability to adapt to culture. Since the concept of credit is a broad historical factor in nearly all societies, microcredit has a useful advantage; it immediately focuses on the best ways to approach extending loans to people. It is necessary to distinguish that monetary culture is usually dissimilar in different societies. What may be acceptable in China is often unacceptable in the United States3. The best example of this concept is the Grameen Bank. The Grameen Bank of Bangladesh is the best-known microfi-nance institution and a worthy example. The Grameen Bank has set up membership criteria based on two factors: (1) the maximum holdings of land can be no more than one-half acre and (2) there can be only one member per household. Obviously the first rule is founded in local economics, an individual with larger land holdings is considered middle-class or upper-class. The second rule rests on the notion that in many Bangladeshi families, whether the man or woman earns the money, the man controls it. If women are raising a family alone, it is practically impossible to secure a loan. This rule affords single mothers greater autonomy to formulate positive financial decisions regarding their family and business. After the basic criteria are established, the Grameen Bank model begins to reveal some aspects of Bangladeshi culture. In order to receive a loan, a group of five people must come to the bank. Each member must know the others and be of the same sex. Since no one in the collective has collateral, there is group liability. Loans are given to the two poorest members, who have a limited time to pay the loan back. After the loan is repaid, the next two get loans, which they must pay back. The last person gets a loan after the third and fourth members pay their loans back. The key is that because there is group liability, if anyone defaults, all members are cut off. This "peer-group monitoring" system leads to "social collateral," more commonly referred to as peer pressure (Khandker 1998). Men and women are also separated because of cultural aspects of gender. In most cases women receive upwards of 75 percent of all loans (Adams et al. 2000). SUSTAINABILITY AND PROFITABILITY OF MlCROFINANCE INSTITUTIONS One key characteristic of microcredit is the high interest rate that is charged for a loan. This rate, which is often 30 to 50 percent higher than commercial rates, is necessary to help maintain the sustainability of microcredit programs. Additionally, even with the high interest rate, there is an average 91 percent repayment rate, much higher than many commercial banks in developing nations (Kole 1999). 3 The United States has approximately 300 of its own microcredit institutions serving people from the Arkansas delta to inner-city Chicago (Burritt 1997). Although sustainability and profitability are the desired outcomes of many microfinance institutions, it is highly unlikely that every borrower will be a success story. A recent study grouped microcredit organizations into three areas: Subsidy Dependent, Operational Efficiency, and Fully Self-Sufficient or Profitable. Subsidy Dependent institutions rely fully on donor support in the form of grants or other subsidies. Operational Efficient institutions are able to cover administrative costs (salaries, rent, etc.) with revenue from interest and fees, but unable to meet demand for new loans. Fully Self-Sufficient or Profitable institutions are completely independent and can turn to larger commercial banks for additional loans. They are also able to pay for those loans out of interest from their members. The study, which focused on eleven key microfinance institutions, found that ten had reached operational efficiency and five were fully self-sufficient or profitable. It concluded that most organizations could reach the third level within five years of operation (Christen, Rhyne, and Vogel 1994). Most microcredit organizations have a difficult time recovering initial losses in the form of administrative costs (Khandker 1998). However, many institutions have become successful, profitable businesses serving the poor and recycling profits to expand their reach. An example of this is Banco Solidario of Bolivia, which received large subsidies from USAID. Today it serves over 81,555 clients and boasts a loan portfolio of $74 million (Guttman 1999). SOCIAL IMPLICATIONS OF MICROCREDIT Beyond the empowerment of the poorest of the poor and the altruistic aspects of microfinance, there have been many studies that show direct societal benefits from microcredit. Since it is most often women who are persecuted, the social and political benefits of microcredit are as positive as the economic ones. Because of microenterprise, Kuwaiti women are slowly obtaining voting rights. "In Rwanda the government is revising discriminatory laws...[and] Cote d'lvoire (Ivory Coast), Senegal and Tanzania recently passed laws against female genital mutilation" (Loar 2000). Development practitioners believe the ability of poor people to break away from poverty has improved general health as well. Since the introduction of microcredit, there has been greater access to education and health care, dramatically reducing the spread of AIDS and other diseases (Roemer 2000). With children free to attend schools and not having to work, many are breaking the cycle of poverty that has haunted their families for generations. Studies show there is a significant statistical increase in the number of both boys and girls that attend school when their parents receive micro-credit (Khandker 1998). Health care, which few of the poor ever received, is now a possibility for many. Nutrition levels have been shown to increase, leading to decreased disease (Khandker 1998). There are even reports of microcredit increasing voter turnout. Since 1991, The Grameen Bank 24 |