Source: Financial Times.
Original article available online.
PARIS, June 4 – Fewer than half of microcredit borrowers invest the money in the grassroots businesses that such loans are intended to foster, new research into poverty alleviation has discovered.
But the claim is disputed by some microlenders, including ASA of Bangladesh, winner of the Banking at the Bottom of the Pyramid category in last year’s FT Sustainable Banking Awards.
Microcredit was devised in the 1970s in Bangladesh by Muhammad Yunus, who founded the Grameen Bank to lend small sums to rural women to buy livestock or invest in farming activities or small businesses. Mr Yunus won a Nobel prize three years ago for his work in tackling poverty.
Researchers say microlenders have realised that many extremely poor borrowers are using their loans for other purposes, such as buying food reserves.
This shows that the benefits of this fast-growing system to people outside the traditional banking net are not as have been portrayed by microlenders, say the researchers, although they say it does not undermine the value of the system.
Stuart Rutherford, the author of several books about a system hailed for enabling the very poor to build sustainable businesses, has led a three-year research project into the way borrowers in Bangladesh used loans. He says that the microcredit industry has been “discovering and acknowledging” in recent weeks that fewer than half borrowers invest in grassroots businesses. But microlenders have kept quiet about this, “pragmatically realising that the rags-to-riches-through-microenterprises story was valuable to the industry as a whole”.
About 50-60 per cent of the money borrowed under all microcredit loans does go into small businesses, Mr Rutherford estimates, but such loans are accounted for by fewer than half of borrowers.
Shafiqual Haque Choudhury, president of ASA, admits some borrowers do not invest the loans in small, grassroots businesses, but disagrees with the proportions estimated. “Our borrowers use some of their loans for consumption, especially those who are facing a real hardship due to high prices of food. But I cannot agree with the conclusion that this is happening generally.”
Professor Jonathan Morduch of New York University says it may be more productive for borrowers to spend loans on food or health care. “If they stay healthy, they can work more and the loans still get repaid.”
Mr Choudhury says that if borrowers did not invest the money, they could not repay loans; “Almost all of the funds are repaid.”
Professor Morduch says the discovery that many borrowers are investing in other things “opens the possibility of using microcredit to benefit the urban poor who are more likely to have jobs than be self-employed”.
Other researchers say the biggest beneficiaries of the loans are not the poorest of the poor. Vijay Mahajan, chief executive of Basix, an Indian rural finance institution says: “The very poor can’t afford interest rates, which tend to be 20 to 30 per cent because of the high cost of operating and recovering such small loans.”
The winners of this year’s FT Sustainable Banking Awards, organised with International Finance Corporation, the private-sector arm of the World Bank Group, will be announced in London today.
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