Microcredit leading to Microenterpise: The Challenges

By Sunil Daniel

INTRODUCTION
Microenterprise is often talked about and has gained prominence in every conference, but rarely anyone realize that it one of the most difficult stages of development. The projection that it has received by big foundations has created false notions about microenterprise. However, microenterprise is indispensable because it is the ‘medium’ or ‘channel’ in development. Microenterprise decides if the financial service rendered to the poor is ‘microcredit or ‘micro-debt’. If you give microcredit to the poor and do not involve in non-financial services like capacity building, skill development, giving marketing skills, and other needs, the poor are worse off – they have a debt to repay.

NOT MICROENTERPRISE EVERY TIME!
It should be borne in mind that microcredit is not always used for Microenterprise activities, at least in the initial stages. There may be other emergency needs for which the credit will be used. Firstly, if they are victims of informal microcredit like that the money taken for high interest rates from moneylenders, then it is better that the microcredit be used for clearing off the debt rather than starting an enterprise. Secondly, the microcredit is often used for consumption needs, which is also indispensable. What enterprise would a person take up if her house were leaking? It would be wise to get the house repaired before taking up an enterprise. It would be wise to buy a mosquito net if there are mosquitoes instead of starting an enterprise. This avoids malaria and actually saves medical expenses. Thirdly it can be used for ‘event-financing’, mostly the lifecycle programs like birth, marriage, death, etc. It is during these crucial times of delivery or death that the poor often take loans from moneylenders. Fourthly microcredit can be used for other profitable needs like the education of the children or health needs. Last but very important is to use it for ‘Microenterprise’ – income-generating activity. So it would be wrong to make the people jump into starting some enterprise when actually there are other needs, and actually taking care of those needs would be much better than starting an enterprise. That is development too! It is often thought that only when an enterprise is started it is development but it is not true.

HINDRANCES OTHER THAN THE NEED FOR MICROCREDIT
Having no access to credit is only one of the hindrances to development. But there are other hindrances to microenterprise and thus development of the people. These should be taken into consideration and one should not assume that just by giving loan to the poor they would come out of poverty.
Social Oppression: In a country like India where there is a lot of differentiation on the basis of caste, and oppression by the rich, even if there is the financial source microenterprise may not be successful. There should be a strategy where the people themselves are enlightened so that they can come out oppression and solve their own problems. When the poor stop going to the informal moneylenders and so something innovative the rich/high caste people often try to hinder the activities. The poor should be empowered to tackle such issues.
People’s mindset: The poor are used to looking towards outside sources for help, as contrast to thinking of what they can do with what they have. They may not reveal what they have (for example they may not agree that they can save even one rupee a day), for fear that the outside help may not be rendered. Usually they say that they cannot practice thrift and save money. An enterprise is looked upon by the poor as an ‘asset’ rather than that of a ‘channel for livelihood’ – for example you might give a cow so that they can earn some income, but they look at it as an asset that can be sold in time of emergency. When you try to evaluate them they will always say that the income is not sufficient, except a few, again for fear that the NGO may leave them and not render further help. It should be made clear to them that they are helping themselves and the social workers are not saviors who have ready-made solutions to their problems or a Santa Claus who can grant all their desires.
Not all are entrepreneurs: One might want everyone to be involved in an enterprise but some may not because they feel that they cannot do it. They are not willing to take risks, so are many of us who are forcing them to jump into an enterprise. Those who are entrepreneurial take enterprise as a challenge and those who are not, come up with many excuses even before they start the activity. Many actually prefer jobs where there is a regular income every month, even though it is very less. It should be borne in mind that most of those who are pushing the poor into microenterprise activities are not entrepreneurs themselves but it is expected that the poor should go for and it and that they should be successful. Many of us would not take up an enterprise either!
Not every technology is contextual/viable: As a part of sill development many skill may be taught but not every technology is contextual. Extra effort has to be taken by the NGO working among the poor to see that they are involving in a viable enterprise. Some time NGOs are satisfied by supplying a productive asset, a sewing machine for example, and think that the poor will generate income. It should not be assume that a productive asset will always be profitable. There should be customers who will give clothes for stitching. Also enterprises should be diversified, everyone should not opt for the same enterprise.
Microenterprise leading to small-scale industry: If there are many who are doing the same enterprise than marketing will be a problem. So an effort has to the be taken by the NGO working in that area to start a small scale industry and see that the business is done in a larger scale so that the marketing can be done under a brand name. If this is not done than all the people producing the same product can be a hindrance in the development activity.

SUCCESS EVALUATED FROM BENEFICIARIES VIEWPOINT
Most often ‘hype’ has been crated by the funding agencies because they give the statistics from their viewpoint. They list the number of countries that they are working in or the total number of people to whom they have made credit available, and most often they highlight the success stories which makes people assume that all the people they are working with also have the same success.

CONCLUSION
Microenterprise is very essential for the development of the poor and poverty alleviation. But it is one of the most difficult stages in development for various reasons as discussed above. It requires patience, research, and commitment to result in the people taking up viable enterprises. Reporting the number of projects given and sharing a report of a few does not mean that the project is successful. If one has failed, then he should be willing to humbly accept it. Otherwise the trend at which microenterprise is promoted will mean nothing in the course of time. Very soon donors may write of microenterprise as an ineffective tool, which is actually not true. It is still an effective tool provided it is implemented the right way.

Analyzing Microcredit for Development

By Sunil Daniel

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INTRODUCTION
The very next day after the announcement of the "Noble Prize for Peace' to be jointly awarded to Muhammad Yunus and the Grameen Bank, there were many web-links on the internet in reaction to the award, both positive and negative. One of the articles was, “Hype and Hope: The Worrisome State of the Microcredit Movement” by Thomas Dichter. Dichter raises some questions like,
If microcredit results only in making the lives of the poor a bit less terrible, or helping just a few real entrepreneurs, is that sufficient reason to laud it? And if borrowers repay microloans does this automatically mean that microcredit is a useful intervention in poverty reduction? And if it is marginally useful, is it cost-effective? …if most of us use credit, when we do, for consumption, why do we make the assumption that in the developing countries, the poor are all budding entrepreneurs; that they will use credit wisely for investment in income production, and are ready for all manner of financial services? And how can we possibly posit (as we have since the 1970s) that credit is a “human right” without recognizing the dangers of debt? These propositions defy both history and common sense.The thesis of his article is that ‘microcredit changes poor people’s lives marginally’. If at all there is any benefit from micro credit, he says it is only to “help the poor smooth consumption over periods of cyclical or unexpected crises….” Regarding microcredit as an investment for microenterprise he says that the research is clear: “…the better off the borrower the greater the increase in income from a microenterprise loan. Borrowers who already have assets and skills are able to make better use of credit…. Indeed, some of the poorest borrowers became worse off as a result of micro-enterprise credit, which exposed these vulnerable people to high risks…” There is no way for microcredit to ‘function as capital aimed at increasing the returns to a business activity’.
One must agree to the fact that while microcredit has created some hope, the importance that it has gained today, more so after Muhammad Yunus was awarded the Noble prize, and the involvement of business giants in micro financing has created much ‘hype than hope’ and ‘Microcredit is on the verge of becoming a self-polluting industry’[1]. Having said about the ‘hype’ of microcredit Dichter also gives some important suggestions for microcredit – probably hope still exists (this will be discussed later).
The government of India has taken up steps in promoting the formation of Self Help Groups (SHGs). And there are NGOs who have taken up research and have come of strategies for microenterprise activities in India. Therefore, while agreeing to most of what Dichter has to say, this paper, in accordance with his suggestions, argues that ‘microcredit for microenterprise’ has been and can successful in India where the SHG system is implemented – provided it is done in the right way. The people should be able to manage their own financing activities and the interest should not go out of the people to an external entity. The ‘Self-governed Financial System’ is the solution to the development of the poor.

ANALYZING MICROCREDIT PROVIDERSBefore looking into microenterprise, microcredit, which is the source for microcredit has to be analyzed. There is confusion with the words Microcredit, Microfinance, Microenterprise, and Microenterprise Development (MED). Many use these words interchangeably to mean the same thing but actually there is a difference in the usage and the meaning of these terms. Microcredit services are rendered by many and so while not discussing about the historical development of microcredit movement, microcredit services provided today can be understood as discussed below.

Microcredit and ‘For-profit Institutions’Microfinance Schism is used to refer to the difference of opinion in the practice of Microfinance. The schism is ‘Welfarist vs. Institutionists’, or ‘Development verses Business’. Connie Bruck wrote an interesting article “Millions for Millions” where she says, “This conflict, between pure do-gooders and profit-minded do-gooders, has come to define the current debate in the microfinance world”.
In India since the time microfinance gained prominence, many non-governmental organizations were reregistered under the companies act so as to be able to make some income for sustaining the institution. But recently a lot of accusations on non-banking financial companies (NBFCs) has been highlighted by the media for making a lot of profits in the name of service charges and development of the poor. Some of the accusations are:
a) A usual practice in the microfinance sector is to quote the interest rate that is calculated on the initial principal amount (flat interest rate and not diminishing)
b) This results very high effective annual percentage rate of interest (APR) – 35 to 50%, as compared to interest rate calculated on a declining principal balance (diminishing interest rate) – 12%.
c) The hidden charges include insurance premiums and in some cases, upfront security deposits of 5-10 per cent of the loan amount
d) Forcible repayments have been reported – in some cases threatening and harassment
e) Some blank sheets with the signature of the clients have also been confiscated
However, the MFIs claim that the media has given wrong information on them. The Indian government has taken steps to set down rules for the MFIs so that interest rates are regulated. The MFIs are picking up! There is more demand for micro loans and the supply is less, providing good market for the MFIs. There are more that 800 MFIs in India. They form small groups and the very next days give loan to the members. The poor are attracted by the ‘door-step’ availability of loans. The MFIs get loans from banks and foundations for interest and they have to repay with interest. This interest along with the administration costs is burdened upon the clients. The microcredit in this case benefits only those who are economically active and not the poor. The poor, if they are caught into this trap are equally in the trap of moneylenders.

Microcredit and ‘Not-for-profit Institutions’There are some NBFCs, though registered as a company restrict themselves to taking interest only for the purpose of administration and sustainability. The interest is comparatively small in this case. But still a portion of the interest goes out. Grameen Bank functions as an institution and take service charges for administration but does not believe in making profit. Connie Bruck quotes the conversation between Pierre Omidyar[2] who is business minded and Yunus who is development minded saying,
Yunus, too, believes in sustainability, and he certainly wants to reach all the world’s poor, but he is convinced that the traditional goal of business—maximization of profit—is inappropriate when dealing with the poor. “I had a long debate with Pierre,” Yunus told me, referring to Omidyar. “He says people should make money. I said, Let them make money—but why do you want to make money off the poor people? You make money somewhere else. Here, you come to help them. When they have enough flesh and blood in their bodies, go and suck them, no problem. But, until then, don’t do that. Whatever money you are taking away, keep it with them instead, so they can come out more quickly from poverty.[3]”
There are very few institutions that are charging only the administration costs. However, even this model of taking interest from the women for administration is not a good model because the interest is going out of the groups. This is not to say that the Grameen model is not good. It is good in Bangladesh but in India there is the SHG system in which every group is individualistic and it is a small bank in itself and managed by itself. The SHG system suits better in India because the population is not homogenous like that of Bangladesh, and Inida is less densely populated when compared to Banglasdesh., India is not a homogenous country like Bangladesh.
Here are a few questions. How were the NGOs sustaining before microfinance sprang up? Can MFIs not raise support for their organization? If they cannot raise support then why do they not promote the SHG system? What about the sustainability of the poor? Should the MFI be always there to give loans?

Microcredit and ‘Self-governed Financial System’
Microcredit should always mean ‘internal micro-lending’ where the interest does not go out. In the same article Dichter gives at least three important suggestions for ‘better functioning’ of microcredit and microenterprise. He says,
1. What would permanently help these poor people, and if not them, their children, are governments that get their acts together and provide structures, laws, and institutions under which people's evident interest in getting ahead in the world could be transformed into reality.
2. To fulfill the promise of long-term change, much harder things need to be undertaken and these cannot be undertaken everywhere, nor by every player in the development aid business who comes along, because they require sophisticated skills, vision, research, and risky experimentation.
3. To move forward the best operators of microcredit need to become banks, move more seriously into savings mobilization, and learn to deal with banking policy and other (institutional) aspects of the enabling environment. The Self Help Group system (SHG) in India is in accordance to point 1 and 3. The government of India has taken up steps to help the women to help themselves through SHGs and it is a system where the interest does not go out of the group. Regarding the SHG system in India Malcolm Harper says,
The formation of SHGs for savings and credit, and their linkage to commercial banks, was initiated in India by MYRADA in the mid-1980s (Fernandez 1998). NABARD management had also been exposed to similar experiences in Thailand and Indonesia, and they responded favourably to MYRADA's suggestion that this could be a useful way to bring formal financial services to the rural poor. Since that time, SHG linkage has been vigorously promoted by NABARD and other institutions. It generally involves two institutions. Most NGOs do not play any financial role. They promote and train the groups, and assist them through the qualifying process of saving and internal lending. The groups are introduced to a bank to open a savings account, and later to take a loan. The NGO may remain heavily involved, assisting the members to manage their affairs, and possibly promoting higher level clusters and federations of SHGs, or it may withdraw and work with other groups Other NGOs also act as financial intermediaries by borrowing from NABARD or elsewhere and on-lending to SHGs, either because they aim to become MFIs, … [4].
Government of India under various schemes has given matching grants to the groups in order to boost up the savings of the group and also subsidy loans to encourage the groups. The groups ought to be federated into ‘panchayat level’ and even at a higher level called the ‘block level’ federation. This is like people owning their own bank – as suggested in point 3. There are some accusations against this model that many groups are not functioning now because the groups were formed just for the purpose of receiving matching grants from the government. This is true because the government had done it for the sake of number. The art of felicitating the groups is very import and it takes time. Another problem is that of the administrative costs. This is not difficult because if one group is formed properly the women themselves will form other groups. The NGO need not form all the groups. In this model the interest does not go out of the group the authority rests with the people and not an outsider.

CONCLUSIONMicrocredit movement as done in the Self-governed financial system is the best way to bring about the development of the poor. This will also lead to the sustainability of the program and the poor will have their own authority on their activities.

[1] From the article ““Hype and Hope: The Worrisome State of the Microcredit Movement” by Thomas Dichter
[2] Pierre Omidyar is the founder of ‘Ebay’
[3] From the article “Millions for Millions” by Connie Bruck
[4] From the article “Grameen Bank Groups and Self-help Groups; what are the differences?” by Malcolm Harper (2002)