Microedit: Small is Liberating (06/02)

International financial institutions like the World Bank, which erroneously assume that economic growth automatically benefits all members of society, tend to concentrate on increasing GDP. But the assistance they provide trickles down to the poor in slow, halting drops. In fact, according to one recent study, 75 percent of the world’s poor live in rural areas, yet the vast majority of international aid goes to developing mega-cities. Further, such aid often does little more than create bureaucracies and export markets. For example, 75 percent of the $30 billion in foreign aid sent to Bangladesh over the past 26 years ended up elsewhere, spent on equipment, luxuries, and consultants.


Nevertheless, this unfortunate trend also has been a driving force behind a burgeoning field in international development. Known as microcredit, it has been delivering small loans to those most in need since the 1980s. Based on small, local institutions, microcredit provides an alternative to bureaucracy and high interest rates, offering empowerment opportunities by letting the poor decide where the money goes.


Perhaps the best known practitioner of microcredit is the Grameen Bank in Bangladesh. Over the last two decades, Grameen has expanded from a pilot project in a single village to an institution that distributed $380 million in loans to over 3.6 million people in 2000. Professor Muhammad Yunus, the bank’s founder, has tailored its lending criteria to address problems prevalent in Bangladeshi society.

One of the prime targets is worker exploitation. With interest rates as high as 100 percent and wages as low as $1 a day, Bangladeshi workers are often cheated by wealthy owners. Lending only to the poorest of the rural landless, Grameen reduces worker abuse and increases self-sufficiency by offering loans averaging $100 each. They’re commonly used to start small businesses or plant crops that can be sold, helping workers to escape poverty and become more self-reliant. So far, the bank’s efforts to reduce worker dependency and exploitation have been quite successful: 48 percent of its borrowers no longer live below the poverty line.

Another problem that Grameen addresses is sexism. Traditionally, Bangladeshi banks refuse to extend loans to women without spousal consent. Because Yunus believes that extending credit to women empowers them, allowing them to reduce the gender inequality typical in rural Bangladesh, Grameen lends almost exclusively to women. Many have seized this opportunity. As a result, families receiving loans from Grameen have birth rates significantly below the national average. In addition, female borrowers are more highly educated and participate more fully in political life.


Grameen’s record of success is largely due to its grassroots approach. By working directly with the poor, the bank has accomplished things beyond the reach of aid programs that work through state bureaucracies. For example, Yunus once attempted to collaborate with the country’s Central Bank on a plan that would have extended $125 loans for home building. But the government ultimately decided that such structures wouldn’t add to the nation’s housing stock, and therefore weren’t a worthwhile use of public funds. Undeterred, Yunus went outside of the state bureaucracy and developed a housing project that has won international acclaim, helping to build over 482,000 houses for Bangladesh’s rural poor.


Despite significant successes, Grameen is sometimes criticized because it doesn’t require borrowers to attend formal skills training classes before receiving loans. Yunus responds with the argument that all human beings have innate survival skills. The fact that someone can survive in a place like rural Bangladesh is proof enough of resourcefulness and intelligence. Believing that the poor already know how to survive, Yunus argues that loans allow them to better exploit existing skills and discover their own potential.


In contrast, Credit With Education, a microcredit program started by California-based Freedom From Hunger, requires its borrowers to attend weekly classes on health, nutrition, family planning, and business practices. Freedom From Hunger President Chris Dunford considers such classes an essential part of microcredit.


Education is necessary to help borrowers escape practices that perpetuate poverty, he argues. For example, poor women often have numerous and frequent births, leaving them malnourished, forcing them to stay at home, and increasing their expenses. Dunford believes classes that teach women about family planning and nutrition allow them to have fewer children, improve their health, develop more power in relation to their husbands, and better manage their finances.


Dunford also thinks classes are essential to reach one of the program’s primary goals – self-sufficiency. Although each Credit With Education chapter is founded by outsiders, it must eventually be run by the community it serves. Initially, the program creates an organization offering loans to groups of 25 women. Combined with classes that teach sound business practices, the loans are used to establish small businesses and develop a microcredit lending institution under local control.


Although Credit With Education’s approach is more heavy-handed than Grameen’s, the results are also impressive. To date, it has established 20 locally controlled lending institutions in 13 countries, with nearly 200,000 members. A study conducted in the 1990s found that 90 percent of participants increased their incomes. Another study concluded that Credit With Education classes fostered significant improvements in the nutrition of women and children.


Despite that success, Yunus’ arguments concerning classes is persuasive. Forced training make borrowers feel foolish, he believes, and some people only attend to receive the incentives offered to boost participation. Furthermore, Grameen’s success in reducing birth rates, empowering women, and helping people escape poverty suggests that classes aren’t essential. Lastly, Yunus’ experiences with the poor indicate they are so eager to learn that there’s no need to force the issue. Grameen borrowers have requested training in such diverse areas as accounting, cattle raising, farming, and solar and Internet technology. Yunus encourages training as long as the borrowers seek it out.


Despite differences in approach, both the Grameen Bank and Credit With Education have impressive records. Encouraging self-sufficiency, using methods that other agencies ignore, and getting money to those who need it most, they and other microcredit agencies bring a refreshing new approach to international aid. Hopefully, their grassroots-based innovation and success will continue to spread.

Scott Esposito currently works with California’s East Bay Community Recovery Project and the Bay Area International Development Organization. He can be reached at scott_esposito@yahoo.com