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Help but no charity

Charity is not an answer to poverty. It only helps poverty to continue. It creates dependency and takes away individuals' initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty.

Muhammad Yunus
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Social microfinance

What is social microfinance ?

Photo: MicrosfereSocial microfinance is one of the most revolutionary instruments for the eradication of poverty. It refers mainly to microcredit and microsavings services. Microfinance refers to programmes that extend small loans to very poor people for self-employment projects either by starting a micro-enterprise (a small business) or by expanding an existing micro-enterprise. Loans in Africa can be of the order of 50-500 euro and are addressed to poor borrowers that do not have access to classical banking systems as they lack assets to provide as collateral or other types of guarantees. Microcredit helps borrowers become financially self-sufficient and is a great empowerment tool. The concept and practice of microcrédit was developed in the 1970s, by Mohammad Yunus and the Grameen bank , which started extending small loans to the poorest of the poor in rural Bangladesh and became a model for similar programmes all over the world. Thanks to this original initiative that started in Bangladesh, about 100 million people benefit today from microfinance throughout the world.

Microcredit is now hailed as one of the most cost effective and efficient tools in the combat against poverty as well as one of the best tools for the empowerment of social groups that are traditionally kept outside the “classical” economic and financial markets. Another key advantage of microcredit is that it helps the poor help themselves, instead of offering free assistance that leads to the creation of dependency. Microcredit is the most common microfinance service applied today. Other Microfinance services are loans, insurances, pensions, etc.

What is the link between social microfinance, poverty reduction and biodiversity conservation?

Photo: MicrosfereAround many protected areas in the world, rural communities are trying to etch a living from land, through activities such as agriculture, hunting and fishing. For many of those communities, the establishment of protected areas in their vicinity has offered significant benefits such as micro-climate regulation, increase in the abundance of pray species in the off reserve areas, increase of tourism-related revenues, control against erosion, etc. However, it has also implied a limitation in the access to natural resources. As a result they have seen their incomes dwindle and their economic and livelihood activities significantly affected. In order to counterbalance those side-effects and to ensure that fringe communities maintain their support of the protected areas, various strategies are being implemented. Social microfinance is one of them, and it aims at the promotion of alternative and sustainable livelihoods through the support of micro-enterprises.

How does a microcredit programme work?

A microcredit programme can be administered directly by an NGO or most commonly by a MicroFinance Institution (MFI). Following an initial control of eligibility by the microcredit staff (the loan officers), interested borrowers are invited to form groups of 10-20 people. The loan officer of the NGO or the MFI assesses the applications of the interested borrowers, and those whose application is approved are accepted into the group. These groups meet regularly with the loan officer of the microcredit program, and each member is liable for all debts incurred by all other members. If a particular borrower cannot repay his/her loan, then the other members of the group are required to make up the amount in default. Borrowers are encouraged to monitor the behaviour of one another to make sure that no one is in danger of default. Once a group has paid off its entire loan (capital + interest) then its members are again eligible to apply for a second loan, if they so wish. This process, established by the Grameen bank has led to extremely low rates of default, which do not exceed 5% of loans. The viability of a microcredit programme depends on its good management. A key parameter for that is the number of loan beneficiaries: the higher the number of beneficiaries, the higher is the chance of covering the incurred expenses (staff, transportation, etc.). The interests charged to the initial loans aim exactly at that: covering the incurred expenses.

What is microcredit? by Muhammad Yunus

The 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.

I 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. I am 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. Let me suggest a broad classification of microcredit : 

A)   Traditional informal microcredit (such as, moneylender's credit, pawn shops, loans from friends and relatives, consumer credit in informal market, etc.)
B)   Microcredit based on traditional informal groups (such as tontin, susu, ROSCA, etc.)
C)   Activity-based microcredit through conventional or specialised banks (such as, agricultural credit, livestock credit, fisheries credit, handloom credit, etc.)
D)  Rural credit through specialised banks.
E)   Cooperative microcredit (cooperative credit, credit union, savings and loan associations, savings banks, etc.)
F)   Consumer microcredit.
G)  Bank-NGO partnership based microcredit.
H)  Grameen type microcredit or Grameencredit.
I)   Other types of NGO microcredit.
J)   Other types of non-NGO non-collateralized microcredit. 


Whenever I use the word "microcredit" I actually have in mind Grameen type microcredit or Grameencredit. But if the person I am talking to understands it as some other category of microcredit my arguments will not make any sense to him. Let me list below the distinguishing features of Grameencredit. This is an exhaustive list of such features. Not every Grameen type programme has all these features present in the programme. Some programmes are strong in some of the features, while others are strong in some other features. But on the whole they display a general convergence to some basic features on the basis of which they introduce themselves as Grameen replication programmes or Grameen type programmes. General features of Grameencredit are :

a)   It promotes credit as a human right.
b)   Its mission is to help the poor families to help themselves to overcome poverty. It is targeted to the poor, particularly poor women. 
c)   Most distinctive feature of Grameencredit is that it is not based on any collateral or legally enforceable contracts. It is based on "trust", not on legal procedures and system.
d)   It is offered for creating self-employment for income-generating activities and housing for the poor, as opposed to consumption.
e)   It was initiated as a challenge to the conventional banking which rejected the poor by classifying them to be "not creditworthy". As a result it rejected the basic methodology of the conventional banking and created its own methodology.
f)    It provides service at the door-step of the poor based on the principle that the people should not go to the bank, bank should go to the people.
g)   In order to obtain loans a borrower must join a group of borrowers.
h)   Loans can be received in a continuous sequence. New loan becomes available to a borrower if her previous loan is repaid.
i)    All loans are to be paid back in instalments (weekly, or bi-weekly).
j)    Simultaneously more than one loan can be received by a borrower.
k)   It comes with both obligatory and voluntary savings programmes for the borrowers.
l)    Generally these loans are given through non-profit organizations or through institutions owned primarily by the borrowers. If it is done through for-profit institutions not owned by the borrowers, efforts are made to keep the interest rate at a level which is close to a level commensurate with sustainability of the programme rather than bringing attractive return for the investors. Grameencredit's thumb-rule is to keep the interest rate as close to the market rate, prevailing in the commercial banking sector, as possible, without sacrificing sustain-ability. In fixing the interest rate market interest rate is taken as the reference rate, rather than the moneylenders' rate. Reaching the poor is its non-negotiable mission. Reaching sustainability is a directional goal. It must reach sustainability as soon as possible, so that it can expand its outreach without fund constraints.
m) Grameencredit gives high priority on building social capital. It is promoted through formation of groups and centres, developing leadership quality through annual election of group and centre leaders, electing board members when the institution is owned by the borrowers. To develop a social agenda owned by the borrowers, something similar to the "sixteen decisions", it undertakes a process of intensive discussion among the borrowers, and encourage them to take these decisions seriously and implement them. It gives special emphasis on the formation of human capital and concern for protecting environment. It monitors children's education, provides scholarships and student loans for higher education. For formation of human capital it makes efforts to bring technology, like mobile phones, solar power, and promote mechanical power to replace manual power.

Grameencredit is based on the premise that the poor have skills which remain unutilised or under-utilised. It is definitely not the lack of skills which make poor people poor. Grameen believes that the poverty is not created by the poor, it is created by the institutions and policies which surround them. In order to eliminate poverty all we need to do is to make appropriate changes in the institutions and policies, and/or create new ones. Grameen believes that charity is not an answer to poverty. It only helps poverty to continue. It creates dependency and takes away individual's initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty.

Grameen brought credit to the poor, women, the illiterate, the people who pleaded that they did not know how to invest money and earn an income. Grameen created a methodology and an institution around the financial needs of the poor, and created access to credit on reasonable term enabling the poor to build on their existing skill to earn a better income in each cycle of loans.

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