Lozah

Microcredit: Panacea for Poverty or Just Another Buzzword?

In 2006 Nobel laureate Muhammad Yunus proclaimed that he had found the panacea that will cure the world of poverty whereby “the only place you would be able to see poverty is in the poverty museums”. This panacea was none other than the age-old concept of providing loans to those who need it, with one important addition: these loans would be exceptionally small in size, and would be provided to the poor. This type of loan ultimately became known as “micro-loans” or “microcredit”.

Microcredit in Egypt is said to range on average between EGP 100 to EGP 3000 and is generally provided by international donors (USAID and Ford Foundation being the largest), the Egyptian Social Fund for Development through NGOs and development banks, and commercial banks. Almost all of the NGO-based micro-lending offers other social services in conjunction with credit such as training for hygiene and health, literacy classes, and skills-building classes. Group savings, which are today formally known within the microfinance field as Revolving Savings and Credit Associations (ROSCAs), have been present in Egypt for decades. Local moneylenders who charge exorbitant interest rates and are known for their exploitation of the poor have also been present for years in Egypt’s informal economy. Overall, microcredit is nothing new to the Egyptian poor, but has been largely informal which may have contributed to its limited efficacy.

However, sustainable poverty-alleviation involves so much more than pushing people slightly above the poverty line; it implies a certain degree of independence and freedom. The non-poor have the freedom to obtain a loan should they wish to do so, which is a very different situation from relying on loans as a means of subsistence. Comparing this notion of poverty-alleviation to the actual benefits of micro-credit, an obvious gap can be seen. Poverty is a result of complex historical and economic processes; to even begin to tackle poverty one must look at the legacy of illiteracy, environmental degradation, dependency, economic exploitation, political marginalization and repression, and many other factors. Claiming that a slight increase in income will eradicate poverty is a wildly simplistic approach that views poverty through a strictly monetary lens.

Furthermore, claiming that the poor who obtain these loans will have access to markets and an ever-expanding enterprise is an incredibly naïve assumption. One can immediately see a problem with the assumption of zero-barriers to entry to markets and that micro-enterprises will be able to compete against multinational powerhouses. The idea of micro-credit being a sustainable mechanism for job creation is flawed, for most of these micro-enterprises are in the informal sector.

However, this criticism should not detract from its importance to the actual loan recipients. Many loan recipients – most of whom are women – truly rely on the income they make from the micro-enterprises they have started. They rely on this income to feed and educate their children. Many women are given literacy and budget-design classes in conjunction with the loans they receive. Economic theory portrays the free-market system as instantaneously efficient. However, reality always necessitates a time-lag between the “trickle-down” phenomenon and harsh day-to-day circumstances. Moreover, in environments of shallow poverty, a little extra income, while it may not remove poverty entirely, goes a long way. Micro-credit is definitely not a panacea for poverty, but its positive effects should not be ignored. Thus, micro-credit should not be used as a long-term poverty alleviation tool, but rather as a stop-gap measure to ease the burden of poverty, and to fill in development time-lags. Both its benefits and limitations must be taken into consideration when designing poverty-alleviation projects.

This article first appeared in the May issue of the Ibn Khaldun Centre’s Civil Society Newsletter.

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June 24, 2009 - Posted by | Development

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