The macro story of microcredit

Perhaps the most important change brought about by micro-credit is one not told through conventional poverty statistics at all. Thanks in no small measure to micro-credit, particularly through its institutional strategy of samities or self-help groups, the poor of Bangladesh have undergone something of a personality revolution, more assertive, pro-active on opportunities, clearer on life-goals. The social reality may not have lost its oppressive features but the poor men and women of rural and urban Bangladesh are new protagonists on the scene and societal outcomes are very much open. With perseverance and determination, they are forging a new ground reality of initiatives and signaling an escalating refusal to remain content with the vagaries of a poverty-laden fate.

Micro-credit has long won its initial argument that the poor are bankable. As the Micro-Credit Summit is being held in Dhaka, today's question is a different one: how effectively is micro-credit evolving to address the poverty challenges of today's ground realities. As the Millenium Development Goals have re-focused the global spotlight on poverty, it is the poverty mandate of micro-credit which demands a re-visit. This is important because the linguistic transition from micro-credit to micro-finance while an acknowledgement that the sector today is an essential component of the mainstream financial system, is also appearing to be a double-edged sword. Mainstreaming is often coming to be understood in a manner which obscures the focus on poverty per se: high repayment rate and MFI sustainability at the expense of poverty impact and borrower sustainability. And this is fuelling a populist critique which in its own turn is in danger of confusing the policy options involved.

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The most important elements of the emerging 'poverty' critique of micro-credit have to do with perceptions on unfairly high interest rate, neglect of 'social' dimensions, and lastly, neglect of the extreme poor. How valid are the above critiques?

Take the case of high interest rate. At one level, the criticism on high interest rate is more about social perception than a critique by clients who find micro-credit a much better option than traditional money-lenders or the inaccessible formal banks.

Populist critiques here are often ill-informed and without merit. However, there are some real concerns. While a relatively high interest rate may have been warranted at the early institutionalisation stage of micro-credit, efficiency gains of the sector and the opportunity for MFIs to access low-cost funds clearly need to translate into some benefits for the clients in the form of lower interest rates.

There is also a widespread perception that micro-credit is neglecting social aspects of dealing the poverty challenge, in particular a perceived abandonment of 'social mobilisation' in favour of quick credit disbursal. How valid is such a perception? When the group approach was pioneered in the early days of micro-credit, social mobilisation in the form of a long gestation period proved necessary to build the social and informational awareness and confront any social resistance. Two decades down the line, micro-credit is a widely-accepted social reality and the informational dimension of social mobilisation has been universalised. Not only that, the financial discipline implied in high repayment rate has become something of a social norm.

These developments clearly raise questions about how critical earlier model of social mobilisation is required for further progress of the sector. Mechanical persistence with earlier mobilisational messages may likely lead to 'awareness fatigue' on the part of borrowers. Where, however, the critique is of merit is regarding competition between large MFIs (micro-finance institutions) who have the strength to go for immediate disbursal and locally-based small/medium MFIs who undertake a gestation phase prior to disbursal. There are no easy answers here since it is the borrower interest which must dictate the process. A preferred outcome may be the one in which large MFIs concentrate on the upper segment of the clientele who require little by way of social mobilisation and the smaller MFIs concentrate on the middle and lower segments for whom a gestation phase may remain critical. It is arguable that locally-rooted MFIs may be better placed to serve these segments of the clientele. How the borrower interest will play out must, however, remain an open question. From a policy point of view, the relevant concern is to ensure level playing fields which in this case means making sure that small/medium MFIs have preferential access to low-cost funds.

The third and from the standpoint of populist perceptions, the widest criticism of micro-credit has been its perceived neglect of the extreme poor. In reality, several arguments have been rolled into one here. That there is a self-selection bias against the extreme poor within the existing micro-credit model has now been well-established through research. This realisation has spawned compensatory initiatives as in projects specifically targeted to the extreme poor.

The policy issues here, however, merit some clarification. While it is true that a self-selection bias operates against the extreme poor, it does not necessarily follow that all extreme poor are willing clientele for micro-credit. An important segment of the extreme poor may not be prepared or able to bear the rigorous repayment discipline of micro-credit; their immediate interest may lie in wage employment or safety net programmes.

At another level, the focus on extreme poor may reflect more of a maturity argument, namely that having succeeded on the broad poverty front, micro-credit needs to ensure coverage of specific sub-groups who make up what may be characterised as the missing poor i.e. indigenous population, people living in remote areas, people losing traditional occupations etc.

But there is also a third argument hidden here. The focus on extreme poverty is a way of raising a broad moral critique of insufficient achievements of existing poverty reduction strategies including that of micro-credit. It is indeed a fact that despite three decades of 'poverty alleviation', forty percent of the population in Bangladesh still remain within poverty and there is also a growing problem of inequality. More than anything else, the moral critique is a call against complacency, against 'business-as-usual', a reminder if any was needed, that the battle on the poverty front remains the most critical of today's challenges. The urgency of this moral critique lies in re-vitalising the sense of mission which is too easily lost in the language of technical expertise, academic discourses and agency paradigms. Fighting poverty remains ultimately an intensely human challenge and it is a lesson and realisation which needs constant nurturing. It is our hope that the Micro-Credit Summit which is being held in Dhaka ultimately serves to re-ignite this sense of mission.

Hossain Zillur Rahman is Executive Chairman of Power and Participation Research Centre.