What is micro credit? Well micro credit is one of the attributes of micro finance, and may be defined as the provision of credit, and other financial services and products of small amounts to rural and semi urban areas. Which is then used to further enable them to increase their income levels and overall standards of living. Micro credit is one which consists of many classifications, each having different strengths and used for different reasons. There is the traditional informal micro credit such as moneylenders credits, pawn shops, money from friends and family, etc. In discussing the question in hand this type is quite irrelevant. What will be focused on will be the micro credit attained through conventional or specialized banks and through NGO(Non-Governmental-Organisations). When further analysing the mechanisms of micro credit what should be put into consideration may be the types of loans given to the individuals in need. Unlike the traditional forms of loan given to individuals or a group of people, micro credit focuses on the present rather than the past track records. In scenarios were traditional loans are simple not viable, micro credit serves as 'a vote of confidence in the ability of the individual to reverse his or her fortunes and become financially solvent'. There are secured and unsecured loans, in this case most are unsecured because the people who borrow do not have collateral, and therefore it is widely considered a lower risk to the borrower. These are the ones which are available in smaller amounts over a period of time. In analysing the types of loans involved we stumble upon NGO(Non-Government-Organisations) and SHG(Self-Help-Groups), voluntary organisations which partake in the whole micro credit cycle and groups of micro entrepreneurs having homogenous social and economic background voluntarily, coming together to save small amounts regularly, in an emergency when one may need emergency funds to sustain their business.
Further analysing micro credit Mr Muhammad Yanus gave an elaboration on the Graamencredit. This simply was credit which was promoted as part of the human rights and helping poor families to help themselves break free from the vicious cycle of poverty. Such credit was targeted specially for women based in poor backgrounds, in addition this type of credit was not based on collateral since in most cases the individual or group may not have possessed any at that moment in time, so instead the trust was imposed. In further anatomizing micro credit, it can be split into various models. Models such as community banking, cooperatives, village banking, grameen and as stated earlier NGO's. In analysing the community banking this essentially treated the whole community as one unit, and then generated a semi formal establishment in which the micro credit was dispensed among the people in need. This further linked to the implementation of NGO and other self help organisations which treated and trained people in the community to perform various financial activities of the bank. When co-operations were involved this was an association of a group of people of people united to meet their social and economic needs through a jointly owned enterprise.
As restated above micro credit is one which provides credit for the poor and mostly targeted at people based in LEDC. A question which should be analysed is why these people need it, and why it focuses more on females than males. The countries which will be analysed will be Bangladesh, Bolivia, and Indonesia. We live in a world which has a high level of inequality. A world where the rich become richer and the poor become worse off. Stated by Mahmood Hasan Khan (2001) research shows about one fifth of the world's population is affected by poverty and the majority of the one fifth live on less than one dollar a day. The issue about poverty is that it is a heterogeneous problem which coincides of many causes and an issue that is indeed quite complex to resolve. Further analysing poverty, theory states that this can be a major detrimental factor that has the ability to slow down or even halt the progress of developing countries and future generations based in that community. In a household affected by poverty common knowledge further states that it is the women and children who are hit more by its negative impacts in comparison to the latter. In addition, the people who are hit by poverty in the rural regions are in a worse position than urban people in urban poverty, which accounts for 60% of the poverty in the world. Simplistically it can be said people need micro credit to better their way of living but this is too blunt of an answer, one must re access the deeper roots and uses of micro credit and how people which are granted this credit utilise it. A question which is raised is why are these people poor? Poverty can be caused in many ways, but the main factors involved can be political instability, corruption or even wars. This can be seen in countries like Bangladesh, Bolivia, and Indonesia were the levels of poverty are very high. The trend with this is also the high level of inequality present, where the richest 15% possess up to 85% of the overall GPD the country owns. Additionally external factors such as climate change and shocks in the international economy such as high food or oil price shocks relatively hit the poor more, due to their small savings and ill preparation.
The table below illustrates characteristics of selective macro finance programs.
Some characteristics of some inistututions which give micro credit are shown, and the results are quite significant. The Grameen bank in Bangladesh with around 1,100 rural branches covers roughly around 37,600 villages and has a 95 percent female membership. The value of females is around 2.4 million, in terms of loans given they last approximately one year, which is around $134. The birth and implementation of the Grameen bank and the use of micro credit has been utilised in other developing countries such as Bolivia and Indonesia. Referring to the table above it shows that Bolivia has a 61% female membership which approximately 81.5 thousand of are its member. The lending duration ranges from 4-12 months and, average loans range from £909. The stark difference is in Bolivia the people who are allowed to achieve these loans do have collateral and are grouped as non poor individuals.
In accessing the issue of why people are in poverty, one must analyse what they own. According to Mahmood Hasan Khan(2001) the assets people in poverty possess may be split into 4 groups. These include human, institutional, physical and infrastructural assets. In analysing human assets this usually depends on the type of labour and in the sense of workers as there could be different genders, skills, ages and health in the area. Infrastructural assets can be defined as public and private transport and communication networks, access to health centres and schools, the availability of water and clean sanitation. Physical assets normally consist of the private and common property rights in terms of land and livestock, machines and other valuable financial capital. Vulnerability is what these people are exposed to, with dramatic changes in the environment they reside in, such as the weather, policies and investment. In reassessing rural poverty it can be said that the main difference it has from urban is that these group of people are not a homogenous group. Each individual has a different level of links to the economy. Theory states that rural poor are classified by their access to food and land, in the sense of owning farms or tenants and landless who are most of the time unskilled workers. The collateral is in the land, but the ultra poor find it difficult to receive loans through the normal banks due to adverse selection and moral hazards. This is where micro credit becomes implemented; referring to Mark Pitt (1998) microcredit has a large effect on poorer households in developing countries. To conclude Shahidur Khander(1998) found by using quasi-experimental OLS method to correct bias, it was observed that consumption in the rural areas increased by 18 taka for every 100 taka borrowed by women.
Micro credit can be said to help a person pull themselves out of poverty via the self employed route, and may consist of many advantages. Jonathan Mordich stated that there would be an income effect, which would push consumption levels up. In addition to the cetirus parabus theory holding all constant there would be an increase in the demand for children, their education and leisure. When analysing Bangledesh research conducted by Fazle hasan Abed (2000) indicated that microfinance created positive impacts on the economic conditions of the borrowers and status of women. The Bangladesh Institute of Development Studies (BIDS) surveyed that poverty had declined by 1% annually. The number of people living below the poverty line has come to 47 from the previous 80 in the 1980's. Empirical studies on microfinance programmes for Proshika and ASA, produced similar positive effects. There was a growth of 5 to 7 % compared to the control group and an additional increase in food consumption, health and child education. These were the findings of Bruntrup, et al, 1997. Inequality was also another goal Bangladesh attempted to rectify via the use of the NGO's. (Zaman et al, 1999) stated that micro finance created an impact on women borrowers.
'With a per capita income of $950, a life expectancy of 61 and under-five mortality of over one in ten (World Development Report 1998/9) Bolivia is the poorest country in South America, and poorer than the average for developing countries as a while.' (Paul Mosley, 1999). This is indeed a true statement and why Bolivia receives micro finance. Today Bolivia has some 35 microfinance institutions with 262,000 borrowers. Microfinance aided people in poverty in Bolivia in many forms. It enabled borrowers to hire some additional workers, who if poor would cause the level of poverty to fall. Secondly, the presence of a new microfinance institution in a particular market may have had the ability to affect both prices of credit or on access to it. In addition new economic activities stimulated by the implementation of micro loans will also increase the purchasing power of the poor individuals.
A problem which may have been faced by micro credit was the adverse selection and moral hazard problem. A broad example may be a farmer in Nigeria who buys his first harvester to use for his farm in the first period of time (t), the production may be expected to rise relative to the output possible when he alone was working by himself. The next investment made may be some fertiliser in the second period t+1, to aid the growth of the crops. It will be expected that output will rise marginally. With this example it can be stated that people in poverty need microcredit to help them move out of poverty, according to the laws of diminishing marginal returns. Focusing more on adverse selection it refers to the condition where the principal of the agents type are willingness to follow the terms of the contract. (Teaching, task and trust: John Brehan and Scott Gates,pg 152). Mathematically analysing this lets say for instance a farming community in Congo, has some farmers who want to maximise their profits. So each farmer decides to make a investment worth 50p in one scheme. The poor Congo farmers do not have any assets to use collateral, this means they could be possibly risky borrowers. A risky borrower in the micro finance scheme may invest 50p and obtain revenue why assuming that there may be a probability P, where 0<p<1. The main concern is if risky borrowers make a loss on their project plan , the loan cannot be paid back.
The other problem faced may be Moral hazard. This refers to the risk that the presence of a contract will affect on the behaviour of one or more parties. The classic example is in the insurance industry, where coverage against a loss might increase the risk-taking behavior of the insured. [1]
Microfinance has been one of the greatest ideas an individual could devise in order to solve the ever recurring problem of poverty based worldwide. The question is how far and how effective has micro credit been in eradicating poverty. (Chowdhury: march 2000) stated that is micro credit was good how come poverty still resides worldwide? Fact shows that poverty still prevails in Bangladesh, and almost all the participants of the micro finance regime still had no crossed the line of poverty. As stated earlier poverty is a very complex issue which simplistic tactics fail to solve. Such an issue requires a multi-spectoral approach and an expansive strategy to solve. Realistically speaking there have been over expectations on the affects of micro credit because it has been wrongly shown as an almighty solution for all economic problems LEDC may face. Further analysing the fallacy of micro credit, the question is raised if it has hit what is known as the ultra poor, the poorest of the poor. research shows that the poorest 20% of the population in Bangladesh were omitted from the microfinance programmes, stated by Hulme and Mosley(1996). This raises some deep question to past research and to the extent of how effective microfinance really is. In contrast to this point the moral of the ultra poor should be put into consideration, theory states the poor self exclude themselves out of the credit programme because they feel they cannot productively utilise the money or generate income to pay back loans. Further more to this problem the NGO are quite careful to identify potential risks and people who they think may give back poor repayment recoveries. Is microfinance sustainable? There are three major factors which determine the sustainability. The sustainability of the organisation, the microfinance programme and the borrowers. The most important issue is to achieve financial sustainability. In contrast to the findings the future of micro finance looks bright, the access to large scale international assistance has helped a large number of microfinance organisations to grow in Bangladesh, Bolivia and Indonesia. Consultancy services are part of the modern concept of management and new commercial products and financial services have been streamlined aiding the alleviation of poverty. To an extent it can be said micro finance may be the key to bringing these people in LEDC above the poverty line and further aiding economic growth but what must be accessed is the time period and the effectiveness of this scheme.
