End of poverty? with micro loans
In his speech accepting the Nobel Peace Prize, Mohammed Yunus, Bangladeshi founder of Grameen Bank, called for ways to end poverty and consign it to a museum.
Yunus himself has innovated a great idea — microfinance — to get loans to poor people with no collateral. But while this is a major step, it is no solution for ending poverty.
Many studies show that the impact of microcredit is limited. Vijay Mahajan, founder of Basix, India’s best-known MFI, has the following to say:
“In an impact assessment study carried out at Basix six years after inception, we found that only 52% of our three-year plus microcredit customers reported an increase in income, 23% reported no change while another 25% actually reported a decline.
What was the reason for this? Our analysis showed that the reasons were (i) unmanaged risk, (ii) low productivity in crop cultivation and livestock rearing, and (iii) inability to get good prices.
“Basix revised its strategy and now offers microcredit along with a whole suite of insurance products covering life, health, crop and livestock. For enhancing productivity, a whole range of agricultural and business development services are being offered to borrowers. For ensuring better prices, alternate market linkages are being facilitated both on the input and output side.”
Obviously, small loans of Rs 2,000-5,000 to poor women — at interest rates of 24-36% — can be a useful palliative, but not a cure for poverty.
Microfinance hugely improves the gender status of women. This empowerment translates into better education and health for the family, and lower fertility.
Microcredit also staves off distress sales of assets (land, jewellery) in times of need (serious illness, drought) and stops people from slipping into deeper poverty.
The majority of microcredit loans are taken for consumption. Only a minority are taken for businesses, since all people are not entrepreneurial, and entrepreneurship requires skills and attitudes that are not common among the poor.
Where infrastructure is the best — as in the periphery of a metropolis — microcredit is likely to do the most good. It is least likely to succeed in remote tribal areas, which are the poorest.
Mahajan estimates that it will take investment of Rs 1 lakh per household to provide the infrastructure, financial and technical support services needed to raise every household above the poverty line. This means Rs 400,000 crore for 40 million poor households, only slightly short of the country’s entire GDP.
Yunus has not discussed the limitations of microfinance in such devastating terms. Perhaps we cannot expect him to. He is the global face of microfinance, and needs to emphasise its virtues rather than shortcomings.
But Yunus himself has gone beyond microcredit, and says that the poor need to get linked to stock markets and banks. He has the concept of social investment that helps convert the poor into entrepreneurs.
He has put forward the concept of micro-franchising. He has set up Grameen Telephones in collaboration with a Scandinavian company that leases mobile phones to poor women, who then act as public call offices.
This is profitable and sustainable. Such franchising could be extended to several fields, linking poor entrepreneurs to local firms and multinationals.
So, two pioneers of microfinance, Yunus in Bangladesh and Mahajan in India, agree that microcredit is not enough. We must link poor people to markets, financial institutions, and even multinationals.
But the government must finance infrastructure and skills, apart from basic education and health, to create the conditions in which higher-income livelihoods become possible.
It is disgraceful that the poverty ratio is 28% (according to a recent government estimate) after half a century of independence.
f during the independence struggle you had said that the number of poor would double after independence, you would have been denounced as a British agent. Yet that is what has happened, going by official data.
Why so? Because, despite spending enormous sums, the government has failed dismally to provide every village with the five basics of growth — all-weather roads, electricity, telecom, functioning schools and functioning health centres.
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