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Salient Features of the Scheme. It is assumed that micro-loans can on their own eliminate poverty. The interest rate will be very low. The loans will be for quite large amounts, at once. Loans will be relatively long term, for three years. Defaults will be treated leniently.
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Salient Features of the Scheme • It is assumed that micro-loans can on their own eliminate poverty. • The interest rate will be very low. • The loans will be for quite large amounts, at once. • Loans will be relatively long term, for three years. • Defaults will be treated leniently. • There will be no savings requirement. • Loans will only be given for ‘approved’, ‘productive’ purposes. • Consumption loans will not be allowed. • Men will get most of the loans. • Loans will be to individuals, with no group system. • The State Government will run the scheme, through its own offices. • The scheme is intended to do its job and then to stop.
Analysis of the Salient Features • Loans can help some poor people to be less poor, but credit alone can not remove the poverty. • Low interest rates encourage inefficient use and slow repayment, they make the loans unprofitable and hence a loan programme unsustainable, they prevent lenders offering good rates on savings deposits, and they encourage corruption with loans being taken by those with power to influence the lender. • Large loans are difficult to absorb and to manage, they attract richer people, un-invested funds may be wasted or stolen, and they do not allow the lender or the borrower to ‘test the water’. • Long term loans are unnecessary because the returns on micro-enterprises are rapid, they encourage misuse and theft, they attract the rich, and they conceal mistakes until it is too late to remedy them.
Analysis of the Salient Features • If default is not rigorously controlled, the more powerful better-off borrowers will be the first to default, no credit culture will be created, the businesses started with the loans will be unprofitable and misuse will be encouraged. • If defaults are allowed anywhere, the ‘virus’ will spread everywhere. Any existing credit culture will be damaged or even destroyed, and it takes many years to rebuild. • Poor people can and do save, in all kinds of ways. If someone has acquired the habit of making regular savings, he/she can more easily make regular loan repayments. Savings provide security for the lender, and funds for lending. Savings facilities are also particularly useful for poor people, because they usually do not have anywhere safe to save.
Analysis of the Salient Features • People, particularly poor people, know what they can make and what they can sell much better than any outsider, particularly government staff. • Poor people need to satisfy their survival needs before they can invest in ‘income generating projects’. So-called ‘consumption’ expenditure on items such as health care, schooling, clothing and house repair are often very productive indeed. • Women save and repay more reliably than men, and they generally spend for the needs of their families, not for entertainment or for risky business ventures. Access to finance also improves women’s position in society. • Co-operatives have usually failed because of official interference. Poor people, in particular women, have traditionally and successfully built group-based financial systems, and groups provide low cost and effective collection and appraisal services.
Analysis of the Salient Features • Governments tend to be bureaucratic, slow, politically influenced, they are not business-like and they are potentially corrupt. Both banks and other financial institutions have shown themselves more able to provide financial services to the poor. • Poor people, like the rest of us, need efficient, sustainable and permanently available financial services to help them manage their financial affairs. Credit cannot be a ‘one-shot’ poverty alleviation mechanism.
Lessons • Do not exaggerate what can be achieved by micro-finance alone. • Set interest rates at a level which covers the costs of lending. • Make small short term loans at first, and only increase the amounts and duration in line with need and performance. • Follow up defaulters rigorously, reschedule in special cases, but avoid write offs. • Offer savings facilities as well as loans, and require clients to save before they borrow. • Allow borrowers themselves to decide how they will use their loans to earn more money.
Lessons • Recognise that so-called ‘consumption’ is usually very productive. • Lend to women rather than men. • Use group intermediation mechanisms, particularly with the poorest clients. • Allow and assist suitable financial institutions and banks to engage in micro-finance. Governments should regulate and may have to subsidise it, but should not do it. • Ensure that micro-financial services are profitable over the long term, and that the micro-finance institutions continue to exist and serve their clients for as long as they are needed.
