Do Micro-loans offer an effective strategy in fighting poverty?
Presenter: Lynn Suter
A Western solution to poverty often favours assisting the start of new small businesses. Making small amounts of money available on favourable terms for such budding micro-enterprises is seen as one way to encourage those in poverty to make their way to a more economically stable life. Microcredit involves small loans, while a microfinancing institution aims to deliver many different financial services (savings, loans, insurance, etc).
Care should be taken not to use these two terms interchangeably. Micro-anything deals with small things. As such, microcredits and microfinancing deal with small amounts of money or investments. How small? That depends on where in the world we are talking about. Usually, it is understood to mean to services for the very poor in India, Bangladesh, and third world countries, where “small” loans by our standards are tiny (just a few dollars, sometimes). However, microcredit institutions are also present in the West, offering loans that are small compared to traditional bank loans. (See Victoria News links below).
For our discussion, I will concentrate on micro-loans for the very poor to have access to credit. There are different ways in which such services work. Specifically for loans, they are either provided by a special institution (like a traditional bank, but specializing in microfinance) or they are funded through a group model (like Kiva – see below). Microcredit and financing are generally touted to be beneficial to the poor people.
The services are advertised to enable the poor to have access to money to set up or expand their business, increase their income and “pull the family out of poverty.” However, there are also many criticisms of these services. Do they encourage a consumer society and take advantage of economically uneducated people? Should other factors be considered first, viz., health, literacy, and sanitation issues if we really want to help alleviate poverty.
Suggested links (both pro and con):
Trade-offs, rights and responsibilities in the business of microcredit :
India Microcredit Faces Collapse From Defaults http://www.nytimes.com/2010/11/18/world/asia/18micro.html?pagewanted=all
Microcredit doesn’t end poverty, despite all the hype http://www.washingtonpost.com/opinions/microcredit-doesnt-end-poverty-despite-all-the-hype/2012/01/20/gIQAtrfqzR_story.html
When Microcredit Won’t Do http://opinionator.blogs.nytimes.com/2011/01/31/when-microcredit-wont-do/ (including comments on the bottom of the article) Microcredit Summit http://www.microcreditsummit.org/what-is-microfinance.html
Microcredit here at home: