Wednesday, September 1, 2010

Is micro-credit a tool for sustainable development and poverty alleviation?

THERE is no reputable statistical evidence to date to show that micro-credit works for reducing poverty or enhancing social contribution by the poorest section of the population.

Does it move people permanently across the "poverty line"? No, again because no evidence to say it does or can. Do the micro-loans go to tiny businesses and do those businesses grow? Again the answer would be mostly no. There is no solid data to disprove this.

Around 2.7 billion of people in countries across the globe are considered to be living in poverty, according to statistics from the United Nations Development Program (UNDP). These people have a consumption level of less than US$ 2.0 per day. Extreme poverty is defined as living in less than $1.0 per day. Around 1.1 billion of the poor live in different countries are in extreme poverty. People living in extreme poverty often lack in opportunities to have their basic needs met, meaning access to food, clean water, clothes and decent shelter. Most lack education and are vulnerable to diseases. Most of the poor are also exposed to political, juridical or social injustices and have little or no power to make their own choices or form their own life situation.

One important aspect of poverty is that it is women, to a significantly higher degree than men. Seventy per cent of those living in extreme poverty are women. Women are illiterate to a higher extent, are more exposed to malnutrition and diseases and lack social, political and economic rights in many places.

Nevertheless, women take a bigger responsibility for providing for the family and usually work harder than men.

The essence of poverty is the combination of lack of power and choice and lack of material resources. People living in poverty are not only lacking in, material resources, but also in, freedom to decide over and shape their own lives. Poverty deprives them of the opportunity to choose on matters of fundamental importance to themselves. Poverty affects not only individuals but also groups, societies and nations. The problem is widespread and very dynamic and the patterns of poverty change over time. The democratic or human rights aspect of poverty interacts with the material dimension, since lack of power and choice often makes it difficult for the poor to obtain adequate material resources.

The problem is context-specific; poverty is unique in each place, with different political, economic, environmental and socio cultural situations. There are many different manifestations of poverty - hunger, poor health, premature death, ignorance, discrimination and insecurity, denial of dignity and social status. Poverty is by the United Nations Development Programme (UNDP) defined as living on a consumption level less than $ 2.0 per day.

Now the question is about sustainability. What is the meaning of sustainability? Within the micro finance sector, the concept of "sustainability" refers to economic sustainability. There are two ways to define sustainability. The first definition is operational sustainability, which means that income (from lending rates, fees and other incomes from the clients) cover all operational current costs (administration, credit losses, salaries, capital costs). The other definition is financial sustainability. According to this definition, the organisation has reached a position where incomes not only cover current costs, but also build up the own capital. The greater part of the micro finance institutions (MFIs) is operationally sustainable - incomes cover costs for current operations - but the organisations are not strong enough to finance further expansion. However, a financially sustainable organisation has an income structure that is strong enough to make further expansion possible, without support from external sources. When impact on gender equity is considered, income is only a part of the equation.

First of all, women's aim is seldom limited to increasing income. In addition, other changes, such as enhancing women's visibility and enabling them to voice their concerns, may be a key means to achieve long-term impact on efforts for raising women's status and improving gender equity. The impact of microcredit alone on women's status and gender equity is limited. Most women borrowers have only partial control over loans, or have relinquished all control to male members of the family. This has serious implications for the impact of gender equity. However, this is not to say benefits are non-existent. As part of a broader effort to raise awareness and mobilise women, credit could play an important role as an "entry point" to strengthen women'snetworks and mobility, increase their knowledge and self-confidence, and increase their status in the family.

Microcredit has proven its potential to generate results. However, these results are generally short-term and vary significantly among borrowers. In general, the poorest seldom benefit from microcredit, while the middle and upper poor benefit the most. Women in particular face significant barriers to achieving sustained increases in income and improving their status, and require complementary support in other areas such as training, marketing, literacy, social mobilisation, and other financial services (e.g., consumption loans, savings). In fact, it is difficult to separate the impact of microcredit from that of other interventions. One of the problems with most development works targeting the poor in least developed or low income countries is dependency on aid. For decades, countries in the western world have been supporting the poor countries, through money, education, technical back-up, knowledge, democracy building and so on. However, a number of problems are connected to this sort of development work. Many of such countries struggle with huge foreign debts, high inflation, political instability, ethnic conflicts, corruption, weak institutions and low education level. Most of them are dependent on a few raw materials for export, and are seriously affected by trade barriers from the western markets. Despite good intentions, aid is not the solution to the poor's problems. Dependency on aid is, in the long run, counteracting development. The incentive to work for change disappears when a situation of dependency is formed. Many donors are getting tired of giving, because of lack of results. A dependency situation does not benefit either party in the long run. It is, therefore, necessary to find ways for sustainable development of poor countries, without financial support.

The topic of micro finance has received extra attention lately, since UN declared 2005 to be the International Year of Micro Credit. This correlates well with the Millennium Development Goals (MDGs), where one of the goals is to decrease by 50 % the proportion of people living in extreme poverty by 2015.

Micro credit is a very important tool to help people out of poverty in many countries around the world. It is important to get a deeper understanding for the transition process to sustainability for the banks, since this, in the long run, is the best way for all parties. The poorest 10-15 per cent of the population are largely excluded from microcredit programs. Financial data is not directly related to results. Sound financial management and the success of borrowers' businesses are crucial to achieving results. However, there is no direct correlation between repayment and business success, and even less of a link between repayment and social and gender impact.

Participatory appraisal may have an important contribution to make to improved monitoring of the impact of microcredit on women's empowerment.

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