DHANKA, Bangladesh- While microcredit has been heralded as an absolute good amid myriad equivocal aid practices, does it all add up? From one perspective, it seems it does: the Grameen Bank, which has disbursed more than $8 billion in microloans, and its founder, Mohammad Yunus, received the Noble Peace Prize in 2006 for pioneering the idea. 150 million people worldwide have taken out a microloan, and institutions are hurriedly propagating to accommodate the demand. However, despite all the praise, new studies show that microcredit does not provide a way out of poverty. In many ways, it can make life worse for borrowers.
For one, due to the significantly higher than normal interest rates (up to 195 percent), if the debt cannot be paid off it expands dramatically until it becomes insurmountable. This has led to many people getting hundreds of dollars in debt, which in turn led to reports of suicides of over-indebted borrowers. In fact, debt collectors often hound borrowers, and if the debt is not paid, take entire families into custody. The community often assumes the debt, and the reputation of the borrower is ruined, straining social relations.
Although some enterprising poor use their microloans in order to start up businesses, these are still too small and unreliable. The main step on the ladder out of poverty involves dependable and steady income, which these microbusinesses cannot provide.
A study conducted to investigate the effectiveness of microloans looked at the differences of nearly identical potential borrowers: one was given a microloan while the other was denied. The results were that their household income and spending remained the same. The microloans did not help the borrowers out of poverty.
A reason microcredit was extolled from the outset was the statistic that 5% of borrowers were expected to climb into the middle class due to the microloan. However, it was shown that most microcredit borrowers were already on the border of lower and middle class, and it was more than likely that the 5% would have made it there without a loan.
Other financial resources such as bank accounts, insurance and mortgages are important services that are simply unavailable for the very poor. Perhaps the most important is having a reliable bank account in order to save money. Saving money is an essential step in protection against possible hardship as well as being able to afford things like goats or bicycles, items that can make the difference in transitioning from lower to middle class. Even people who make $2 a day can save money, if only they had access to a bank account.
Although microcredit does not offer a viable way out of poverty, it does help people get by, and the mere fact that it has survived as a commercial enterprise shows that it is desirable to the borrowers. That being said, other financial services should be asserted before people look to invest in microcredit.
– Jordan Schunk