This research paper presents argumentative evaluation of micro-credit in several developing countries. Micro-credit has improved its credibility, popularity and advocacy and has successfully brought economic development and several working opportunities to the poor people residing in the developing countries. The condition of micro-credit has developed in past twenty years, and is known to be one of the best effective tools to fight against poverty in the developing region. Micro-credit can be defined as the small and easy to pay-back loan provided to the poor to help him in becoming self-employed. Micro-credit is provided to the unemployed poor people who are not considered bankable or who are not eligible to borrow big loans from banks. These small loans are provided to them so that they could help themselves to do something productive. Many individuals are able to support their families and educate their children because of micro-credit loans. It has been an innovative and supportive aid for them and a part of the microfinance banking scheme, which was basically originated in Bangladesh. Wide range of services is provided to the poor through micro-credit and it has helped several jobless individuals to get involved in self-employed projects so that they could not be dependent on other sources, rather than their own strengths and power. It has also enabled many people to come up to the standard of small-scale business and has taken them out from the circle of poverty. Micro-credit has been very successful and has enhanced the condition of the banking sector. Many banks have started to give micro-credit to poor people while considering them pre-bankable loan borrowers or micro-entrepreneurs. Apart from that, many developing countries have also been provided with micro-credit in order to improve their financial conditions and to fight back against poverty successfully (Sachs, pp. 75-211).
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Micro-credit Analysis in the Developing Countries
This section provides the overall analysis, study, research, evaluation and description of micro-credit in the developing countries. In the region of the developing countries, even 50 US dollars are considered reasonable to start a little fortune by the poorest people present there because with this amount of money, they can start something from the stretch as a little investment which could grow with the passage of time and could dig the out from the grounds of poverty. This can help in making their labor more productive because there are so many things which could be done in a day with this much of amount. For example, they can buy clothing materials and sew something to sell in the marketplace, they can buy thread in bulk quantity for weaving, they can buy items in the wholesale market and could sell them with beneficial amount, they can buy hand-stitching threads or items and prepare hand-made items which have very high demands in the global market. There are so many things which could be done with a small fraction of investment and from which poor could get numerous benefits. Nonetheless, there are thousands of micro-credit programs operated by several institutions which include NGOs, private industry, the United Nations, intermediaries, community banking sector, rotating savings and credit associations, governmental bodies and so many more who are supposed to follow the basic model of the leading Grameen Bank in Bangladesh (Sachs, pp. 75-211).
(Swider, North; 2007) At present, there are more than 13 million micro-entrepreneurs available globally who are benefited with the help of micro-credit and are earning handsome amount of money each day. Their taken loan is paid several months ago and now the entire earned amount is their own labor result and bliss of the energy they are putting in their small businesses everyday. Several micro-entrepreneurs have succeeded in taking their families out from the circle of poverty, they are educating their children and living a very happy, contented and fruitfully blessed life.
Origin of Micro-Credit Concept
The original foundation of the main concept of micro-credit began in Bangladesh in the year 1976, where Muhammad Yunus started micro-credit with the help of Grameen Bank. Grameen Bank has the reversed conventional banking and originated a new banking system supported by creativity, accountability, participation, and mutual trust. The management of Grameen Bank believes that poverty could fight back with the help of micro-credits. This has ultimately helped the entire nation in developing the socio-economic conditions of those who are poor and considered outside the circle of banking orbit or are not bankable enough to be provided with loans to start small businesses. The main objectives of Grameen Bank are for the development of poor people; such as, to eradicate the mistreatment of poor people by money-lenders, to introduce several opportunities of self-employment for the unemployed poor people in countryside of Bangladesh, to finish ff the cycle of “low income, low savings, low investment” and to exchange it with the new modern cycle of “low income, credit, investment, more income, better investment, more income”, to increase the banking facilities for poor men, women and families, and to help women from the poor households and make them organize to understand the business needs and operate accordingly with them (Grameen Bank, 2008).
“Many of us see the millions of impoverished people in the world as a seemingly unsolvable ‘problem’. However, we should see them as the world’s largest untapped source of entrepreneurs and consumers.”
Muhammad Yunus, Founder of Grameen Bank of Bangladesh.
Three C’s of Credit
(Grameen Bank, 2008) There are main three C’s involved in effective and beneficial micro-credit for poor people and better banking sector. Capital refers to the existing accessible possessions and valuable belongings of the money borrower, which includes investment, savings, or real estate which could be used to pay back the loaned amount in any case of income unavailability. Character refers to the background past information of the money borrower so that the bank should know how the person has dealt with the past debt obligations. This includes information such as, honesty report, reliability balanced information, credit history, and personal background information. Capacity refers to the highest amount of debt which the credit borrower could handle with ease at one time and payback it to the bank in the right manner. Apart from that, legal obligations and income streams are also checked so that there should be no hindrance in paying back the loaned amount to the bank.
Micro-Credit in the Developing Countries
(Mersland, Alliance; 2005) There are several countries who make use of micro-credit in their homeland and are improving their economic conditions with the help of their people. Uncountable people from numerous countries have taken micro-credit to become self-employed and to do their business so that they could stand on their own feet. The main region of micro-credit is the Asia-Pacific region which includes mainly Bangladesh, Philippines, India, Poland, Russia and other countries. Not even Asian and African regions are utilizing the benefits of micro-credit, but there are certain European states and regions from the United States where people claim themselves as poor and make use of the micro-credit banking system.
(Ahmed, 2008) CEE/CIS and other Baltic states include Azerbaijan, Bosnia and Herzegovina, Bulgaria, Hungary, Kyrgyzstan, Moldova, Poland and Russia. East Asia and the pacific regions include countries from Cambodia, China, Indonesia, Malaysia, Mongolia and Philippines. Eastern and Southern Africa region serves micro-credit banking services in the countries of Anglia, Botswana, Burundi, Comoros, Djibouti, Kenya, Malawi, Mozambique, South Africa and Zimbabwe. Latin America and the Caribbean side of the world include countries; such as, Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Grenada, Guatemala, Jamaica, Mexico, Nicaragua, Panama, and Venezuela. The countries which fall under the region of Middle East and North Africa are Iran, Jordon, Morocco, Turkey, Italy, and Luxembourg. South Asia contains countries such as, Bangladesh, Pakistan, Bhutan, Nepal and India. While the developing countries coming under the region of West and Central Africa are Burkina Faso, Democratic Republic of the Congo, Ghana, Guinea-Bissau, Liberia, Mauritania, and Nigeria.
(Henderson 327-340) All the countries listed above include homelands from the developing and developed regions of the world. This is because poor and needy people are everywhere who need to become self-sufficient and self-employed so that they could not rely on other resources other than their own manpower and strengths. Even people residing in the European and American countries have asked microfinance banks to provide hem with micro-credits so that they could eliminate the poverty around them, support their families, start something by their own planning and business strategies, and to educated their children with good education and manners. Bank industry has helped both kinds of people who reside in the developing countries or from the developed world, so that people equally fight against poverty in almost every region of the world.
Apart from all this, developing countries have improved their economic conditions to huge extents with the help of their people who were provided with the micro-credit facilities.
“Microfinance is much more than simply an income generation tool. By directly empowering poor people, particularly women, it has become one of the key driving mechanisms towards meeting the Millennium Development Goals, specifically the overarching target of halving extreme poverty and hunger by 2015.”
— Mark Malloch Brown, Administrator of the United Nations Development Programme (International Year of Microcredit 2005, 2005)
As a whole, micro-credit helps in improving the social condition of the poor people and the economy of a nation, but on the other hand, it also grabs them in never ending lending policies because the re-paying amount’s interest rate is very high which also creates several boundaries for the clients to return the money and maintain a beneficial revenue for themselves in return.
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Some Examples from the Developing Countries
Describing and mentioning every single example of micro-credit financial banking sector in the developing countries is not easy to explain here. However, some of the examples from the journal of “International Year of Micro-credit 2005” could be presented from the region of different developing countries for the assistance and better understanding of the readers.
(International Year of Microcredit 2005, 2005) According to a calculation, around 48 percent of the poorest families in Bangladesh have improved their living standards and wages with the help of the micro-credit banking system. In Indonesia, micro-entrepreneurs have increased their income with the help of micro-credits up to the ratio of 12.9 percent, which was hardly 3 percent as compared to previous poor income growth. This has helped around 90 percent of the total households to come out from the shell of poverty. In one village situated in Bangladesh, 60 percent increase was seen in the girls’ school admissions while 81 percent of boys started going to school for better education who have never gone to school before. In Bolivia, almost all the micro-credit loan takers increased their total income to double ratio. This enabled the clients not only to improve their daily life routines, but also to support their families while sending their kids to proper schooling systems for learning good education and etiquette. Opportunity International organization gave micro-credit loans to more than 675,000 micro-entrepreneurs in the year 2004 and more than 98 of the clients returned their debts on time or within the period of 30 days maximum. This shows the productivity and enthusiasm of clients with sense of responsibility which proves that they are highly interested in doing manageable business strategically. At least five percent of clients and micro-entrepreneurs graduated out of poverty annually with the help of micro-credit program. At least 12 million clients of micro-credit are present in India from whom, 44 percent of borrowers are considered below the scale of poverty. At least three-fourth of micro-credit clients who took help from the microfinance banks observed significant improvements in their small businesses, while half of them successfully promoted themselves from the circle of poverty to establish business oriented people and households. Around 95 percent of clients showed improvements with the help of the microfinance program held by Foundation for Credit and Community Association (FOCCAS) in Uganda. Nonetheless, in Nepal, more than 68 percent of women from every household field of life were helped by the micro-credit running institutions to show improvements in all areas, such as, decision making in buying and selling properties, going to school and graduating from colleges and universalities, planning their families and negotiating for their children marriages (International Year of Microcredit 2005, 2005).
(Elahi, Danopoulos; 643-654) The several positive post effects which could be enjoyed by the micro-entrepreneurs with the help of micro-credit are; Equity, Sustainability, Efficiency, Effectiveness, Self-confidence, Self-employment, and Relevance.
Advantages of Micro-Credit
(Yollin, 2007) One of the major benefits which micro-credit provides is the reduced amount of vulnerability among the poor people. This is because the micro-entrepreneurs help themselves by making their own household products most of the times which reduces many risks and can be easily sold if a need arises. Furthermore, there is no big lose or drawback associated in the small business because there are no huge costs involved. Another best benefit which a micro-entrepreneur could enjoy the most is the decreased income poverty, which means that the income involved in generating revenue keeps on increasing with the passage of time. The only thing which the owner can enjoy is an emerging income over time. Furthermore, it has been proved with several studies carried out in different countries that reduction in vulnerability and income poverty helps in increasing the overall income, which adds directly to a remarkable increasing boost in the overall consumption of the household products.
Disadvantages associated with Micro-Credit
(Shankar, 2007) Despite all the benefits and advantages involved with the micro-credit, there are some drawbacks involved which are discussed in this section. The high re-payment costs involved with the micro-credit, associated with the low drop-out rates and several borrowings create micro-credit dependability on the micro-entrepreneurs. In this way, neither the client can stop borrowing nor can he drop out from the micro-credit program, which ultimately creates a strict boundary for the borrower. The clients are required to adjust their incomes with the additional costs involved in the micro-credit and interest re-payments along with the condition to invest in other small programs run by the company they borrowed money from. The major disadvantage of micro-credit is that they do not provide loans to the poorest people or poorest business oriented entities because of their high interest rates scale. The poorest people require minimum costs which does not give high interest return backs to the banking sector. This is why the loan is provided to those who could afford to give back the amount to the money lenders on time. The borrowers or clients must plan and invest in such a way that they could make some handsome amount of revenue so that they could return the loaned amount on time to the banking sector and could survive after paying the interest rates. Otherwise, they might become a dependable borrower of micro-credit institutions forever. Another disadvantage associated with micro-credit is that it focuses on the literate and educated circle of poor people who could come up with several good ideas by using their education and morals. This creates bad situation for those who are not educated and cannot come up with some good ideas of doing small business.
This research paper presents a very descriptive form of Micro-credit along with its description, meaning, the scope of work, condition around the world and specifically in the developing along with some live examples, followed by the advantages and disadvantages which are associated with micro-credit.
Micro-credit is the small amount of loan provided to poor people so that they could become self-employed and could improve their living standards by graduating themselves and their households from the circle of poverty. In this way, the poor could not be dependent on other sources or people for further help. Micro-credit has improved the condition of several counties economically, because it develops the circumstances of the working class and their income which eventually adds to the economy of that particular homeland. The first micro-credit institution was formed by Mr. Muhammad Yunus in Bangladesh and this idea of helping the poor was flourished to other regions of the world quickly, specifically in the developing regions of the world (Ahmed 122-155).
The argument continues here which states that micro-credit provides the country with major benefits such as, employment opportunities, economic security, asset generation, and empowerment of the poor, while supporting the female gender particularly in certain working areas. Poverty cannot be demolished overnight, but it can be reduced from the face of the world if proper planning is carried out and the developing countries are served with handsome amount of micro-credit to the poor population. This is because of the fact that the problem of poverty is multi-faced, which cannot be demolished by a single solution. Micro-credit cannot be that particular single solution, but it can help in reducing the ratio of poverty and help the poor in increasing their household standards and daily income. Just like it has helped several developing countries (particularly the region of Asia Pacific) in fighting against the negative force of poverty with the help of their skills, strengths and micro-credit help. Micro-credit programs assists in providing comprehensive help to inner city businesses where the people could get training, skills, assistance, technical knowledge, strategies for businesses and most of all, revenue oriented experiences for creating thriving small scoped businesses (Campbell 99-109).
Micro-credit can act as one of the tools to mitigate poverty, but it is not the complete solution. Moreover, it has several boundaries of engaging only the literate people in the micro-entrepreneur circle, which leaves other education-less poor class to suffer from poverty.
- Jeffrey Sachs, 2005, The End of Poverty: Economic Possibilities for Our Time, Published by Penguin Press, p75-211.
- Paul Swider, Michael North; 2007, Microcredit: A Greenstar Research Brief, GreenStar Organization. Web.
- Grameen Bank, 2008, Three C’s of Credit, grameen-info.org, Web.
- International Year of Microcredit 2005, 2005, Microfinance and the Millenium Development Goals, Web.
- Roy Mersland, Norway Atlas Alliance; 2005, Microcredit for self-employed disabled persons in developing countries, Published on: October 2005, MPRA Paper No. 2068. Web.
- Khandakar Q. Elahi, Constantine P. Danopoulos; 2004, Microcredit and the Third World: Perspectives from moral and political philosophy, International Journal of Social Economics, Emerald Group Publishing Limited, Volume: 31 Issue: 7, Page: 643 – 654, Web.
- Patricia Yollin, , 2007, Microcredit movement tackling poverty one tiny loan at a time, San Francisco Chronicle, Sunday, September 30, 2007; Web.
- Savita Shankar, 2007, Transaction costs in group microcredit in India, Management Decision Journal, Emerald Group Publishing Limited, Volume: 45 Issue: 8, Page: 1331 – 1342.
- Fauzia Erfan Ahmed, 2008, Microcredit, Men, and Masculinity; NWSA Journal, The Johns Hopkins University Press, Volume 20, Number 2, Summer 2008, pp. 122-155.
- J.W. Campbell, 1999, A CONCEPTUALIZATION OF A MICRO-CREDIT UNION — WORKERS COOPERATIVE TO ASSIST PEOPLE TO DEVELOP SELF-EMPLOYMENT, Humanomics Journal, Publisher: MCB UP Ltd, Volume: 15 Issue: 2, Page: 99 – 109. Web.
- Keith M. Henderson, 2001, Urban service delivery in developing countries – Escaping western bureaucratic solutions, International Journal of Public Sector Management Journal, Publisher: MCB UP Ltd, Volume: 14 Issue: 4, Page: 327 – 340, Web.