Investigating Microcredits in Developing Countries

1. Investigating Microcredits in Developing Countries Is it the Answer to Poverty Eradication? http://ryerson.ewb.ca

2. What is Microcredit? • Microcredit is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs, and to others living in poverty who are not considered bankable. • In Canada: Micro-credit is a loan under $25,000In Developing Countries: Microcredit is a loan of as little as $10 to $20

3. Why did Microcredit Start? • The inititiatives were started by idealists concerned to help poor • The organizations involved were NGOs • There was a belief that people could not improve their lives through investment in their own enterprises

4. Uses for Microcredit? • Women selling vegetables • Women with kiosks selling candles, soaps, matches, etc. • Women sitting by the street selling cigarettes, peanuts, etc. • A lady who breaks rocks with a hammer, and sells the broken rock as aggregate for concrete. • A woman selling baskets. • A woman selling assorted goods outside her house. • A man selling milk from his bicycle. Reoccurring theme?

5. Brainstorming Activity • Split up into groups and brainstorm: • Strengths of Microcredits provide for developing countries • Weaknesses of Microcredits which may hinder impoverished people • Opportunities that Microcredits provide • Threats that arise with using Microcredits • Also What has caused this burgeoning interest in Microcredit recently? Which factors do you think are significant? Would you rate some as more significant than others? • Do you think borrowers are likely to develop “thriving businesses”? Will credit really help them to escape poverty?

6. SWOT Brainstorming Results • Strengths • Closing gaps (rich/poor) • Sustainability • Self-reliance and independence • Empowering • Weakneses • Unfair (not available everywhere) • Group (back of line rely on front) • Unethical/improper use of loans • Men using women to get $$ • Increase in competition b/w businesses… less profit (saturation point in economy) • High Interest rate • Undermine Gov’t institutions • Encourages free market system • Opps • More time for other activites • Educated on managing a business • More Money.. For Better nutrition, meet needs • Influx in capital into idea (Through publicity) • Diversify economy • Access to upward social mobility… kids benefit • Threats • Penalties (Can’t pay off loans)

7. Strengths • Can provide poor families with inexpensive financial services • Example: National Bank for Agriculture and Rural Development (NABARD) in India finances banks that lend money to self help groups (which consist mainly of poor and low caste women) • Can improve the country’s economy by providing “everyday people” with sustainable income (thus, an increase in disposable income will also help the country’s economic growth) • Not only can microfinance improve economy, it can also “increase agricultural productivity, empower women, give the poor access to better nutrition and improved housing” (Ruben 2007) • Will be most effective when used with other social investments like employment and education programs, in addition to appropriate technology and promotion of self-help groups • This will help the poor successfully manage their small businesses, increase economic growth and thus reduce poverty • References: • Ruben, Matthew. The Promise of Microfinance for Poverty Relief in the Developing World. May 2007. • Wikipedia

8. Weaknesses • Not all impoverished people want to be self-employed • Microfinance is a necessary, but not sufficient, condition for microenterprise promotion • Many organizations give to poorest people, but not those slightly above poverty line • Does not incorporate other external factors that may prevent people from getting credits (i.e. caste, ill health, alcohol abuse, family obligations) • Make people think that it’s the easy way out and anyone can do it

9. Opportunities • Empowers people in poverty to recognize that they can pull themselves out it • Can create opportunities for wage-employment through newly created businesses • Creates a financial opportunity that may not have been there before

10. Threats • Creates assumption that credit is main financial service needed by poor. • Common belief that it will always work, when in fact this is not the case. Could risk the loss of individuals current assets. • Poor may suffer from the reduction in other efforts of poverty alleviation, such as well-tried but less dramatic strategies of investment in human capital through simple primary health and primary education programs • No real competitive advantage for entrepreneurs

11. Why Microcredit has Become So Popular • The existence of large #’s of NGOs working in development • The lack of job opportunities in developing countries, leading to increased dependence on micro enterprises for survival • The adoption of the mutual guarantee scheme for loan repayment • The relief felt by donors on discovering something that seemed to work and could help the poor on a large scale • The fact that most of the borrowers are women • The rediscovery of the importance that poor people attached to savings • The fact that prominent people and journalists have publicized examples of people transforming their lives with microcredit

12. Videos • http://www.youtube.com/watch?v=YxpTFwQx-A8&feature=PlayList&p=EB810066ECBBF1D6&index=7 • http://www.youtube.com/watch?v=2slVM8u_gi4

13. Other Thoughts?