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“Contribution of Micro Credit on Peace and Development In Bangladesh.”

1. Definition of Microcredit

a. Definition by Dr. YunusThe word "microcredit" did not exist before the seventies. Now it has become a buzz-word among the development practitioners. In the process, the word has been imputed to mean everything to everybody. No one now gets shocked if somebody uses the term "microcredit" to mean agricultural credit, or rural credit, or cooperative credit, or consumer credit, credit from the savings and loan associations, or from credit unions, or from money lenders. When someone claims microcredit has a thousand year history, or a hundred year history, nobody finds it as an exciting piece of historical information. We think this is creating a lot of misunderstanding and confusion in the discussion about microcredit. We really don't know who is talking about what. We are proposing that we put labels to various types of microcredit so that we can clarify at the beginning of our discussion which microcredit we are talking about. This is very important for arriving at clear conclusions, formulating right policies, designing appropriate institutions and methodologies. Instead of just saying "microcredit" we should specify which category of microcredit.

Microcredit data are compiled and published by different organizations. Then we can prepare another set of important information, number of poor borrowers, and their gender composition, loan disbursed, loan outstanding, balance of savings, etc. under each of these categories, countrywise, region wise, and globally.

These sets of information will tell us which category of microcredit is serving how many poor borrowers, their gender break-up, their growth during a year or a period, loans disbursed, loans outstanding, savings, etc. The categories which are doing better, more support can go in their direction. The categories which are doing poorly may be helped to improve their performance. For policy-maters this will be enormously helpful. For analysis purpose this will make a world of difference.

We urge Microcredit Summit Campaign secretariat to present the information that they already collect on number of clients, number of the poorest among them, number of poorest clients that are women, number of clients that have crossed the poverty line, broken down for each of the categories of microcredit. This will help donors to select the categories they would like to support. This sorting out is very important for the donors, as well as the policymakers.

b. Definition by Microcredit summitMuch of the current interest in microcredit stems from the Microcredit Summit (2-4 February 1997), and the activities that went into organizing the event. The definition of microcredit that was adopted there was:

Microcredit (mI-[*]Kro'kre-dit); noun; programmes extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families.

Definitions differ, of course, from country to country. Some of the defining criteria used include- size - loans are micro, or very small in size target users – micro entrepreneurs and low-income households utilization - the use of funds - for income generation, and enterprise development, but also for community use (health/education) etc. terms and conditions - most terms and conditions for microcredit loans are flexible and easy to understand, and suited to the local conditions of the community.  

2. Historical background of Microcredit

MICROCREDIT emerged in the 1970s as social innovators began to offer financial services to the working poor — those who were previously considered “un-bankable” because of their lack of collateral. Once given the opportunity, not only did clients of MFIs expand their businesses and increase their incomes, but their high repayment rates demonstrated that the poor are capable of transforming their own lives given the chance. This model of lending disproved all conventional thinking. MICROCREDIT was born. Since then, MICROCREDIT has become one of the most sustainable and effective tools in the fight against global poverty.

Most microcredit programs target women as the most desirable borrowers. This is partly a result of a policy of social empowerment and partly as a result of the perception that women have higher rates of repayment than men. As noted above, loans are usually collateral free. Maturity is normally 50 weeks with repayment in weekly installments. All financial transactions are conducted in the presence of the entire borrowing group and all transactions are recorded in individual passbooks. Most microcredit programs begin with small loans, but allow borrowers to take more and more as they repay each previous loan and thus prove themselves good credit risks. Finally, borrowers have full freedom to choose the activities to be financed. Loans need not be spent only on investment; spending for consumption is equally acceptable.

In broad terms all microcredit programs are working towards the goal of decreasing income poverty and decreasing the vulnerability of the poor. Microenterprise clusters claim to enhance these effects by improving on the microcredit strategies. According to the supporters of microenterprise clusters, clustering can solve many of the problems associated with microcredit financed enterprises such as distance from markets and inefficiency. The origin of the microcredit movement is usually attributed to the work of Muhammad Yunus’ Grameen Bank which was founded more than 20 years ago in Bangladesh (Jolis, 1996). Today microcredit and microenterprise programs can be found throughout South and Southeast Asia, many parts of Africa and Latin America and even in the US and other Western countries. Support for such programs has been on the increase in recent years and there is a lot of optimism about the capacity of microcredit to reduce poverty. To quote from The Independent again (5 May 1996), “Muhammad Yunus believes that he can eradicate world poverty, all by the use of one simple idea. Now the world’s leaders are starting to take him seriously.” This essay will try to determine whether such belief and optimism is warranted. Lastly, it should be noted that despite the spread of microcredit programs and their growing popularity with policy-makers, hard data is somewhat lacking. There is little standardization across studies as to how to define critical processes and measures of success. The definition of “poverty”, and especially “reductions in poverty”, tends to vary from study to study. “Women’s empowerment” is another very nebulous term. Many terms and processes are redefined on an ad hoc basis each time a new study is conducted. Much of the literature on the subject of microcredit appears to be in the stage of empirical observation and anecdotal evidence. However, after 20 years the preliminary results are in. There is plenty of

information on the positive and negative aspects of microcredit programs, as well as some early information on the long-term effects and prospects of microcredit and microculstering schemes. This information should be more than enough for the purposes of this essay.

3. How microcredit works?The most common micro credit product is a microcredit loan — usually less than 10,000 tk. These tiny loans are enough for hardworking micro-entrepreneurs to start or expand small businesses such as weaving baskets, raising chickens, or buying wholesale products to sell in a market. Income from these businesses provides better food, housing, health care and education for entire families, and most important, additional income provides hope for a better future.

In addition, the poor, like all of us, need a secure place to save their money and access to insurance for their homes, businesses and health. Micro credit institutions (MFIs) are now innovating to help meet these needs, empowering the world’s poor to improve their own lives.

The global repayment rate for microcredit loans is higher than 95 percent, which allows MFIs to re-lend these funds to even more clients. By giving the world’s poor a hand up, not a handout, micro credit can help break the cycle of poverty in as little as a single generation.

4. Why Is Microcredit So Popular?

In spite of criticism and concerns over whether or not microcredit is an effective means to eliminate poverty, support for microcredit has grown significantly in the last decade. World leaders, international institutions and high profile celebrities like Hilary Clinton and Jennifer Lopez have publicly endorsed microcredit. The United Nations even named 2005 the "International Year of Microcredit" and sponsored a multitude of global events to help microcredit gain attention and support. This has also coincided with an ideological shift in development programs and policy. In the United States support has moved toward programs that emphasize self-help rather than dependency on government. Microcredit has been sold worldwide as a "free-market" kind of development approach. This rests well with those who believe market-based approaches to development are superior to state-based initiatives in which the state becomes responsible for providing economic opportunities and social services.

1. Microcredit and Peace in general

When Yunus was asked why he received the Nobel Prize for Peace he responded that microcredit eradicates poverty and this provides real peace. Sverre Lodgaard, Director of the Norwegian Institute of International Affairs and first deputy member of the Norwegian Nobel Committee, told the BBC that the Nobel's choice for the Peace Prize was right on. He explained, "More people die each year from poverty than from war, so a fight against the violence which is perpetrated through the extreme division in our world's resources is very welcome." Elizabeth Littlefield, head of a pro micro lending think tank sponsored by the World Bank, concurred, "It is simplistic to draw a direct connection between poor people improving their lives and peace, but microfinance helps alleviate poverty, creating the pre-conditions for a more stable and democratic society." According to the Nobel Committee, "Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Microcredit is one such means."

Since the terrorist attacks in New York City and Washington DC on September 11th, 2001 and the bombings in London that occurred in July 2005, many political leaders have suggested that poverty in the developing world may precipitate terrorist attacks on the West, namely the United States and Europe. Patricia Hewitt, the former Secretary of State for Trade and Industry of the British government, stated during an interview with the New Statesman journal in 2003, that there is a clear connection between terrorism and poverty. She warned that if the West did not do more to assist poverty suffered in developing countries then the West would "pay a price in increased terrorism and increased insecurity all around the world."

According to the Nobel Committee, "Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Microcredit is one such means".

On the first day of the 2005 G8 Summit, an annual political meeting between the heads of state of eight of the most politically and economically powerful countries in the world (Canada, France, Germany, Italy, Japan, Russia, the U.K. and the U.S.), a series of explosions struck the London underground transportation system. In the aftermath, British Prime Minister Tony Blair alluded to the connection between poverty and terrorism and stated that the G8 commitment to improving the destitution suffered in developing countries was an act of defiance against terrorism.

2. Peace and development in generalWhile peace and development appear on the surface to be mutually reinforcing, at timesthere may be a tension between development and peace-building objectives, requiring development practitioners to make difficult choices about their approaches in fragile, conflict-ridden societies. In particular, the role of economic development in sustaining peace and transforming conflict is poorly understood. However, the somewhat formulaic approach that has been applied to many post-conflict recovery programs— typically involving elements for macroeconomic stabilization, livelihood support and income generation—may not fully engage the private sector in preventive action and may even miss critical opportunities to promote broader stabilization goals. To be effective, economic interventions must be located within broader peace-building frameworks embracing political, socio cultural and security dimensions. Rehabilitation of conflict-affected societies demands integrated approaches rather than more traditional ‘silo’ approaches. But what does this mean in practice? Post-conflict recovery programs that focus primarily on ‘the issues’ without seeking to promote attitudinal and behavioral changes are unlikely to achieve durable outcomes. Tangible measures to address inequity and inequality, to improve access to services/resources, to generate employment and to provide other ‘peace dividends’ must be infused with measures to inculcate peace into the mind-sets of those in conflict. The importance of attitudinal and behavioural modifications was succinctly captured by a Solomon Islander during the February 2004 UNDP Peace and Conflict Development related Analysis (PCDA): ‘We have taken the guns out of the hands of the youth but we have not yet taken the guns out of the minds of youth’. Removal of weapons gets rid of the means but not the reasons for waging conflict. Within the economic sphere, the attitudinal changes and behavioural modifications necessary for conflict transformation are captured, on one hand, by preventive actions encapsulated in concepts such as corporate governance, corporate social responsibility, and within employer-labour relations, and on the other hand by reductive actions such as the Kimberley Certification Process and the Peace Diamond Alliance. Finally, it is worth considering the question that perhaps should have been asked at the outset:

‘What is peace?’ It was readily apparent during the PCDA mission to the Solomon Islands, for example, that there are very different concepts of peace existing in parallel and therefore benchmarks for achievement of peace will vary accordingly. For the Regional Assistance Mission to the Solomon Islands (RAMSI), peace has (to date, at least) largely been measured in terms of security, in a law-andorder sense. For the Solomon Islands government, peace appears to be defined in terms of governance practices, while within the business community peace is perceived in terms of the investment environment. On the other hand, traditional leaders have spoken in terms of traditional reconciliation processes while church leaders have referred to peace in spiritual terms. Pointedly, some individuals have spoken of an external security provided by RAMSI but have also said that they do not yet feel an ‘inner peace’. Inevitably different understandings of peace will lead to different programming responses. However, the conceptualisation of peace as a more deep-seated sense of well being reflects the imperative to tackle root causes of the tensions, not just the more proximate causes such as weapons, criminality and graft. This action must be founded on a comprehensive understanding of peace-conflict dynamics. Critically, ownership of ‘the construction of structures of peace and the de-construction of structures of violence’ (Bush 2003:4) must be vested in those that are most affected by violent conflict. In Solomon Islands, as elsewhere in societies emerging from violent conflict, this is likely to involve capacity building in all three spheres—the public sector, the private sector and civil society. At the same time it will require fundamental contradictions arising during the transition from a society embedded in traditional culture to a society that is able to accommodate the challenges of an increasingly globalised world, to be acknowledged and addressed. The role of business in supporting or subverting peace has become an area of emerging interest for aid workers. On the whole, the private sector sustains negative impacts by violent conflict and therefore has a keen interest in efforts to reduce and eliminate its incidence. However, the private sector itself can exercise significant influence on peace-conflict dynamics and can play an important role in conflict transformation processes. This will require not only a new level of partnership between the private sector and other elements of societies in conflict but also a shift in the relationship between the private sector (both offshore companies and local businesses) and more traditional peace-building actors. In March 2004 the international nongovernmental organization, International Alert, called for an extension of conflict-sensitivity mainstreaming to address development policy that affects the private sector—including macroeconomic reforms, private sector development, support to SMEs and micro-credit as well as engagement of local actors in peace-building activities (International Alert 2004:5). Conflict sensitivity calls for attitudinal change and behavioural modification as well as capacity building and infrastructure inputs. For the private sector and economists tasked with economic revival of conflict affected societies this will involve a shift in traditional mindsets from ‘development economics’ to ‘peace-building economics’.

3. The Benefits of MicrocreditThe benefits of microcredit can be divided into three categories: economic, social and spiritual. Since the aim of this paper is to focusmore closely on the spiritual contribution, we will only briefly list the main economic and social contributions of microcredit. The main benefits of microcredit claimed by proponents are

1. A reduction in vulnerability to adverse circumstances on the part of the poor,

2. An increase in consumption in the same group, and

3. a reduction in income-poverty. The supporters of micro enterprise clusters further claim that clustering increases the chances of success and prosperity for poor loan recipients.

a. Economic BenefitsMicrocredit stimulates the informal sector of third world economies, both urban and rural. This sector, which encompasses most of the population and its poorest people, is usually the most dynamic sector of the economy. Application of resources to this sector will have the greatest multiplier effect on the local economy. The establishment of a petty trade sector creates linkages between rural and urban areas which thus stimulate each other. It enables a closer integration and a more effective matching of supply and demand between them. Microcredit stimulates the small holder agricultural sector by incrementing its productive potential and enabling it to grow progressively out of subsistence farming and to market its surplus production. A thriving trade sector will further stimulate this process. The economic rewards from the type of activities supported by microcredit have an immediate impact at the family level in the fight against poverty by increasing income and consumption capacity. The latter will in turn stimulate the surrounding economy by providing additional opportunities for micro businesses. Success in the informal sector is often a prerequisite for a small business to enter the formal economic sector and tap its benefits, that is, access to many services such as banks, government schemes, exports, selected social coverage and so on. On a macroeconomic basis, transition to the formal sector will also link the activity to fiscal mechanisms thus increasing the government's capacity to play a growing social role.

b. Social Benefits of MicrocreditBy supporting and sustaining productive activities, microcredit is a good antidote against unemployment and poverty. Indeed, poverty and idleness are the main cause of many social problems that plague cities in emerging economies. Family breakdown, crime and violence, and child delinquency exacerbate the process of social marginalization which creates a context whereby opportunities of social and economic improvement are difficult to seize and benefit from. Microcredit can ease tensions inherent in the chaotic urbanization process experienced in the third world by: - reducing the flow of rural-urban migration by improving economic opportunities in rural areas. Indeed, - restoring dynamism and pride in rural life will provide urban areas with some breathing space to better absorb its poor and alienated population, - increasing the number of viable economic opportunities in urban areas. Microcredit allows marginalized social groups who do not have access to formal or traditional sources of finance to take on a productive role in society. In many countries, traditional social relations have left population groups on the fringes of society, denying them the possibility to improve their well-being and/or assume a more participative role in society. Microcredit strengthens the fabric of the family by enabling this fundamental unit of society to sustain itself on an economic basis and by reinforcing the quality and strength of family relationships. Indeed, the village is still a very important factor in determining identity patterns in expanding urban areas and village dynamics have a strong and subtle influence on the behaviour as well as pride, confidence and ambition of villagers presently living in urban areas. The increased returns of economic activity at the individual family level will generate the need and capacity to sustain constantly improving social services such as infrastructure, education and health, as well as the propensity to invest in housing. Progressive access to and use of these improvements is a basic benchmark of development.

c. Spiritual Benefits of MicrocreditThe concept of spirituality is difficult to grasp in the context of our discussion because of its abstract nature. However, it plays a profound role in defining and guiding individual and

collective behaviours and attitudes. Spirituality is thus linked to the set of values that individuals and communities will turn to when deciding and implementing any action. The rise of capitalism and scientific determinism on the one hand, and the progressive alienation of religion and ideology as sources of moral values on the other, has led to the domination of a materialistic and individualistic vision of life at the expense of traditional value systems that have maintained the cohesion and survival of communities for generations. The inability to respond to this dominant materialistic vision of existence with the human and spiritual values that generate attitudes of solidarity, cooperation and justice is the main reason for the crisis that our planet is witnessing and the inability of the world community to cope with it. This realization is slowly emerging among decision- and policy-makers. For example, on the specific theme of the environmental crisis, Al Gore Jr, the United States vice president writes, 'The more deeply I search for the roots of the global environmental crisis, the more I am convinced that it is an outer manifestation of an inner crisis that is, for lack of a better word, spiritual.'3 This realization about the ecology can easily be transposed to the other challenges facing humanity and thus we can read in religious literature that 'the universal crisis affecting mankind is essentially spiritual in its causes'.4 If it is the lack of spiritual qualities that is at the root of the crisis facing humanity then those qualities must be emphasized in devising and implementing practical solutions. Indeed, spiritual principles or human values are at the core of the motivation that will generate within the individual and the community the will and aspiration to uphold solidarity, service, cooperation and justice without which unity, development and peace for humanity cannot ever be achieved. Among the vast array of practical solutions, microcredit schemes stand out as having a great potential to contribute to this objective because they provide the individual, the family and the community with the possibility to develop their full potential while at the same time enabling them to contribute this potential to the wider context to which each belongs.

d. Promotion of the Role of Women in SocietyVery often in the developing world, women are, by tradition, in men's shadow. However, they are often the main factor in the stability and unity of the family unit. On an economic side, the proceeds of any economic activity led by women are usually invested in the well-being of the family members; this is not always the case for those produced by men. Because of this tendency, women are often more sensitive to the responsibilities involved in taking a loan and will more readily make good use of it. Since women are the main educators of children and spend much of their time with them, any improvement in their level of knowledge and confidence will immediately influence favourably the character of their children. Further, harmonious and sustained development of society at large cannot be achieved while the blatant injustice prevails which prevents half the population from realizing its potential and from fully contributing to that society.

e. Increased Consumption    Another benefit of microcredit programs is the increase in household consumption. One researcher in Bangladesh (Khandker, pg.148) has found that for every 100 taka (the unit of currency in Bangladesh) lent to a female borrower, household consumption rises by 18 taka. Other researchers (Zaman, pg. 4) have found that income smoothing, which is the result of lessened vulnerability, also leads to consumption smoothing. These are both important effects for people who typically live on the edge of disaster. Even small increases in consumption and increased regularity in consumption can lead to better health and nutrition, and enhance the ability to make long range plans for the family. Combined with the investment possibilities opened up via additional loans from the microcredit program, such stability can have a far reaching positive effects on participating households.

f. Family Stability and AutonomyIt is clear that in times of economic hardship, families become vulnerable to disintegration and breakdown. However, the family unit is the most fundamental component of society; all successful civilizations have been built on the firm foundation of strong and stable families. Not only are they the cradle of the quantitative growth of the human population but they are also the locus of its qualitative development, the place where people learn the values and behaviours that determine their future. Society is often the reflection of the state of its component families. If dignity, justice and love are present in a given family, it will provide an adequate soil in which the next generation can grow and mature while at the same time reflecting these qualities into the environment to which it belongs. However, a family experiencing economic hardship or unemployment will find it very difficult to have the confidence required to take life in its own hands and plan its own future. Thus any measure such as a loan from a microcredit scheme that will enable a family to secure employment, overcome its economic difficulties and enable it to take control of its future will reinforce the fabric of the family and help it release its unlimited potential for the benefit of society both in the present and in the future.

4. Problems of Microcredit

This section will first address the effectiveness of microcredit in alleviating poverty and improving the status of women in existing programs (since women are the target population). It will then look at the question of whether implementation of microcredit programs on a wider scale could have a significant impact on overall global poverty. Finally, it will conclude by suggesting that microcredit programs do have some value, but can not have a significant effect by themselves owing to the multiple causes of poverty around the world.

a. Turning a Profit on the LoanOne of the most fundamental problems with microcredit programs is the difficulty involved in actually turning a profit on the loans. In the first place, borrowers must bear not just the cost of the loan and interest payments. They must invest a significant part of their time in group activities mandated by their programs. In addition, women in many traditional societies must bear the stigma of being under the authority of a male (the loan officer) who is not a family member, and of engaging in work outside the home. Also, the loans usually finance some type of  “women’s work” which is not seen as fit for men to do. This leads women to rely on their female children for supplemental labor, and thus female children are under increased pressure to stay out of school so that they can help contribute to the family income. (Khander, pp. 57, 59) Investments may not turn a profit. In this event the money to repay the loan must come from reduced consumption or borrowing from some other source, usually on worse terms. Another problem is capture of the loans by male relatives. In some cases, male relatives use female borrowers as fronts to get relatively low interest loans. These loans may or may not be used to benefit the family, and the female borrowers rarely see any benefit at all. And yet, the women are still held responsible for repayment of the loans. (Mayoux, 1997)

Indeed the chances of a female-headed enterprise succeeding at all are often quite small. The experience of microentrepreneurs in Botswana is illustrative. Seventy-five percent of the people engaged in informal sector business activities are women. A majority of their microenterprises never grow. They either fail completely or remain at the initial stage of street vending. In Bangladesh and most enterprises that started with 1-4 workers never expanded. (Ntseane, 2000) Women are legally perceived as minors. They are not allowed to take out ordinary bank loans without the signature of absent, migrant laborer husbands. And

even when women do manage to start small businesses they must continually fight against a repressive patriarchal social structure, and make do with what little schooling they may have received before going into business. So it is plain that making use of a microcredit loan is not as easy as some supporters would make it sound. One final obstacle to turning a profit is the fact that as microcredit programs become more successful and hand out more loans, more people enter the local marketplace as micro entrepreneurs. Nan Dawkins Scully (2000) writes that the cumulative effect of rising costs, declining demand, and competition from both cheap imports and increased entrants into the sector leads to shrinking profits in informal-sector trade. In Zimbabwe for example, women traders in the informal sector experienced significant declines in income following the implementation of structural adjustment, and new entrants into the sector reported earning less than they had previously earned in their formal sector jobs. In other words, the initial success of micro enterprises can lead to subsequent over competition problems, especially when international trade liberalization is factored into the equation. A few micro entrepreneurs in a given area may be able to turn a profit. A large number probably can not.

b. Inability to reach the poorest of the poorA second important drawback to microcredit programs is that they don’t reach the poorest members of the society. To quote “Assessing the Poverty and Vulnerability Impact of Micro-credit in Bangladesh” (pg 4), “the poorest have a number of constraints (fewer income sources, worse health and education, etc) which prevent them from investing the loan in high-return activity” The same report also writes that “there appears to be a growing consensus that moderate-poor micro-credit borrowers benefit more than extremely poor borrowers.” The reasons for this are clear. The poorest need tiny loans which are not cost effective even for microcredit programs. The poorest also place the greatest demands on microcredit training programs, which make the cost of lending even higher. As microcredit programs are pressured to become more self-sufficient, the incentive to lend to such desperately poor borrowers evaporates. (Mayoux, 1997). This is a major problem for microcredit programs. Although they are raising some people out of poverty and keeping some people from further poverty, they do not appear to be reaching the people who need assistance the most. In fact, such programs may even be increasing the chasm between the poorest and the rest of society. This is clearly a failure for programs whose avowed purpose is to narrow the gap between rich and poor, and raise up the poorest members of society.

c. Microcredit dependency  Another possible failure of microcredit programs lies behind seemingly benign statistics. Some researchers have proposed the idea that the high repayment rates, repeated borrowing, and low drop-out rates indicate a dependency on microcredit programs rather than an attraction to successful microcredit programs on the part of poor borrowers. Many borrowers have no alternative to borrowing from microcredit programs, and consequently can not afford to default. Neither can they afford to stop borrowing or drop-out of the programs. There is nowhere else for them to go. (Khandker, pp.160,166) In order to stay in good standing with the microcredit program, borrowers may even be forced to resort to pawnbrokers or other alternate sources of funding. Furthermore, unless borrowers can increase their incomes they may become permanently dependent on microcredit lending (Khandker, pg.166). This a very real possibility as was noted above. Again this is a significant failure, as many microcredit programs tout themselves as more progressive alternatives to the existing systems of informal credit which have caused so many problems in poverty stricken areas (systems such as share

cropping, debt bondage, and so on). The chances of microcredit programs becoming just another form of debt-based oppression is real and must be addressed before microcredit programs can progress much further. And yet it has hardly been discussed up to this point.

5. Empowering NGOs through microcreditThe provision of credit, particularly credit targeted at rural populations, has been a long-standing strategy in national development efforts' in the world South. In Bangladesh, the birthplace of micro-credit through the now-famous and globally influential Grameen Bank, rural credit was touted as central to development efforts in the 1970s. (1) However, neoclassical economists, who argued that such practices resulted in a distortion of the market for scarce investment funds, identified targeted and subsidized credit as a failure from the mid-1970s. (2) During this same period, a number of nongovernment organizations (NGOs) were experimenting with mechanisms for the alternative delivery of credit. Termed microcredit, these mechanisms involve the provision of collateral-free small loans to jointly liable people for the purposes of income generation and self-employment. The recipients of loans are typically not eligible for credit from commercial lenders, and they are predominantly women. In development circles, microcredit has generated a wave of enthusiasm with the Microcredit Summit Secretariat (MCS) launching a "global movement to reach 100 million of the world's poorest families, especially the women of those families, with credit for self-employment and other financial and business services, by the year 20O5." (3) Amid the enthusiasm for microcredit, there has been limited critical response from development studies. This is in part a corollary of the "impasse" of the 1980s (4) and the fact that development studies is still coming to terms with the rise of NGOs and the proliferation of associated notions such as self-empowerment in the shifting development project. As development studies is informed by both a strong economic orientation and attempts to address the realities of poverty, microcredit is further insulated from critical inquiry as an initiative that promises both a commonsense good such as "empowerment" and a better standard of living for the poor. This article begins to address this lacuna by developing one framework for a critical response to initiatives such as microcredit.

a. The Social Impact of Grameen Bank and BRACImpact assessment is all too frequently discussed in a purely economic sense. In recent years, more researchers are concentrating on the social impact of microcredit institutions. Since Grameen Bank and BRAC prefer female members to male members, we first assess the social impact on the lives of women. Later, the broader impact of these institutions on the society will be examined. With patriarchal norms being strictly observed in Bangladesh, it is not easy for a microcredit institution to reach women. Purdah —female seclusion—confines women to the homestead and makes contact with men outside the family unacceptable.47 Education for girls is considered unnecessary.48 Dowries are paid, and women have to make sure that their husbands do not leave them.49 Women are not supposed to have any income independent of their husbands. It is obvious that under these conditions, females attending meetings with male leaders and being in control of finances are aspects of microcredit programs that violate patriarchal values. Develtere and Huybrechts Although female members are difficult to reach, it is important to involve them in development projects. Because a woman has to stay at home, she is confronted with poverty more than a man. She has to feed the children, and if there is a lack of food, she eats less. Further, Sen, using the term women’s agency, indicates that women cannot merely be passive recipients of aid: They have to be actively involved in improving their lives. Sen is convinced that women can take part in household decision making and improve their status considerably if they contribute to family income. It is in this field that the microcredit program of Grameen Bank and BRAC

can contribute to women’s emancipation. Combined with a social program of skills training, education, and social awareness, microcredit not only improves the situation of women but may also positively affect the entire family. Thus, in order to measure the impact of microcredit provision on the situation of poor women, we now concentrate on the contribution to family support as the intermediate variable between credit and empowerment. Hashemi, Schuler, and Riley indicate that these contributions to family income are often rather small.52 While 72 percent of the Grameen Bank members and 40 percent of the BRAC members were classified as “contributing to family support,” only 26 percent of the former and 12 percent of the latter declared to be responsible for more than half of the family budget. These low figures are due to the fact that Grameen Bank members often invest in traditional activities like stock breeding. These can be practiced at home, but do not bring in a lot of money. Further, the loans are not merely used for the women’s own activities. They also have to cover the husband’s undertakings. This problem of control of resources is discussed below. When we compare Grameen Bank and BRAC, Grameen Bank members on average seem to add more to the household’s income than their BRAC counterparts. A faster, more frequent loan provision, and greater discipline among Grameen members, may explain the different outcome. The available evidence supports the hypothesis that, through the provision of credit, both microcredit organizations enable their members to contribute to family support. Whether this will lead to emancipation of women is discussed later, when positive and negative opinions are considered. The Impact of Credit on Emancipation of Women:

b. The social impact of ASA movementThe micro credit programs of ASA are implemented for the poor segment of population with a view to alleviating their poverty. The landless poor people get together and form groups with 15 - 30 members. That is, each group of ASA has around 25 members on an average. ASA provides loans to individuals hence there are no group liability in the ASA lending. The loans are collateral free. Members get their first loan after one week of admission in the group. Repayments are made in installments. The first installment of the loan with service charge is deposited after 15 days of loan disbursement. Service charge is calculated flat on the principal of the loan. The operational procedure of the ASA credit programs is simple and transparent. Loan application, size of loan, repayment procedures etc. are standardized and devoid of any complications. Small Loan Program is the basic loan program of ASA. Through this program ASA provides small loans to its poor landless women members selected as per predetermined criteria. Women from poor families having a monthly income of less than Tk. 5,000 and owning less than 0.5 acres of cultivatable land are eligible for receiving the small loan of ASA. The main objective of the program is to provide poor women with small amount of loan as a capital for conducting income generating activities (IGAs) with a view to alleviate their poverty. On receiving loan the poor women generally take up the traditional IGAs such as paddy husking, poultry and cattle rearing, handicraft manufacturing, rickshaw pulling etc. Through implementation of the IGAs they can generate income, which is added to the household income to bring financial solvency to the family. Moreover, involving in the income generating activities women acquire a better status through making financial contribution to the family. The size of small loan is from Tk. 4,000 to Tk. 6,000 and in some cases from Tk. 8,000 to Tk. 20,000 in urban areas. The small loan is provided for a term of 1 year. Repayment of the loan is made in 46 equal installments. A grace period of 6 weeks is allowed to the small borrowers. The service charge is 15% flat on the principal. The subsequent loans are increased by Tk. 1,000 to Tk. 3,000 every year. Women form groups with 15-30 members and attend weekly meetings where they make repayments of installments and deposit savings. At the end of 2004, ASA had 129,230 groups with 2.87 million members. Total loans disbursed under this program were with service

charge Tk. 99,012 million with Tk. 86,628 realized and Tk. 12,384 million outstanding among 2.65 borrowers. ASA's recovery rate for the small loan program was 99.92%.

c. Impact on Income and Consumption of Grameen BankThere are different ways to measure the impact of microcredit on income and consumption. First there is the borrowers’ recall of the “before-after” situation. Using this method in the early 1980s, Hossain concluded that both per capita income and household income were positively associated with the amount of credit obtained from Grameen Bank. The impact can also be gauged through member perception. On the basis of a survey of 1986 measuring borrower perception, Hossain found that 91 percent of Grameen Bank members improved their economic conditions after joining Grameen Bank. More recent research uses income and consumption as dependent variables for the measurement of microcredit programs’ impact. Using this technique, most authors conclude that microcredit institutions can have a positive impact on combating poverty. Khandker takes the lead in this positive evaluation. Together with Chowdbury, he examines the impact of Grameen Bank and BRAC. They find for both institutions that a greater number of loans means a lower incidence of poverty for all program participants. In the Grameen Bank villages, for instance, percent of participants who have taken no loans or only one loan are below the poverty line, compared with only 57 percent of those who have taken five or more loans. Based on his 1998 research, Khandker comes to the same conclusions. He estimates that for every 100 taka lent to a female member of BRAC, household consumption increases by 18 taka. For men, this figure is 11 taka. These results indicate that poverty decreases as the borrowed amount (possibly in different instalments) increases. The study further shows that the poverty rate of BRAC members falls by around 15 percent for the moderate poor and by 25 percent for the ultrapoor when borrowers have a loan for up to three years. Khandker points out, however, that this rate of poverty reduction appears to decline with duration of membership. For instance, for households that have been members for more than five years, moderate poverty fell by 9 percent and ultrapoverty by 18 percent. These figures are considerably lower than for households that had been members for three years or fewer. Moreover, since the “less than three years” category has a lower average cumulative loan size (3,348 taka) compared with the “five years plus” category (6,567 taka), these results suggest that the poverty reduction impact of credit declines with cumulative loan size for BRAC. Khandker and Chowdbury observe the same outcome for Grameen Bank.13 Thus, the reduction of the level of poverty is variable and declines with the passage of time. Khandker goes further in this comparative analysis.14 His 1998 study reveals that for both Grameen Bank and BRAC, the per capita spending and net worth (assets plus savings/loans outstanding) of the members has increased. Women, however, seem to score better than their male counterparts when it comes to per capita spending, 15 while men generally have a higher net worth. Female members of Grameen Bank show better results on this criterion than those of BRAC. It should be noted that many households working in the agricultural sector have to deal with seasonality in consumption. At harvest time, their income reaches a peak. In other periods they have almost nothing. The programs of Grameen Bank and BRAC help to smooth their consumption pattern. Finally, for a program to be successful, it is not only important to alleviate the poverty of its clients but also to achieve a long-term sustainability of the benefits. Khandker and Chowdbury point out that it takes approximately five years for a poor member to work up to above the poverty line,16 and it generally takes eight years before the member is able to function independently from the microcredit institution. Consequently, Khandker is convinced that providing microcredit is an effective instrument to reduce poverty and even to overcome it.

d. Impact on Employment and Productivity by Grameen Bank and BRAC

Besides income and consumption, the employment generated by microcredit programs can indicate a reduction of the poverty rate. Rahman and Khandker show that Grameen Bank and BRAC have been successful in expanding the opportunities of self-employment for their members.17 Selfemployment generates a higher return than wages.18 Still, the average returns are higher in nonagriculture activities compared with those in livestock and agriculture. This finding is strongly correlated with “the fallacy of composition” in the sense that the more people who specialize in the same activities, the lower the return will be. Further, Rahman and Khandker’s paper shows that labor-force participation rates among women have increased compared with those of nonmembers living in control villages. The latter often do not have the necessary credits and other inputs to start up their own enterprises. Finally, Hossain states that the members’ careful choice of projects, cooperation with the staff, and peer pressure also contribute to the two microcredit institutions’ successful fight against poverty.

6. Role of Microcredit In The Eradication Of Poverty

There is an on going debate whether credit alone or credit plus is needed for poverty reduction. There are views that credit alone on its own is inadequate to fight poverty. The need for other services is also important in this respect. Such views, although, do not negate the role of credit, fail to appreciate the role of credit on its own merit. Nobody says that credit alone is cure for all. Most of the practitioners believe that credit plays a vital role as an instrument of intervention for a poor person to discover her potential and to stride for better living. Muhammad Yunus advocates that Credit is a human right. Once this right is established, the entitlement to other rights for leading a dignified life becomes easier. It empowers to break the vicious cycle of poverty by instantaneously creating self-employment and generating income. When in the ultimate analysis nothing can be said to be panacea, by overemphasising that micro-credit is not a panacea is in a sense overreacting and underestimating the role of credit as an instrument to combat poverty. Micro-credit is itself a very powerful tool. But if it is combined with others, it is definitely more empowering. How micro-credit can reduce poverty may better be understood by understanding conceptually the mechanisms by which financial services can affect the lives of the poor. It is important to consider the fulfillment of basic needs (food, clothing, shelter, health, education and psychological well-being), the means to achieve welfare at present and in the future, social networks and empowerment and vulnerability to risk. It is known that poor people live in a high risk and vulnerable conditions. Their ability to take advantage of opportunities that will lead to increasing their income or economic status, to protect themselves against risks of crises, and to cope with these when they occur is very important. Reduction of poverty is partly a process of increasing income and economic stability which enables fulfillment of basic needs and access to different kinds of services. This may also be understood in the form of developing a range of assets that will reduce the vulnerability of the poor to physical, economic and social shocks. These assets may be defined as financial (income size, regularity and security, savings, loans or gifts), human (skills and knowledge, ability to work, good health, self-esteem, bargaining power, autonomy and control over decisions), physical (housing, land, productive and nonproductive possessions etc.) and social (networks, group and centre membership, trust based relationship, freedom from violence and wider access to society and social institutions. Poverty reduction may also be considered from both short term and long term perspectives. In the short term it can be understood with reference to individual borrowers, their households and also the society at large. Different studies conducted in Bangladesh and elsewhere show that there is positive correlation between micro-credit programs and their accrued benefits in terms of employment, income generation and

promotion of social indicators. The present report has been prepared in response to a request contained in General Assembly resolution 52/194 of 18 December 1997. This is the first time the Secretary-General has been requested to prepare a report on the question of microcredit and the eradication of poverty. The prominence given to the matter reflects the recent success of small-scale lending programmes such as the Grameen Bank of Bangladesh. These rely on lending (usually a few hundred dollars) to small enterprises in agriculture, distribution, crafts, trading and similar activities. The participatory nature of these projects, together with the emphasis on women entrepreneurs and employment creation, has raised hopes of reducing poverty through this approach. The present report surveys current experience and highlights the strengths and weakness of the microcredit approach, including the administrative difficulties and limited linkages with other services for the poor. The report also contains suggestions for strengthening operations, and makes a particular plea for ensuring that microcredit projects are established in a broader context of support to the small enterprise sector. Responsibilities of donor countries in this regard are emphazised. Finally, the report highlights the activities of the United Nations system and non-governmental organizations in support of microcredit, giving special emphasis to the World Bank-led Consultative Group to Assist the Poores.

a. Microcredit and poverty eradicationSince the World Summit for Social Development the priority given to poverty eradication has grown. As stated in the previous report of the Secretary-General on the eradication of poverty (A/52/573), it is now broadly accepted that robust economic growth that is labour-intensive and equitable, combined with larger outlays of social expenditures, especially directed towards the poor (now estimated at 1,3 billion people), are a winning combination in the fight against poverty. Several factors have led to increased interest in microcredit in promoting growth with greater equity. There has been a growth in the recognition of the importance of empowering all people by increasing their access to all the factors of. production, including credit. In addition, the value of the role of non-governmental organizations in development is receiving more attention. It is in that context that microcredit has recently assumed a certain degree of prominence. It is based on the recognition that the latent capacity of the poor for entrepreneurship would be encouraged with the availability of small-scale loans and would introduce them to the small-enterprise sector. This could allow them to be more self-reliant, create employment opportunities, and, not least, engage women in economically productive activities. Currently, there are estimated to be about 3,000 microfinance institutions in developing countries. These institution also help create deeper and more widespread financial markets in those countries.

b. Characteristics and recent successes of microcredit programmesInformal and small-scale lending arrangements have long existed in many parts of the world, especially in the rural areas, and they still survive. Good examples are schemes in Ghana, Kenya, Malawi and Nigeria ("merry-go-rounds", "esusus" etc.). They provide the rural population with access to savings within the local area and with a certain cushion against economic fluctuations, and they encourage a cooperative and community feeling. The groups formed provide joint collateral and serve as instruments for spreading valuable information that is useful for economic and social progress.

These schemes are characterized by relatively small loans, a few hundred dollars at most. The repayment period is relatively short, about a year or so. Women are a major beneficiary of their activities, and the destination of the funds primarily includes agriculture, distribution, trading, small craft and processing industries. The administrative structure is generally light

and the entire process is participatory in nature. The impact of microcredit lending varies widely between rural areas and urban areas.

Furthermore, it is not clear if the extent to which microcredit has spread, or can potentially spread, can make a major dent in global poverty. The actual use of this kind of lending, so far at least, is rather modest: the overall portfolio of the World Bank, for example, is only $218 million. In recent international meetings, it has been stated that a target to reach 100 million families by the year 2005 would require an additional annual outlay of about $2,5 billion. This should be compared to the total gross domestic product (GDP) of all developing countries, which is now about $6 trillion. A certain sense of proportion regarding microcredit would seem to be in order.

Moreover, in the proliferation of microlending institutions, non-governmental organizations and foreign donors have played an increasing role. Non-governmental organizations vary in quality and strength. The best results are produced, research shows, when developing country Governments and non-governmental organizations work hand in hand. While donor participation can be positive, it should be noted that total official development assistance (ODA) has declined in recent years.

c. Recent development Over the past decade, microfinance institutions have adopted innovative ways of providing credit and savings services to the entrepreneurial poor. Two approaches have been advocated on the role of credit in poverty reduction. While supporters of the income-generation approach maintain that credit should be provided mainly to the entrepreneurial poor to enable them to finance specific private income-generating activities to increase their revenues, proponents of the so-called new minimalist approach argue that credit progammes would still be helping the poor fight poverty by giving credit to any poor person who is able to repay a loan without dictating to that person how and on what the loan should be used. Some studies have pointed out that the problem of the non-productive use of credit, as advocated by the minimalist approach, lies in the fact that by consuming rather than investing their loans, the actions of such borrowers, if imitated by other poor people, could produce a negative impact on the future growth of microcredit Several microfinance institutions have succeeded in reaching the poorest of the poor by devising innovative strategies. These include the provision of small loans to poor people, especially in rural areas, at full-cost interest rates, without collateral, that are repayable in frequent installments. Borrowers are organized into groups, which reduces the risk of default. These are also effective mechanisms through which

to disseminate valuable information on ways to improve the health, legal rights, sanitation and other relevant concerns of the poor. Above all, many microcredit programmes have targeted one of the most vulnerable groups in society - women who live in households that own little or no assets. By providing opportunities for self-employment, many studies have concluded that these programmes have significantly increased women's security, autonomy, self-confidence and status within the household.7. Poverty and Women in Current Microcredit ProgramsPoverty has a woman–s face. There are more women then men who suffer from abject poverty. They live in severe deprivation and despair. In fact, hunger and poverty are more female issues than male issues. According to an estimate, of about 1.2 billion people in absolute poverty in the world, the majority are women. Traditionally they have to manage the family with virtually nothing to manage with. If any one has to go hungry in the family, it is usually the mother. In the words of Muhammad Yunus, ”Mother has to go through the traumatic experience of not being able to feed her children during the days of famine and scarcity„. Despite progress in some areas like life expectancy, education, fertility rates, maternal mortality rates etc. in different countries, women still face many barriers to economic, social and political opportunities. In many countries, women are facing continuing legal discrimination. They are not treated as equal to men- .whether in property rights, rights of inheritance, laws related to marriage and divorce, or the rights to acquire nationality, manage property or seek employment–. For many women, life is shadowed by a threat of violence “ both physical and psychological. For all these reasons, credit is much more significant for women than men. With credit, poor women turn out to be better fighters. They have immense potential to move up. They are hard working. They are concerned about their human dignity, and about the future of their children. They are ready to make personal sacrifices to increase benefits to their family and for building a brighter future for their children. They do not like to see their children suffer form poverty as they have suffered through out their own lives. Once they have access to credit they are better equipped to maneuver the forces around them to their best advantage. They try their best to earn more, to build and expand their capital base and improve their quality of life. They are empowered. They are able to enjoy their human right which is definitely a difficult and challenging task but which is achievable.

As was stated above (section II. C), microcredit programs can lift as many as 5% of program participants out of poverty every year. Unfortunately, this figure fails to mention that, in Bangladesh for example, microcredit programs only reach about 20% of the population. Therefore, only about 1% of the population can rise from poverty each year under microcredit programs. (Khandker, pg. 73) And at the same time that this 1% is rising from poverty, the population is increasing by 1.8% per year, predominantly in the poorer classes. So the net effect is to hold poverty at bay rather than to roll it back. There is also a further concern. Either an increase in the rate of population growth or a decrease in the success rate of existing programs could erase the poverty alleviation progress that has been made to date. Similar situations exist in most areas where microcredit programs are active, so the tenuous nature of microcredit-based economic improvements can not be ignored. Microcredit’s track record in the area of female empowerment is equally mixed. Some studies have found a strong correlation between participation in microcredit schemes and female empowerment. They attribute this to the self-confidence women gain from handling money, operating independent businesses, and earning money for the family. Others point to the paternalism of lenders and tendency for loans to be captured by men as factors, which tend to negate any empowerment, which might be going on. They also point to the selectivity problem. This is the problem of determining whether women who appear to be empowered joined a lending

scheme because they were empowered, or became empowered as a result of their participation. These questions have yet to be resolved either way.

Microcredit is also a mixed blessing for women in the sense that even when women do increase their incomes, the increase comes at the expense of their time and that of their female children, as mentioned earlier (section III.A.1). So in some cases microcredit may be doing nothing more than pioneering new routes to the same old destination of female subordination. Microcredit may even worsen the situation if women must work harder to maintain the same low social status and lack of education they have always had. The prevailing wisdom in microcredit circles holds that women are more helped than harmed by microcredit, but this wisdom is increasingly being challenged as programs are examined more closely.

8. A Positive Evaluation of the Impact on PovertyThere are different ways to measure the impact of microcredit on income and consumption. First there is the borrowers’ recall of the “before-after” situation. Using this method in the early 1980s, Hossain concluded that both per capita income and household income were positively associated with the amount of credit obtained from Grameen Bank. The impact can also be gauged through member perception. On the basis of a survey of 1986 measuring borrower perception, Hossain found that 91 percent of Grameen Bank members improved their economic conditions after joining Grameen Bank. More recent research uses income and consumption as dependent variables for the measurement of microcredit programs’ impact. Using this technique, most authors conclude that microcredit institutions can have a positive impact on combating poverty. Khandker takes the lead in this positive evaluation. Together with Chowdbury, he examines the impact of Grameen Bank and BRAC. They find for both institutions that a greater number of loans means a lower incidence of poverty for all program participants. In the Grameen Bank villages, for instance, 76 percent of participants who have taken no loans or only one loan are below the poverty line, compared with only 57 percent of those who have taken five or more loans. Based on his 1998 research, Khandker comes to the same conclusions. He estimates that for every 100 taka lent to a female member of BRAC, household consumption increases by 18 taka. For men, this figure is 11 taka. These results indicate that poverty decreases as the borrowed amount (possibly in different instalments) increases. The study further shows that the poverty rate of BRAC members falls by around 15 percent for the moderate poor and by 25 percent for the ultrapoor when borrowers have a loan for up to three years. Khandker points out, however, that this rate of poverty reduction appears to decline with duration of membership. For instance, for households that have been members for more than five years, moderate poverty fell by 9 percent and ultrapoverty by 18 percent. These figures are considerably lower than for households that had been members for three years or fewer. Moreover, since the “less than three years” category has a lower average cumulative loan size (3,348 taka) compared with the “five years plus” category (6,567 taka), these results suggest that the poverty reduction impact of credit declines with cumulative loan size for BRAC. Khandker and Chowdbury observe the same outcome for Grameen Bank.13 Thus, the reduction of the level of poverty is variable and declines with the passage of time. Khandker goes further in this comparative analysis.14 His 1998 study reveals that for both Grameen Bank and BRAC, the per capita spending and net worth (assets plus savings/loans outstanding) of the members has increased. Women, however, seem to score better than their male counterparts when it comes to per capita spending,15 while men generally have a higher net worth. Female members of Grameen Bank show better results on this criterion than those of BRAC. It should be noted that many households working in the agricultural sector have to deal with seasonality in

consumption. At harvest time, their income reaches a peak. In other periods they have almost nothing. The programs of Grameen Bank and BRAC help to smooth their consumption pattern. Finally, for a program to be successful, it is not only important to alleviate the poverty of its clients but also to achieve a long-term sustainability of the benefits. Khandker and Chowdbury point out that it takes approximately five years for a poor member to work up to above the poverty line,16 and it generally takes eight years before the member is able to function independently from the microcredit institution. Consequently, Khandker is convinced that providing microcredit is an effective instrument to reduce poverty and even to overcome it.

ConclusionMicrocredit is not a panacea. Realizing its limitations, some organizations have already begun to develop new programs and approaches to reach those presently excluded by microcredit programs.

Some organizations working in microcredit are developing programs to bring those excluded within the folds of the mainstream programs. BRAC’s Income Generation for Vulnerable Groups Development (IGVGD) is one example of a program attempting to reach the poorest women by providing concessional loans combined with government relief rations. According to the plan, IGVGD members would be gradually absorbed in the mainstream RDP program, where they would take larger and larger loans.

"Those who have been trapped in poverty require a broad range of interventions, from general policy changes to specific forms of support, to move into sustainable livelihoods. A large-scale transfer of resources into one specific type of intervention -- micro-credit – as the World Bank's CGAP has done, and is being proposed at the Micro-Credit Summit, may actually divert resources away from those in greatest need."

The Learning Circle also underlined the limitations of micro-enterprise support in isolation as a strategy to promote sustainable human development. It concluded that micro-enterprise support is more likely to have a sustainable impact when accompanied by improvements in other sectors, such as health, education, sanitation, and peace and safety. Striking a balance between a realistic and well-considered program and the perceived need to generate enthusiasm, remains a challenge for the organizers of the Summit. The danger is that generating dramatic effect (through a proposed "quick fix" to poverty) to encourage broad-based (and especially private sector) involvement will generate unrealistic expectations and an excessive focus on credit alone. As we have seen, spiritual principles and considerations have an important place in the discussion of the practical solutions needed to face the challenge of sustainable development. Indeed, an understanding of such principles enables us to view development holistically, as a harmonious process focused on the individual and his environment where the fulfillments of economic, social and spiritual aspirations go hand in hand. Spiritual or moral principles determine the value system that is the basis for devising and validating any action or Endeavour.

Thus spiritual principles are a part of both the means and the end. When looked at from this perspective, microcredit is an important instrument in the arsenal of practical measures needed to make development sustainable since it is aimed at the poorest, who form the majority of the population in the third world, and focuses on the family unit. For microcredit projects to realize the vast potential described above, both decision-makers and loan

beneficiaries will need to shift their thinking and attitudes away from the dominant individualist, self-centred vision of life towards a perception of theindividual's responsibility to society.

a. Results Achieved: Beyond Our ExpectationsCredit has power. We’ve heard the anecdotes, about how a loan of $20 turned life around for a person, for a family. And we’ve learned the lesson that credit can transform self-image, unlock potential, and boost the productivity and well-being of the poor. Huguette Labelle, CIDA President Plenary Address, Microcredit Summit, Washington, D.C., February 1997.

Q: Have microcredit programs generated positive results for the poor, and poor women in particular?A: Numerous studies and evaluations have demonstrated a rise in incomes and other indicators of standard of living from microcredit programs. A large number of these programs have focused on supporting women, who bear the brunt of poverty and have been left out of most poverty reduction programs in the past. In many programs, women make up as many as 90 per cent of borrowers. Lending to women is also assumed to result in a greater multiplier effect because women pass on the benefits to children, through increased spending on the household, education and nutrition. In many cases, microcredit has contributed to changes in attitude about women’s contribution to and role in economic and social development. Specifically, microcredit has resulted in increased recognition of women’s productive role. Earning our own money allows us to do what we want with it. It also brings us ‘izzat’ (honour or respect) because the money “proves” our contribution. Otherwise, we work like animals, we are never given credit for our contribution and even our own men say that we do not work. When we have our own money we are no longer mohtaj (dependen to the point of being at the other person’s mercy. The word is often used for the physically disabled). (quote from a Pakistani entrepreneur, in Nighat Said Khan, 1984.)

Whether or not they are poor, women may take advantage of their newfound financial independence to assert themselves, stand up to abusive spouses or serve as role models in the community. Microcredit programs have also, in many cases, increased mobility and strengthened networks among women who were previously confined to the home (Carr et al., 1996). Borrowers build solidarity through their participation in lending circles and village organizations. This is especially important in Bangladesh, for example, where women’s mobility is limited, and weekly meetings can be an opportunity for women to meet outside the home and discuss their problems. There are also studies that suggest even more far-reaching social impact, including decreases in fertility rates, assumed to be linked to increased financial self-reliance (Ruhul, 1994) and more say for women in family matters, including family finances (Hashemi et al., 1996). The growth and expansion of microcredit programs over the last ten years has been impressive. In Bangladesh in particular, many districts are served by the Grameen Bank, BRAC, ASA (Association for Social Advancement), Proshika, RD-12 or some other microcredit provider. There are over 4 million microborrowers in Bangladesh alone. The repayment rates in well managed programs tend to be very high, around 95 per cent. Finally, the success of microcredit runs deeper than program expansion. It is the manifestation of a paradigm shift in microfinance, defeating the notion that the economically disadvantaged constitute a “poor risk” and are not “creditworthy.” It has opened our eyes to possibilities once con- sidered illusory in the field of microfinance. The discussions now taking place around the role of microcredit and the need for diversified financial services and complementary non-financial programming aim to build upon the impressive progress of recent years.

b. Measuring Results

The quest for reliable indicators of social and gender impactThe evidence on performance of these schemes in reducing poverty is still fragmentary.(...) Even the better microfinance schemes have had limited impact on the poorest who are often risk averse, and often lack the capability (in education or health) to take advantage of credi for self-employment activities. (...) Sound program design can often enhance an intervention’s effect on poverty. But this type of intervention (credit) seems unlikely to be the main route out of poverty.(Martin Ravaillon, World Bank 1996, cited in Jacob Yaron et al., 1997, p.50)

Q: How effective are repayment and disbursements as indicators of social and gender impact?A: Most studies evaluate microcredit based on the indicators of repayment and disbursements.These indicators, are often referred to as proxies, because they are not directly related to the success of borrowers, or to the impact on social or gender relations. The assumption is that “efficient RFIs (rural financial institutions) should lead to the desired development impact” (Yaron et al.,1997, p.102). However, there is no direct correlation between repayment and business success, and even less so between repayment and impacts on social and gender relations. First, repayment is not an accurate indicator that funds were used to invest in successful productive activities.

Even when a borrower repays a loan on time, the source of income is not necessarily from revenues generated by investing the loan in productive activities.In most peer lending microcredit programs, for instance, borrowers must commence weekly installments almost immediately after the investment is made. Hence, borrowers will either be forced to choose activities that generate almost immediate revenue (and these activities tend to generate the lowest returns), or they will have to repay the loan from other sources. In practice, repayment is often derived from general family income rather than the income-generating activity itself. Hence, repayment may be good, due to discipline or peer pressure, regardless of business performance.

Furthermore, while repayment might remain high, drop-out rates may also be high. Hence, high repayment rates do not necessarily suggest borrowers, especially the poorest women who are more likely to drop out, are able to borrow repeatedly. Repayment and disbursement figures only reflect the ability to repay of those who remain in the program. Some borrowers may in fact be facing difficulties, repaying from other sources of income, or be unable to identify other investment opportunities. Research has shown drop-out rates in the 10-15 per cent range annually in Bangladesh (see next section for more on drop-outs).

Use and repayment of loansThe poor will often use loans to meet their needs as they see them, regardless of the intent of lending programs. Loans may be used for a wide variety of purposes, including:• to invest in an income-generating activity, of the borrower herself or another family member• to use as collateral to obtain a larger loan from a moneylender• to engage in moneylending

• (a female borrower) to hand over to a male family member for either investment or nonproductive purposes• to pay off debts with moneylenders• for consumption or emergency purposesRepayment may be derived from sources other than microenterprise earnings. These might include, for instance: savings, other earnings, borrowings from a moneylender; a loan from a spouse or relative; or the wage earnings of the borrower or another family member. (MacIsaac, 1996A) In addition, aggregate repayment and disbursement figures may mask important differences between men and women, and the poorest and other borrowers. For example, consider not only the percentage of women borrowers, but the relative size of loans and total portfolio size for women and men. Given men’s preferential access to markets and information, they tend to have better opportunities to invest, and capture larger loans (Kabeer, 1996). Hence, the numbers of borrowers may not accurately indicate the gender division of financial resources.

Borrowing charges: biased against poor women?Some programs charge a flat interest rate (e.g., BRAC, Bangladesh Rural Development Bank in 1996) or calculate interest charges at the outset regardless of early payments. However, some borrowers pay off their loans early. Because they do not benefit from a reduction in the lending charge, they pay a higher effective rate of interest than others. The question that remains is: which groups are paying off loans in advance? Are the poor and the poorest women in particular, who tend to be the most debt averse and have few additional sources of income for repayment, the most likely to pay early? Answers to questions such as this one improve our ability to strengthen impact and improve services for those most in need.

1. Abbreviations and Explanatory NotesThe following symbols have been used in the tables throughout the publication:Two dots (..) indicate that data are not available or are not separately reported.A dash (—) indicates that the amount is nil or negligible.A hyphen (-) indicates that the item is not applicable.Parentheses ( ) indicate a deficit of decrease, except as otherwise stated.A slash (/) indicates a school year or a financial year (e.g., 1981/82).Use of a hyphen (-) between dates representing years($) indicate United States dollars, unless otherwise stated.The following abbreviations have been used:ASA Association for Social AdvancementBIDS Bangladesh Institute of Development Study CNEWA Catholic Near East Welfare AssociationCRS Catholic Relief ServicesEC European CommissionESCWA Economic and Social Commission for Western AsiaEU European UnionFAO Food and Agriculture Organization of the United NationsFINCA Foundation for International Community AssistanceGDP gross domestic product ha hectareICU Institute for University Cooperation (Rome)IFAD International Fund for Agricultural DevelopmentIFC International Finance CorporationLIBOR London interbank offered rateLL Lebanese pounds

MIS management information systemNGO non-governmental organizationSMEs small and medium-sized enterprisesUNDP United Nations Development ProgrammeUNICEF United Nations Children’s FundUNIRDP United Nations Integrated Rural Development ProgrammeUNRWA United Nations Relief and

Reference

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3. About The authorMd. Nazmul Arif SarkerM.S.S -Dept. of EconomicsShahjalal University, Shylet.