Microcredit is a concept which was invented by Muhammed Yunus in 1976 in Bangladesh. His goal was to expand the banking services for the rural poor in India, who are not able to borrow on the normal banking market. This money should allow them to build small independent organisations and as thus, escape from poverty. In order to implement this concept, Yunus founded the Grameen Bank. In 2006, Yunus and his Grameen Bank received the Nobel prize for peace.
Microcredit assumes a positive thought, namely that poor people also are capable of setting up and leading a (small) business, for example selling milk or eggs in a small village. By lending them money and not giving it, they are not seen as needy, but instead they are given a chance. This fosters their self-image and belief in theirself. This is contrary to the “standard” developing aid, where poor people don’t get the chance to do it themselves. The idea is that this should foster important economic variables such as employment rates, income, investments, … . These resources, in turn, could then be used to set up even more important projects, such as education and health. All these factors improve the well-being of the poor. According to the Grameen Bank, 97% of the loans are given to women. This makes them clearly the biggest target of the Grameen bank. In this way, the position in society of the women ameliorates. This is still a big problem in some developing countries.
So far, this sounds a great solution to solve a part of the problems related to poverty. Nevertheless, there are also a lot of problems when implementing microcredit. At first sight, microcredit uses a low interest rate. This is not the case, however. Microcredit makes use of the “flat interest rate method”. This method charges interest on the total loan, without taking into consideration that the periodic payments reduce the amount loaned. Because of this, interest rates are much more higher than normal standards and some people refer to microcredit as predatory lending. Clients are not informed about this interest rates, and don’t possess the knowledge to know more about it. Next to this, corruption is also very common in developing countries. Some dutch sources also state that there are too many intermediaries, and the loans are wrongly applicated (for unproductive things, like repairing a roof). This raises some questions about the true objectives of the ones who supply the loan and the working method of microcredit. A key solution probably can be found in a better regulation and supervision by governments and international organisations like the World Bank. This is not the case so far. We can ask ourselves why this hasn’t been introduced yet.
Next to this, I would like to add a word about the discussion whether microcredit is a better solution than development aid. Proponents of microcredit argue that it rises economic efficiency and projects are seen on a long-term basis. The ones in favour of development aid argue that they can develop bigger projects better than the local population because they have more knowledge. Why can these two concepts not be complementary?
By Jeroen Ducheyne- Exchange student