Investigating Microcredits Investigating Microcredits in Developing Countriesin Developing Countries

Is it the Answer to Poverty Eradication?Is it the Answer to Poverty Eradication?

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What is Microcredit?What is Microcredit?

• Microcredit is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs, and to others living in poverty who are not considered bankable.

• In Canada: Micro-credit is a loan under $25,000In Developing Countries: Microcredit is a loan of as little as $10 to $20

Why did Microcredit Start?Why did Microcredit Start?

• The inititiatives were started by idealists concerned to help poor

• The organizations involved were NGOs

• There was a belief that people could not improve their lives through investment in their own enterprises

Uses for Microcredit?Uses for Microcredit?

• Women selling vegetables• Women with kiosks selling candles, soaps, matches,

etc.• Women sitting by the street selling cigarettes,

peanuts, etc.• A lady who breaks rocks with a hammer, and sells

the broken rock as aggregate for concrete.• A woman selling baskets.• A woman selling assorted goods outside her house.• A man selling milk from his bicycle.

Reoccurring theme?

Brainstorming ActivityBrainstorming Activity

• Split up into groups and brainstorm:• Strengths of Microcredits provide for developing countries• Weaknesses of Microcredits which may hinder

impoverished people• Opportunities that Microcredits provide• Threats that arise with using Microcredits

• Also What has caused this burgeoning interest in Microcredit recently? Which factors do you think are significant? Would you rate some as more significant than others?

• Do you think borrowers are likely to develop “thriving businesses”? Will credit really help them to escape poverty?

SWOT Brainstorming ResultsSWOT Brainstorming Results• Strengths

• Closing gaps (rich/poor)• Sustainability• Self-reliance and independence• Empowering

• Weakneses• Unfair (not available everywhere)• Group (back of line rely on front)• Unethical/improper use of loans• Men using women to get $$• Increase in competition b/w businesses… less profit (saturation point in economy)• High Interest rate• Undermine Gov’t institutions• Encourages free market system

• Opps• More time for other activites• Educated on managing a business• More Money.. For Better nutrition, meet needs• Influx in capital into idea (Through publicity)• Diversify economy • Access to upward social mobility… kids benefit

• Threats• Penalties (Can’t pay off loans)

StrengthsStrengths

• Can provide poor families with inexpensive financial services• Example: National Bank for Agriculture and Rural Development (NABARD) in India finances

banks that lend money to self help groups (which consist mainly of poor and low caste women)

• Can improve the country’s economy by providing “everyday people” with sustainable income (thus, an increase in disposable income will also help the country’s economic growth)

• Not only can microfinance improve economy, it can also “increase agricultural productivity, empower women, give the poor access to better nutrition and improved housing” (Ruben 2007)

• Will be most effective when used with other social investments like employment and education programs, in addition to appropriate technology and promotion of self-help groups

• This will help the poor successfully manage their small businesses, increase economic growth and thus reduce poverty

References: •Ruben, Matthew. The Promise of Microfinance for Poverty Relief in the Developing World. May 2007.•Wikipedia

WeaknessesWeaknesses

• Not all impoverished people want to be self-employed

• Microfinance is a necessary, but not sufficient, condition for microenterprise promotion

• Many organizations give to poorest people, but not those slightly above poverty line

• Does not incorporate other external factors that may prevent people from getting credits (i.e. caste, ill health, alcohol abuse, family obligations)

• Make people think that it’s the easy way out and anyone can do it

OpportunitiesOpportunities

• Empowers people in poverty to recognize that they can pull themselves out it

• Can create opportunities for wage-employment through newly created businesses

• Creates a financial opportunity that may not have been there before

ThreatsThreats

• Creates assumption that credit is main financial service needed by poor.

• Common belief that it will always work, when in fact this is not the case. Could risk the loss of individuals current assets.

• Poor may suffer from the reduction in other efforts of poverty alleviation, such as well-tried but less dramatic strategies of investment in human capital through simple primary health and primary education programs

• No real competitive advantage for entrepreneurs

Why Microcredit has Become So Why Microcredit has Become So PopularPopular

• The existence of large #’s of NGOs working in development• The lack of job opportunities in developing countries,

leading to increased dependence on micro enterprises for survival

• The adoption of the mutual guarantee scheme for loan repayment

• The relief felt by donors on discovering something that seemed to work and could help the poor on a large scale

• The fact that most of the borrowers are women• The rediscovery of the importance that poor people

attached to savings• The fact that prominent people and journalists have

publicized examples of people transforming their lives with microcredit

VideosVideos

• http://www.youtube.com/watch?v=YxpTFwQx-A8&feature=PlayList&p=EB810066ECBBF1D6&index=7

• http://www.youtube.com/watch?v=2slVM8u_gi4

Other Thoughts?Other Thoughts?