By: Bikal Dhungel
9 years ago, the Nobel Committee awarded Grameen Bank and Dr
Mohammad Yunus the Nobel Peace Prize for their outstanding work on
lending to the poor, called Micro-credit. It was regarded as the magic
bullet that leads to a great escape from poverty. The micro-credit
scheme however started in late 1970s and early 1980s when Dr Yunus
lent money to a villager from his own pocket. She paid back. It
motivated him to launch the idea of granting small credits to the
poorest of the poor in Bangladesh. Slowly, it became his job and he
continued until the Nobel Committee thought it as a once in history
phenomenon that has solved the problem we were dealing since hundreds
of years.
The basic functioning of micro-credit is as follows. A group of
women in a village make a team of 4 or 5 or few more if necessary. If
anyone from the team wants to borrow money from the micro-credit
institution, she first needs to talk within the group and once others
are okay with it, she can borrow the money. However, the group
members will closely monitor how she spends that money. They will
intervene if she spends for tempting goods like alcohol or cigarettes
or spend it in unproductive things. They have to do this because if
they dont, the credit-worthiness of the whole group worsens. They
might not be able to borrow if one group member default in her loan.
By this way, the micro-credit institution has transferred the
transaction cost to the borrower, which means, the bank should not
run after the borrower to check if she is spending the money in a
proper way. Exactly this is the problem why traditional banking
sector does not lend to the poor. One obvious reason is because the
poor lack any collateral to be able to borrow but another reason is
that it is connected with high transaction cost. Mostly the poor
borrow tiny amounts. For that, it makes less economical sense to
perform regular procedures and monitor if the money is being used in
a good way. There is also information asymmetry, meaning that the
bank does not know the person and the problem of adverse selection
might arise. Financial institutions in poor countries lack all sorts
of mechanisms and technical know-how to solve this problem. This is
why financial sector in poor countries is under-developed. They dont
lend much. If so then only to few businesses or their regular clients
who can be government officials or ministers. So the large portion of
the population lives without any access to credit or financial
institutions. Consequently, due to lack of capital, economic
development is difficult. This was exactly where micro-credit
institutions could do more. They have already solved the problem of
risk. When it is administered locally, the institution itself will
also know the borrowers and so on. By this way, the poor can also
borrow and invest the money in a way they think will help them to get
out of poverty trap. Mostly it is taken to start a small business
whose final aim is to help the person and her family grow
economically, empower her and improve health conditions, educational
indicators etc. At least in theory, it sound wonderful. International
institutions lent to micro-credit institutions. They were lent by
donors, even private businesses invested their money under the scheme
of Corporate Social Responsibility. It also attracted thousands of
researchers to study micro-credit in different countries.
So, has it delivered the promise it was believed to achieve ? Were
the borrowers successful in expanding their business and become
entrepreneurs ? Were there female empowerment and improvement in her
education, health and other areas ? Unfortunately not. Or the result
was not that convincing. I summarize the findings done by many
researchers in South Asia, especially the MIT team directed by Esther
Duflo. Before presenting the results, let me talk a bit about the
methods used in research, namely the Randomized Controlled Trials (
RCT ). RCT methods are popular in medical research if we are to find
the effectiveness of a certain treatment or a medicine. For example,
I want to check if eating only fruits and vegetables in dinner
reduces the risk of cardiovascular diseases. Then I choose 100
volunteers who would like to participate in this experiment, assign
them to two groups, treatment group and control group. Treatment
group gets the intervention and control group get nothing and they
will be used to compare with treatment group. Who belongs to
treatment group and who to control group will be chosen by
randomizing. This means, I can simply write a number 1-100 in a piece
of paper and take 50 out of them at random who will be assigned to
treatment group and the remaining ni control group. Randomization is
very important in researcher otherwise the results will be biased.
This means, certain people who would like to be in a group will get a
place there at any cost. In this case, people who eat vegetable and
fruits in dinner anyway might see this experiment as an opportunity
to relax their budget and their cardiovascular situation would be
better even before the experiment. So, it is important to randomize.
Before the experiment, we check the health status of all people, like
their weight, proportion of far and other indicators. Then we provide
the intervention to the treatment group for the entire period of
study and at last, check their health status again, and also of the
control group, then we find the difference between two of these
groups. The change occurred in treatment group can then be attributed
to the intervention i.e. This was because of the intervention we
provided, in this case, letting them eat vegetables and fruits in
dinner.
RCTs are now used in other sectors, also in social sciences.
Especially in development research, it has gained immense importance.
So, the researchers also used RCT to check the effectiveness of
Micro-credit borrowers. They took a number of borrowers, studied them
and they saw those who did not borrow from micro-credit institution
and compared the result.
What they found was not what micro-credit initially promised.
Checking if the micro-credit borrowers are likely to spend in new
business, the researchers found that in treatment area, meaning those
who took micro-credit, 5.6% of the people were likely to have opened a
business in a given year whereas in control area, where they had no
micro-credit access, it was 4.7%. This means that it makes little
difference in entrepreneurship either you had an access to micro
loans or not. For a so called social revolution, or women
empowerment, it was found that women in treatment area were no more
likely to be the primary decision maker regarding the household
spending, investment, saving, education etc. This implies, even
though the micro-credit institutions give loans overwhelmingly to
women, they are not the sole decision makes at home. Their husbands
of somebody else in the household decides how to spend the loan. So,
we cannot say this a woman empowerment. Additionally, in treatment
group, there was no positive health outcome in long term ( in this
case 9 years ). the treatment group was also not likely to spend more
than the control group in health and sanitation items. Similar result
was found in the probability of school enrollment of teenage children
of the borrower. Only it was found that micro-credit clients were more
likely to send their children to private schools than the control
group. Concerning consumption, it did not increase with micro
borrowing. May be the amount of sell was either used to repay the
loans or invested again in the business. However, the profit in their
business did not increase for the most groups. The health spending
decreased in the long term. Overall result showed that micro-credit as
a whole did not lead to the escape from poverty though it increased
the number of hours worked in their business. But it makes less sense
when you spend more hours working but are still in poverty trap.
Hence, all the researchers involved in finding the updates concluded
that micro-credit was probably not the magic bullet to empower women
and fight poverty as it was told all the time. When businesses were
difficult to expand, lower health expenditures were made, micro-credit
cannot be said as a miracle that has saved the world.
Hence, the popularity of micro-credit is going to fall. These
researches will have a big policy impact. Donors might cut their
funds and try something else to fight poverty. However, we should
also see the limitations of such researches. Who knows what would
have happened in the absence of micro-credit, they might have ended in
even bizzare situation. It can also be said that as micro businesses
kept people busy, they did not participate in violent activities or
committed any crimes and have contributed for a peaceful though poor
society. One positive side of micro-credit however is, as written
above, people were likely to send their children to private schools.
In the long term, this can have positive results. So, one can argue
that we should expand the time frame to see the impact of micro-credit
through the education of children which might help them to escape
from the poverty trap. But, still, respecting the outstanding works
or researchers who presented what they have found about the
functioning of micro-credit, it might be necessary to reform the
credit scheme to manage it efficiently and to realise the promises
made when the scheme was launched. The limitation of the study is
also that it was done in some villages of south asia. It does not
mean that the same is true for somewhere else. More researches are
needed in other places. As a whole, we can say that micro-credit at
least kept the people busy which is very important to avoid social
unrest. Places where there are lots of unemployed people in formal
and informal sector, the likelihood of conflict and violence is
higher. This is why Dr Yunus was awarded Nobel Prize for Peace and
not for Economics because fighting poverty is generating peace. When
people have jobs, a means to live they will not involve in stealing
and committing other forms of crimes. So, micro-credit might have
helped to avoid this. We needed a longer time frame to see if other
promises will be realised as well.
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