Table of Contents
2. THE CONCEPT OF MICROCREDITS IN BANGLADESH
3. OPPORTUNITIES OF MICROCREDITS IN THE FIGHT AGAINST POVERTY
4. RISKS AND DIFFICULTIES OF MICROCREDITS FOR LOAN-TAKERS
5. OPTIONS FOR A SUSTAINABLE REDESIGN OF MICROCREDITS
The global divide between poor and rich countries widens: The richest 1 % of the global population own more than the remaining 99%. People in developed coun- tries today are on average 196 times richer than people in East Asian emerging countries (Hickel, 2016). Globally there is increasing awareness that this poverty gap destabilizes international peace and means significant injustice. The sustain- ability concept stipulates the harmonization of economic, social and environmen- tal goals (DiGiulio, 2003, p. 17-18). Sustainable development means economiz- ing and developing resources to ensure the prosperity of future generations (Brundtland-Report, 1986, p. 46). Diverse initiatives have been suggested to en- able poor economies and individuals to overcome the spiral of poverty. Micro- credits are a prominent example: This study systematizes arguments in favor of as well as risks and limitations of micro credits in emerging countries particularly Bangladesh and discusses how microloans could be regulated and redesigned to sustainably free borrowers from the downward spiral of poverty.
2. The concept of microcredits in Bangladesh
The idea of microloans originated during the Bangladesh famine crisis in 1974. Then economics professor Muhamad Yunus at University Chittagong loaned 27$ to a group of 42 women and their families to finance their own microbusiness. The loan-takers could finance the material expenses for small sales businesses on the loan. The loan was paid back from the proceedings of the sales and the business flourished (Hamelink, 2010, p. 2).
Encouraged by this success, Yunus started a research project finding that na- tional economic productivity could benefit from a broad coverage of microloans particularly in rural areas (Grameen Bank, 2017, online). This insight in mind, Grameen (Bangladeshi for “rural or “village”) Bank was founded, authorized by national legislation in 1983 and supported by U.S. bankers and a donation of the U.S. American Ford foundation (Glen, 2006, online).
Grameen bank locally addresses those who would never be able to acquire credit from conventional banks (Yunus, 2007, p. 46), charges small interest rates and utilizes these to award new loans to more people. Credit conditions are kept sim- ple and understandable. Repayment conditions are flexible. The bank actively addresses poor people with credit offers and favors women assuming that these avoid loan delinquency and support sustainable investment. Grameen bank stip- ulates borrowers’ participation in a five-person support group, which collectively ensures the investment of part of the savings from the business into a group-fund (Yunus, 2007, p. 46-49). When the fund is managed successfully, further loans become available. Refunded loans are reutilized for new loans and local devel- opment projects e.g. education, pension funds, dividends to poor people as shareholders of the bank and the expansion of the bank (Singh, 2016, 3-4, 13). By 2007, Yunus was awarded the Nobel Peace Price for his engagement (Glen, 2006, online), but finally was sacked from his own bank (Doherty, 2011, online).
3. Opportunities of microcredits in the fight against poverty
A range of studies prove the efficiency of microcredits as an instrument of poverty alleviation (Khandker, 1998, p. 228). Since national productivity in developing nations is low, incomes, savings and investments cannot grow, which stifles eco- nomic growth. Human development is significantly impaired by economic poverty. Children from low income families do not attend schools, are frequently illiterate and unable to develop their mental capacities, which again keeps their productiv- ity low. Human health and survival are insufficient due to economic weakness (Cheung et al., 2006, p. 4-5).
The microloan concept interferes in this vicious cycle and grants poor people loan based investment opportunities, which boost their economic productivity and income. Ideally loan-takers earn more than they need to survive, pay back the loan and in the long run develop an own capital stock for further investments. Loantakers become independent of the ailing labor market and establish their own small businesses (UNESCO, 2017). Moderate income should enable the formerly poor to send their children to school, develop their capacities and improve their health status and survival opportunities. When this development takes place among larger fractions of the poor population, national economy can benefit as a whole (Auwal, 1996, p. 27). Infrastructure is developed, tax revenues are achieved and growing economic production makes a variety of goods available. When successful entrepreneurs create employment, broad levels of the population benefit from the impetus. Local microloan initiatives unfold national economic impetus (Bateman & Chang, 2012, p. 13-15).
The conception of microcredits has found strong support from the neoliberal as well as the leftist Marxist political spectrum, since microcredits correspond to the ideal of self-determination of the poor and micro-entrepreneurship as an economic factor.
4. Risks and difficulties of microcredits for loan-takers
The assumed positive effects of microloans however are under debate.
According to Banerjee et al. (2009, p. 5) micro-credits do not sustainably increase the welfare and the social status of these communities after 12 to 18 months of operation: People do not send their children to school to a larger extent, but engage them on their newly founded businesses. Most profits made from the businesses are utilized for short-term consumption instead of for sustainable development. Granting loans to the more trustworthy female clientele frequently fails, since women are abused by their husbands to retrieve financial means, which frequently are consumed on daily needs or even drugs (Amin et al., 2003, p. 34). This particularly concerns larger loans, which then quickly drive the concerned families into even larger distress (Karim, 2008). Only 5 to 7 % of micro-loan takers escape from poverty in the long run (Doherty, 2011).
Critics argue that the small-scale loan market can never be fair. Equally serious banks like Garmeen have to charge much higher rates for small credits to cover expenses for loan management and the solvency risks incurred. Grameen for instance charges an average interest rate of 20% in 2003 (Sharif, 2003, p. 61). At such high rates the risk that loans turn insolvent increases exorbitantly.
While loans figures soar quickly in booms (e.g. from 1980 to 1995 from about 20,000 to more than 2 million contracts and 8 million loans from 2005 to 2007) (Roodman, 2010/II), in downward periods and crash phases (1998, 2001, 2007) the number of due but outstanding loan repayments increases (Roodman, 2010/II). Poor people are tempted to acquire new credits to repay the old one (Roodman, 2010).