This article was written by one of our volunteers, Elena Scarso, and edited by Jubilee Scotland.
Banks are often considered the cause of economic and financial issues. Trying to change this opinion, in 1983 Muhammad Yunus had the idea to create a microcredit institute able to support poor people by means of loans on easy terms.
Grameen Bank (GB) – meaning ‘village bank’ – overturned the regular concept of the bank, founding its bases on the idea that poor people can also manage their own financial affairs. It operates in Bangladesh, using credit “as an effective weapon to fight poverty” and “as a catalyst in the overall development of socio-economic conditions of the poor” – people normally excluded from the world of banking.
The most recent results of this initiative are encouraging and, somehow, surprising. As of December 2015, GB has 8.81 million borrowers, and 97% of them are women. GB provides services in 81,392 villages, covering more than 97% of the total villages in Bangladesh. The average borrowed amount is 100 dollars. But how does it work? They claim it starts “with the problem rather than the solution”. It refuses to base its activities – and approach borrowers – using pre-established banking systems. Moreover, the project is based on a collecting long-term process, that allows poor people to collect the necessary money to repay the loan.
Nowadays GB has 2,568 branches and on and every working day it collects an average of $1.5 million in weekly instalments. Based on a principle of trust, they claim the project is a working oiled machine. Of the overall borrowers over 97% of the loans are paid back, a recovery rate higher than any other banking system. Since the initiative gained such a positive result, GB method is been applied by different associations in other 58 countries, including US, Canada, France, Netherlands and Norway.
However, not all that glitters is gold. Observing GB, we could have the impression that microcredit is the appropriate instrument to fight poverty. However, the reality seemed drastically different in South Africa. After apartheid ended in 1994, the international community defined a microcredit plan “to bring new jobs, incomes, empowerment and dignity to the poorest black communities and townships, expectations of rapid progress ran high”. This is not what happened. In fact, the microcredit model damaged the South-African economy and society for different reasons. First, it represented an ‘anti-development’ intervention. “In South Africa, the microcredit movement has created an incredibly risky and expensive way to support the immediate consumption needs of the very poorest”, writes the Guardian. This loaning system brought poor people to sell off their houses and borrow money from friends and acquaintances in order to repay their microloan. The only slight signal of a positive impact of the microcredit system on the South-African economy is constituted by the birth of new small shops and street traders. But this is just a small part of its effects since microcredit gave a new and generous incentive to the black market.
After the first phase of optimistic outburst in self-employment, its income dramatically felt between 1997-2003 because of the incredible hyper-competition. It led to burning social tensions and to an intensification of poverty. Moreover, the dominance of microcredit in the South-African economical system took away from real business activities – the limited financial resources of the country. In other words, such minimum loans impeded people to create “productive and sustainable business activities” and opened doors to temporary and inward-looking trades.
The main problem here is that South-African economy can’t be easily fixed. Microcredit institutions damaged it permanently, and “extracting the poor from the grip of the microcredit movement will not be easy”. Saying that, can we really consider microcredit as an effective weapon against poverty? We described two similar example with supposedly opposite results. It may depend on social and economic factors, but spreading a model without being sure about its effect doesn’t seem a good idea, since the unlucky target of this experiment it would be those who we should help, namely poor people.
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