Microcredits are small loans granted to people in developing countries to enable them to set up their own small business. Some years ago, this was considered an interesting means of combating poverty in developing countries (as discussed in the first article: Microcredits: Can Poverty be Tackled by Entrepreneurship?), but it was soon followed by harsh criticism – Part 2 (Microcredits: A Completely Wrong Path?) dealt with this in detail.
From the outset, the idea of microcredit was based on the assumption that female borrowers (as already mentioned, most of the borrowers are women) would receive detailed advice before being granted loans and would then be looked after on a long-term basis. However, critics report that there have been numerous striking mistakes, especially a massive over-indebtedness of customers.
Is the microcredit concept therefore unsuitable overall, or can it make a significant contribution to poverty reduction in developing countries with some improvements – such as more advice for borrowers and more accompanying measures? After all, we must not forget that a large part of the critical remarks mentioned in Part 2 date from 2009 to 2012 and since then there has been a lot of time to correct the concept.
Helmut Berg, Oikocredit Austria representative, commented in a personal meeting with Idealism Prevails. Founded in 1975, Oikocredit operates in around 60 countries, mainly in South Asia, South America, and Africa, but also in South Eastern Europe. However, Oikocredit does not grant the loans directly but cooperates with local partner banks.
Helmut Berg takes the criticism of the microcredit concept quite seriously, but describes it as “partly ideologically shaped”, because there is often discussion of a “transfer of the capitalist system to the poor countries”.
People in developing countries are anoyed when some Europeans come and say: ‘We know what’s good for you’. But they also know very well what works for them and what doesn’t,
he replies. The microcredit concept is by no means suitable for all people in developing countries, says Berg, but it does work for many of them.
Berg sees the key to the successful application of the concept in a careful selection and constant monitoring of the lending partner institutions. Oikocredit has a requirement that loans will only be granted if their benefits are likely and the granting of loans is socially acceptable. The organisation uses a detailed catalogue of criteria to continuously check whether these requirements, which also include details such as the training of loan officers, are being met.
As a kind of customer advisor, these “loan officers” are the interface between banks and borrowers. “If a woman wants to open a sewing shop, but there are already four sewing shops in the village and the market for a fifth is not big enough, the loan officer will convince her not to do so,” says Berg. “The loan officers also regularly ask customers how things are going after the loan has been granted. This social competence of microfinance is the most important thing, and many institutions neglect it.”
Oikocredit reports an enormously high repayment rate of 99%, which means that only about one percent of loans have to be written off as being irrecoverable – similarly high figures are cited by other microfinance institutions. Critics of the concept claim that these repayment rates mainly come about by means of credit accumulations: a very large number of female borrowers take out a new loan in order to repay the old one and thus get into a vicious circle of debt.
Helmut Berg admits that this “microfinance shopping” does exist, but regards the claimed extent as exaggerated. However, it is actually not possible for the lending institutions to check whether their customer already has other loans in progress, because a credit report that can be viewed by all banks, such as the German Schufa, is not available in the countries concerned. “But you can’t release these people completely from their own responsibility either. These are people who need to know for themselves what they are doing in their lives.”
“All the negative examples have only shown where microfinance will lead if the social criteria are not observed,” said Berg. He sees a very important reason for the undesirable developments in the global financial crisis of 2008/2009: As a result, investors have been looking for new niches in order to invest their capital profitably. Especially in India at that time, normal banks discovered that microfinance can be a business, and an enormous number of new microfinance institutions were grounded.
As a result of this undesired development, there were also legal regulations for microfinance banks in India and Bangladesh that effectively curbed excesses such as over-indebtedness and violent money collection. “Microfinance has become more sophisticated,” says Berg, because the banks have also noticed that merely giving out money is not enough.
Oikocredit uses the Progress out of Poverty Index (PPI) to assess the social benefits for the borrower’s family after one or two years. “The question of what has changed in concrete terms is then asked: Is one of your children going to school already? Do you have water in the cottage yet, or do you still have to get it from the well?” According to Oikocredit, a large proportion of borrowers and their families achieve a significant improvement in their living conditions according to this measure.
Another major point of criticism is the interest rate, which, in the opinion of the critic, is excessively high. Helmut Berg believes that this must be put into perspective:
The loans are paid out in the respective national currency, and many of these currencies have high inflation rates, which of course have to be compensated by the interest rates. In Ghana, for example, even a person with the very best credit rating – for example a hotel owner – pays around 20% interest. And why is that? Because inflation is around 15%.
He sees social microfinance as having no alternative: “But what would happen if it did not exist? People would get money, but from informal money lenders at exorbitant interest rates.”
There is no doubt that microcredit is not a miracle cure for poverty in developing countries, nor is there any denying the fact that pure money is not enough. With accompanying social measures, however, the concept can apparently bring a substantial improvement for a large number of people in developing countries.
Translation German-English: Anna Dichen
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