What is Micro-credit? and its Application and Criticism

What is Micro-credit? and its Application and Criticism

What is Microcredit

Micro-credit is a small amount of loan given to the poor to develop their standard of living. This small amount of loan can help people to come out the cycle of poverty by generating income. Defining micro-credit, it is a - “Financial service where small amounts of money (usually around $50- $150) are loaned to poor people for use as a capital to start or expand small businesses” [2]. It is amazing how does the little amount of money gives strength to the poor to start a business and helping to break out the vicious cycle of poverty. This small amount of loan or financial supports to the needy people helps to encourage setting up free-businesses. In other way, it is a financial innovation system that comes from grameen banking system or procedure which is based on trust and collateral-free and opposite to conventional banking system. In order to get loan people go to the conventional bank but Grameen Bank approaches rootless or landless people’s door steps. It is incredible that, without guarantee any bank can allocate or sanction loan to the rootless or vulnerable people. This loan giving approach placed Grameen Bank in a unique position in micro-finance and approaches beyond the boundaries

Application of Microcredit

Grameen Bank is founded on the principle that loans are better than charity to interrupt poverty: they offer people the opportunity to take initiatives in business or agriculture, which provide earnings and enable them to pay off the debt.
The bank is founded on the belief that people have endless potential, and unleashing their creativity and initiative helps them end poverty.Grameen has offered credit to classes of people formerly underserved: the poor, women, illiterate, and unemployed people. Access to credit is based on reasonable terms, such as the group lending system and weekly-installment payments, with reasonably long terms of loans, enabling the poor to build on their existing skills to earn better income in each cycle of loans.

Grameen's objective has been to promote financial independence among the poor. Yunus encourages all borrowers to become savers, so that their local capital can be converted into new loans to others. Since 1995, Grameen has funded 90 percent of its loans with interest income and deposits collected, aligning the interests of its new borrowers and depositor-shareholders. Grameen converts deposits made in villages into loans for the more needy in the villages (Yunus and Jolis 1998).

It targets the poorest of the poor, with a particular emphasis on women, who receive 95 percent of the bank’s loans. Women traditionally had less access to financial alternatives of ordinary credit lines and incomes. They were seen to have an inequitable share of power in household decision making. Yunus and others have found that lending to women generates considerable secondary effects, including empowerment of a marginalized segment of society (Yunus and Jolis 1998), who share betterment of income with their children, unlike many men. Yunus claims that in 2004, women still have difficulty getting loans; they comprise less than 1 percent of borrowers from commercial banks (Yunus 2004). The interest rates charged by microfinance institutes including Grameen Bank is high compared to that of traditional banks; Grameen's interest (reducing balance basis) on its main credit product is about 20%.
Grameen has diversified the types of loans it makes. It supports hand-powered wells and loans to support the enterprises of Grameen members' immediate relatives. It has found that seasonal agricultural loans and lease-to-own agreements for equipment and livestock help the poor establish better agriculture. The bank has set a new goal: to make each of its branch locations free of poverty, as defined by benchmarks such as having adequate food and access to clean water and latrines.

Grameen Bank is best known for its system of solidarity lending.The Bank also incorporates a set of values embodied in Bangladesh by the Sixteen Decisions. At every branch of Grameen Bank, the borrowers recite these Decisions and vow to follow them. As a result of the Sixteen Decisions, Grameen borrowers have been encouraged to adopt positive social habits. One such habit includes educating children by sending them to school. Since the Grameen Bank embraced the Sixteen Decisions, almost all Grameen borrowers have their school-age children enrolled in regular classes. This in turn helps bring about social change, and educate the next generation.

Solidarity lending is a cornerstone of microcredit, and the system is now used in more than 43 countries. Although each borrower must belong to a five-member group, the group is not required to give any guarantee for a loan to its members. Repayment responsibility rests solely on the individual borrower. The group and the centre oversee that everyone behaves responsibly and none gets into a repayment problem. No formal joint liability exists, i.e. group members are not obliged to pay on behalf of a defaulting member. But, in practice the group members often contribute the defaulted amount with an intention to collect the money from the defaulted member at a later time. Such behavior is encouraged because Grameen does not extend further credit to a group in which a member defaults.
No legal instrument (no written contract) is made between Grameen Bank and its borrowers; the system works based on trust.To supplement the lending, Grameen Bank requires the borrowing members to save very small amounts regularly in a number of funds, designated for emergency, the group, etc. These savings help serve as an insurance against contingencies.

In a country in which few women may take out loans from large commercial banks, Grameen has focused on women borrowers; 97% of its members are women.While a World Bank study has concluded that women's access to microcredit empowers them through greater access to resources and control over decision making, some other economists argue that the relationship between microcredit and women-empowerment is less straightforward.

In other areas, Grameen has had very high payback rates—over 98 percent. However, according to the Wall Street Journal, in 2001 a fifth of the bank's loans were more than a year overdue.Grameen says that more than half of its borrowers in Bangladesh (close to 50 million) have risen out of acute poverty thanks to their loan, as measured by such standards as having all children of school age in school, all household members eating three meals a day, a sanitary toilet, a rainproof house, clean drinking water, and the ability to repay a 300 taka-a-week (around 4 USD) loan.

Criticism of Micro-credit Programme

Some analysts have suggested that microcredit can bring communities into debt from which they cannot escape.Researchers have noted instances when microloans from the Grameen Bank were linked to exploitation and pressures on poor families to sell their belongings, leading in extreme cases to humiliation and ultimately suicides.
The Mises Institute's Jeffrey Tucker suggests that microcredit banks depend on subsidies in order to operate, thus acting as another example of welfare.Yunus believes that he is working against the subsidized economy, giving borrowers the opportunity to create businesses. Some of Tucker's criticism is based on his interpretation of Grameen's "16 decisions," seen as indoctrination, without considering what they mean in the context of poor, illiterate peasants.
Maulana Ibrahim, an imam in Bangladesh, spoke out against the Grameen Bank in 1993 for fostering "un-Islamic ways." He alleged that the lenders' pledge required women to say they would not obey their husbands and would not live in poverty anymore.
The Norwegian documentary, Caught in Micro debt, said that Grameen evaded taxes. The Spanish documentary, Microcredit, also suggested this. The accusation is based on the unauthorised transfer of approximately US$100 million, donated by The Norwegian Agency for Development Cooperation (NORAD), from one Grameen entity to another in 1996, before the expiry of the Grameen Bank's tax exemption.
Yunus denies that this is tax evasion:
“There is no question of tax evasion here. The Government has provided organizations with opportunities; we have made use of these opportunities with aim of benefitting our shareholders who are the rural poor women of Bangladesh.”
David Roodman and Jonathan Morduch question the statistical validity of studies of microcredit's effects on poverty, noting the complexity of the situations involved.Yoolim Lee and Ruth David discuss how microfinance and the Grameen model in South India have in recent years been distorted by venture capitalism and profit-makers. In some cases, poor rural families have suffered debt spirals, harassment by microfinance debt collectors, and in some cases suicide.

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