Microcredit and the Alternative to “Job Creation”

coins - by Sanja GjeneroWhen money is lent to the right people under the right conditions, it can transform lives and even entire communities.  This principle has been driving a revolution in international development: the microcredit revolution.

Normally, the only financing available to impoverished communities comes from loan sharks, who require such exploitative rates that borrowers can never escape and, in some cases, quite literally become slaves.  Often the loans are for only very small amounts of money; yet repayment can last a lifetime.

But microcredit loans are designed to help people bring themselves out of poverty by providing very small amounts of money to individuals who want to start or expand their own businesses.

The idea started when Bangladeshi economist Muhammad Yunus visited his home country as a professor in the 1970s.  While there, he met Sufiya, who operated a business making bamboo stools from her home.  Despite her hard work, Sufiya could never manage to escape poverty because to borrow money she had to agree to sell her lender all she produced at a price the lender decided.  After meeting 42 people like Sufiya whose combined debts totaled only US$27, Yunus and his students decided to open the Grameen Bank.

Ever since, Grameen Bank has been lending tiny amounts of money (normally a few hundred dollars or less) to entrepreneurs.  It averages a 98.6% repayment rate on these loans and has operated on a profit nearly every year of its existence— all without relying on any donor funds since 1995.

But does microcredit merely replace one type of exploitation with another?

Critics note that Grameen Bank (and other microlending institutions that have emerged after it) typically lend at high interest rates because the loans often aren’t secured by collateral.  These banks also typically require the borrowers to come by the bank and make payments on an almost daily basis.  Additionally, some borrowers have become so  overwhelmed with debt they’ve resorted to suicide when they felt there was no way out.

Grameen Bank may not deserve all of this criticism, however.  Many of the suicides and heavy indebtedness have resulted after other microcredit institutions adopted worse lending practices and lacked individualized attention.

Professor Yunus at One Young WorldGrameen’s loans are typically issued to a small community group, which then divides and disburses the loans amongst its members.  Lending to a group provides support and accountability for the borrowers and helps allocate funding to the projects most likely to succeed.  Overwhelmingly, the groups are composed of women, because Grameen Bank has found that women are much more likely to use the money for constructive purposes.

Microcredit has provided a radically different way of thinking about economic solutions for poor countries.  Yunus believes economists too often overlook the potential of people in developing countries to self-employ. Instead, they focus solely on increasing the number of large factory and farm jobs.

The trouble with these jobs, however, is that they never capitalize on individuals’ unique skills, talents, and entrepreneurial energy.  So much potential goes unrealized.

Perhaps Yunus’ way of thinking could work not only in the developing world but also in the developed.  In the United States, lower-income people also take out loans on devastating terms (think of payday loans, balloon payment mortgages, and high interest credit cards).

Perhaps rather than focusing simply on “creating jobs,” we should think about financing the creative potential and unique talents of these people, who take out debt but aren’t empowered to monetize it well.

Doing this would require some changes.  We would need to create environments where people could start their own businesses and realistically compete with larger, existing businesses.

Such environments could fill our societies with endless variety, spontaneity, and vitality.

(Photo credits: Coins / Prof Yunus)

2 Responses to “Microcredit and the Alternative to “Job Creation””
  1. There are natural boom and bust cycles in the economies of the world. During busts credit shrinks rather than expand and weak businesses fail leaving the remaining credit for the stronger ones and also leaving more room for the stronger ones to grow just as some weaker plants fail in a garden. This makes the overall economies stronger as busness becomes more and more competitive. When government intervenes in the process to favor certain companies the whole system is weakened and the economy undergoes profound changes as weak non-competitive companies are favored with government imposed non-deserved credit at favorable rates. The businesses of a country and the country itself are weakened and less competitive.

    The way Yunus does it seems to be the correct way. Even though his rates seem artificially low he is doing it on his own with private funding, at least thats the way I read the story. Good for him. If he can do that and remain profitable thats great or if he wants to do it as a charitable function thats great too. Sometimes when the kind of lending exploitation you describe occurs on the level of lending you describe the money has government backing or a government source otherwise in many countries its criminal like a protection racket or organized crime operation.

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