5 Comments so far

1. Rod Schwartz on November 28, 2008 11:07 am

   Nice piece Julia. Kiva is a great organisation doing wonderful things, indeed. Would love to know how they are now funded and if they are financially sustainable.

   best, rod

2. Fuzzy vs financial: How do I invest in social businesses in developing countries? (Part 2) : The Social Investor on December 5, 2008 12:21 pm

   [...] beget blogs: An introduction (3)Pyramids and buffalos: How do I invest in social businesses in developing countries? [...]

3. premal shah on December 29, 2008 8:20 pm

   hi - i serve as president of kiva and want to thank you for writing about us. it’s great to see a blog focused on social investments…there’s so much potential here for innovation. glad people like you are tracking it!

4. admin on January 28, 2009 5:38 pm

   Hi Premal,
   And thanks for the comment, it’s reassuring to know that people are a) reading what I write and b) finding it interesting. I have found that there is even more to write and discuss than I had realised- I just wish I had some more time to do it! Please do let me know if you think of any other topics I can add to my ‘to do’ list.
   Best
   Julia

5. Samantha Morshed on May 3, 2009 3:38 pm

   I think it is really important to look at micro-credit from all angles. To consider the positives and negatives and to consider the aggregate progress that has been made at national level on the reduction in poverty in order to truly assess its effectiveness.

   I work at the grassroots level in Bangladesh and I see both positive outcomes of micro-credit and negative outcomes and I think that this is to be expected in a field which has become so large. There are great stories of people buying a cow and then another and transforming their lives and moving out of poverty and there are sad stories of people buying a blanket because it’s cold in the winter and never being able to repay the loan, because they didn’t have an income in the first place, and then simply finding themselves in a spiral of ever-increasing debt where one loan is wrapped up into another all the time accumulating interest. This raises a basic question of regulation. If a person in the UK or the US is sold a mortgage that they can’t afford then they have the right to recourse and a financial ombudsman or other and they can complain and insist the system is changed. The poor have no such voice.

   Rather than looking at individual stories which can be compelling on both sides, I think it would makes more sense to consider the debate at a national level. Microcredit has been around in Bangladesh for the past 30 years and is widely available. I cannot imagine there is one person in Bangladesh, even in the most remote parts, who does not have access to it if they want it. Bangladesh is a country of 140 million people of whom 40% live on less than a dollar a day – that’s about 56 million people. There are many large microcredit institutions in Bangladesh of which Grameen bank and BRAC are the largest. Grameen currently have about 8 million borrowers. If 8 million people are raising themselves out of poverty through microcredit every year then this would equate to about 7% of the poor population – that would be fantastic. If we look at the real reduction in poverty in Bangladesh from 2000-2007 the rate of progress is about 1% per year and it is commonly accepted that much of this progress is due to remittances.

   This leaves a conundrum.

   In the US about 11% of the population are entrepreneurs; it’s slightly less in the UK and less again in Europe. If we assume that 10% of those Grameen bank borrowers actually use their loans for entrepreneurial activities then this would equate to an annual reduction in poverty of about 0.7%. Still a little higher than the actuals but I think that here we are starting to see a more realistic view.

   Microcredit has made banking services available to the poor and this is a good thing. Everyone should have the right to be able to save and borrow and regulation should ensure that these transactions are made fairly. Just to be clear - availability of banking services - not a direct route out of poverty simply by throwing money at a situation.

   Microcredit doesn’t create entrepreneurs per se. It gives those with some entrepreneurial tendancy the availability of credit to start their enterprise. I have huge respect for Yunus and the pioneers of microcredit but the followers since have used this as an easy way of trying to throw money at a situation to solve it.

   Microcredit is not a panacea for eradicating poverty.

   Even where you do have a person with entrepreneurial spirit, if they are living in a community with little or no buying power then who will be the customers? I work in many of those communities where there is little or no buying power and I can assure you that much of the time there are no customers. In Bangladesh microcredit largely creates self-employed people, something I consider to be different from entrepreneurs. They tend never to employ anyone else except maybe a close family member and rather than starting on the road to a successful growing business, find themselves simply eeking out an existence.

   Microcredit must be seen as only part of the solution to eradicating poverty along with the creation of rural employment of both flexible and structured nature, and of course, the ever important remittances. Once a community starts to see an expanding local economy through employment: employers who have come to the community with work bringing jobs, then we will see a much better impact from microcredit.

   Many people consider the pyramid at a macro level with Bangladesh as one of the countries at the bottom of the pyramid. Within Bangladesh itself, we can also consider the pyramid structure, where those at the very bottom of the pyramid need employment and those on the next step up, within communities with buying power are able to benefit from the entrepreneurship and self-employment that microcredit can bring.