Microcredit for The Developing World:
A Step Toward the Eradication of Poverty

Antonia Malone
February 2000

One of the sad truths about a great deal of the aid sent to developing nations is that it impedes actual development. When we send food or allow cheap subsidized food to evade their tariff barriers, we undercut the business of the local farmers and discourage them from improving their farming production. When we send clothes we discourage local initiatives to manufacture clothes for local consumption. When we initiate complicated technological projects, local people abandon them, because too often the projects are foreign to their culture and mindset. Now while some direct aid may be necessary temporarily, in the absence of any local initiatives, it should be as rare as possible and only be considered a stop gap measure. It would be better to help a young woman buy a sewing machine, material and thread, or to enable a farmer to buy tools and seed cheaply from a seed and tool bank. More complicated projects will have to wait until people can meet their basic human needs of food, clothing, shelter and health care and have the education to move on to more technologically complicated endeavors.

The poor for the most part are not lazy. Most of them have always worked, but because they lack a source of credit or capital, they are never able to free themselves of those predators such as the loan sharks and the sweat shops that enslave them. A microcredit program gives small loans to the poor at low interest rates, so that they can procure whatever they need to start a small local business of their choice, for themselves. An initial investment in the form of a microloan of $40-$100, at 1% per month interest, can empower people to buy a loom or a pig; an old sewing machine or some rattan; some beans or some seed or whatever materials they need to start their small business.

Poverty is not a given; poverty exists because of the misplaced priorities of the institutions we have built to govern our social and economic lives, and because, out of ignorance, we have accepted these priorities as immutable.

In the early 1970's Muhammad Yunus, an American trained Bangladeshi economist, with a new PhD in hand, returned to his country hoping to help his people. While teaching economics at Chittagong University, he began to be aware that nothing he had learned in his economic classes at Vanderbilt University even began to address the problems of the poor villages surrounding the university where "people were just moving toward death because there wasn't enough food to eat."

He decided he had to try to understand what was going on. Why were people starving despite all the humanitarian aid that was flooding Bangladesh? Walking from village to village, he noticed that often people suffer because they lack just very tiny amounts of money which might enable them to better their situation, and he came to the conclusion that the lack of access to credit was one of the major reasons that the poor were unable to work their way out of poverty.

So with the assistance of some of his students he began to make small loans to a handful of people. His first loan was for $6 to a woman to buy material to make woven reed baskets and stools. Formerly, she had been forced to sell her products at a very cheap rate to the man who sold her the reeds, who then resold the finished products and walked off with the profit. Her income was 6 cents a day. With Yunus' loan she was free to buy and sell to whomever she wanted, and her profits soared to $1.47 a day. Today that woman has a thriving basket business, can feed her children and has been able to build a house with a tin roof for her family.

From these inauspicious beginnings grew the Grameen Bank, a microlending institution, which, in the last twenty years, under Yunus' leadership, has loaned over two billion dollars to over 3.5 million of the poorest people.

How does it work?

A microcredit program gives small loans to the poor so that they can procure whatever they need to start a small local business of their choice. A microloan of $40-$100, at 1 or 2% interest per month, can empower people to buy a loom, a pig or a cow; an old sewing machine or some rattan; some beans or some seed or whatever materials they need to start their small businesses.

In the absence of collateral, the Grameen Bank loans are made to groups of five, mostly women, who guarantee each others' loans. It works like this. If a woman wants to receive a loan and if her idea for a business is accepted, she is encouraged to find four other women and form a group. Then, the first two women are given loans and the others are encouraged to help them make their enterprise a success. After about 6 weeks, if the first two are making their payments on time, the next two women get their loans and six weeks later the last one. All persons who have paid back a first loan, are automatically eligible for a second loan and eventually a third so their businesses can grow. At the same time from the interest, the loan fund is growing, though slowly, and loans are available to more persons. In some places people pool their loans and later their profit and open a cooperative for growing pigs or corn or chickens. All members of a group are responsible for each other. If one does not pay back one's loan, no one in the group will receive a second loan.

To guard against emergencies, such as one's cow dying and not being able to repay the loan, an emergency fund is set up at the time of the first loan. This simply means that a few coins, perhaps an additional

1% of the loan, are put into an emergency fund. This emergency fund is available on a group vote to bail out the person who had the emergency so that she can repay her loan and not destroy the credit of the group.

Today there are microcredit institutions providing microcredit loans to the poorest of the poor all over the world. In Latin America they are often under the umbrella of ACCION; in India of SEWA. In the United States, the South Shore Bank of Chicago is pioneering a microcredit program. At a recent microcredit summit, it was estimated that these programs are now reaching about 7% of the poor in the world and making a substantial difference in their lives.

In addition, institutions are finding that the poor are a good credit risk. Repayment rates are steadily 90%-97%; substantially better than the best of banks. Where formerly, if the poor wanted a loan, they had to go to a loan shark and pay exorbitant daily interest rates which continually compounded and kept them impoverished, these microcredit loans are made for anywhere from 6% to 18% simple interest yearly. In most rural situations a local person hired as "a banker" collects the money owed on the loans on a monthly basis, or the loans are administered by a credit union, or some sort of local parochial caritas.

Starting a Microcredit Program

To start a small scale microcredit program in a poor or developing area, one needs a local contact who understands the process and has some training in the microcredit concept. A local council needs to be organized to administer the loans, collect the interest, interview those applying for loans. Local leadership and education ensure a broad buy-in at the local level, and a truly caring and efficient administrator can forestall problems that might arise such as favoring family members and friends when it comes to the distribution of loan money. There are always more people looking for loans, than money available.

Yunus' policy when he went into a village was to look for the poorest person, the one who was too afraid even to come and ask for a loan, and suggest to them that they apply for a loan.

In Haiti where our Haiti Committee has established a small microcredit loan project with five $10,000 grants, there are four criteria for receiving a loan.

1. That there is a good chance that a loan would improve the person's economic situation.

2. That the person be honest. (The decision of who receives a loan is best made locally because everyone in a village knows who is honest and who is not.)

3. That the person seeking the loan have a plan as to what they will do with the money.

4. That the person is part of a group of at least 5 who have agreed to help each other.

The primary idea behind a microcredit program is to enable the borrower or the cooperative to become independent of an anonymous market system that keeps them at the bottom where only the dregs trickle down. The poor are constantly preyed on by loan sharks and middlemen. For instance, transportation of goods is a big problem in Haiti where our program is, because the poor have no consistently dependable means of transportation. If the resources they need for their "ti commerce" is 25 miles away, they may either have to pay a middle man to procure it for them or pay dearly for their own transportation.

For this reason local and regional self-sufficiency must be encouraged wherever possible, before imports or exports. If goods need to be transported from a distance, as often happens in the cities, some sort of cooperative transportation efforts need to evolve. The success of a small business depends on a continuous turnover of goods(so that it is not destroyed by inflation) and a dependable market. This is usually not an export market where credit, slow payments, and irregular orders are most often the rule. It is extremely important that we don't raise false hopes by making promises of markets that we can't follow through on, on a regular basis.

And another caution - a microcredit program may not work among some of the most deprived persons in the cities if the following conditions are present:

In conditions of such abject misery, a certain level of hope in the future has to develop before a microcredit project may be appropriate.

The number one priority in most developing nations is that people develop the ability to feed themselves. As former President Aristide of Haiti once said to a group of us, "the best medicine is food."

Since it looks like there will be no return to protective tariffs on food imported into the third world, the only alternative is an influx of capital to build up local production and technology which can eventually compete with the low cost of certain imported items. Microcredit loans and educational and technological assistance are the best vehicles for strengthening local economies, especially when they have a personal and relational component which builds up trust between neighbors and enables and empowers people to hope in their own abilities and talents.


Antonia Malone

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