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Published in the 16-30 Nov 2004 print edition of MG; send me the print edition


What is microcredit

By Anjum Ara Khalidi

The microcredit movement first of all began in Bangladesh 25 years ago with a $60 donation which is worth more than $1 billion today. At present, its replications are spread over many major cities, including Delhi, Hyderabad and New York City. Its basic lending principles, if adopted by Muslim communities in India, hold the potential for alleviating poverty for a substantial number of people within a matter of years.

The concept is simple: Lend money to poor people to start or expand a small business and ensure that they repay their loans in small instalments. Most importantly, the money is provided without requiring collateral, i.e., something of equal value to the loan to be held as a mortgage to guarantee repayment. This is what sets apart all microcredit institutions from regular established financial institutions. It provides access to credit and money by those who are normally deemed too risky to lend money to by commercial banks. 

The first such microlending institution was Grameen Bank, started in Chittagong by Muhammed Yunus, a professor of economics at an American university, with his own contribution of $60. Dr. Yunus describes in his book, Banker for the Poor, how he met with bank managers during a visit home, and asked them why they did not lend money to street-level vendors. Too risky, he was told. So he dipped into his own pocket and lent $60 to a group of three basket weavers and made the women collectively responsible for repaying their individual debts. This group met all the expectations, and the movement got started. More such groups were formed, money was donated by foreign governments, and within a few years spread to most parts of rural Bangladesh. The movement's success, inevitably, shook up the established power structures in rural communities, and a long delayed social change got under way.

According to the latest Microcredit Summit Campaign Report, there are 234 microcredit institutions around the world, reaching 35.8 million of the poorest families. Forty-four of these institutions are located in India, reaching more than 9.3 million of India's poorest. The report defines the "poorest" in developing countries as families whose income is in the bottom 50 percent of all those living below their country's poverty line when they started with a program.

Some of the organizations located in India include the Friends of Women's World Banking and the Self-Employed Women’s Association both in Ahmedabad; Swayam Krishi Sangam and SHARE Microfin Limited, both in Hyderabad.

Grameen and other such microcredit institutions firmly believe that poverty is not created by the poor; it is created by the institutions and the policies which surround them. Furthermore, they believe that charity alone is not an answer to poverty. Charity only helps perpetuate poverty because it creates dependency and takes away an individual's initiative to break through the wall of poverty. Instead, access to credit and the unleashing of energy and creativity in each human being is the answer to poverty. 

What makes this approach practical and achievable is that a small business can be based upon skills an individual may already have, such as sewing, basket weaving or farming. This is the beauty of all microlending institutions. It allows persons, men or women, literate or illiterate, to strive to support themselves financially and build stability in their lives. 

Due to equal access, thousands of women have been able to raise their status, lessen their dependency and improve their homes and the nutritional standards of their children due to these microcredit programs all over the world.
The success of many microlending operations has shown that many of the doubts some had to lending to the poor have been overcome through the Grameen Bank approach. For example, some thought that those living in poverty would not be able to form businesses that yield significant profits; however, many borrowers in microcredit programs have successfully done so. It was also thought that the poor would not be able to repay their loans; however most successful microcredit institutions, such as the Grameen Bank, have reached repayment rates of 97 percent, which exceeds the levels achieved by most commercial banks.

It has been estimated that the average household income of Grameen Bank borrowers in Bangladesh is about 25 to 50 percent higher in comparison to other villages. It has also been found that the landless have benefited the most from these microcredit programs. As a consequence, this has resulted in a considerable reduction in the number of Grameen Bank members living below the poverty line.

What started as an innovative local initiative has now grown to make an impact on poverty alleviation at the national level. The Grameen Bank approach has proven to be a viable model for poverty alleviation across the globe. 

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