Microcredit: Reducing Poverty to Lower Income Inequality

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Microcredit Reducing Poverty to Lower Income
Inequality

• Tanya Picinich
• Paige Stillwell
• April 22, 2009

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Overview

• Reducing income inequality
• Basics of Microcredit
• History
• Principles
• How it works
• Example
• Success and Critiques
• Moving Forward

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Recall

• Gini Index
• Measures income inequality in one number
• Calculated as the area between the Lorenz curve
  and perfect equality (yx)
• High Gini Index (close to 1) means high income
  inequality and a low Gini Index (close to 0)
  means low income inequality

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What If We Want to Lower the Gini Index?

• Reduce Poverty
• If more people rise out of poverty income
  inequality would reduce
• Example Suppose 55 of population makes 20 of
  income. Now consider if next year 40 of
  population makes 20 of income.

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What is Microcredit?

• Programs that extend small loans to very poor
  people for self-employment projects that generate
  income, allowing the to care for themselves and
  their families
• Part of microfinance which provides numerous
  financial services to the poor

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Qualifications for Traditional Credit

• Assets
• Income
• Debts
• Repayment History

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Qualifications for Microcredit

• Activity will generate employment
• Little or no collateral
• Part of a support group
• Women preferred
• Agree to Codes of Conduct
• Previous borrowers can get a loan as long as
  previous loans are paid off

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History of Microcredit Muhammad Yunus

• Founded by Muhammad Yunus
• Grew up in the village of Bathua in Hathazari,
  Chittagong
• Attended Dhaka University and has a BA and MA in
  economics

• Ph.D. in economics from Vanderbilt University
  
• Returned to Bangladesh and became head of the
  Economics Department at Chittagong University

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History of Microcredit Women of Jobra

• In 1976 Yunus visited the village of Jobra
• A Jobra woman was selling bamboo furniture for 2
  cents a day
• A trader loaned her money so that she could buy
  the bamboo
• Indebted to the trader and could only sell her
  products to him
• Yunus found 42 women with similar debts
• Total debt for the women 27
• Yunus lent the women the money
• Idea of microcredit is born

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History of MicrocreditStruggle for Support

• Yunus attempted to convince the banks of
  Bangladesh to loan to the poor people
• Every bank denied his request
• Tried different banks for over 6 months
• poor people are not credit worthy
• Became a guarantor for a bank
• Successful lending in 5 different villages
• But banks continued to deny his requests
• Yunus realized he had to form his own bank to
  lend to the poor

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History of Microcredit Grameen Bank is Formed

• Success in the district of Tangail and two other
  districts
• Established a new law so that his bank would be
  different than others
• Seven years after meeting the women of Jobra, the
  Grameen bank was established
• October 1, 1983

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History of MicrocreditGrameen Bank Today

• As of July 2007 Grameen Bank has loaned 6.38
  billion to 7.4 million people
• More than 94 of loans have gone to women
• More likely to devote money to their family
• In 2006 Yunus received the Nobel Peace Prize
• 1.4 million prize
• Company to make low-cost, high-nutrition food for
  poor
• Eye hospital for the poor in Bangladesh

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History of MicrocreditMicrocredit Today

• Today there are more than 7,000 microfinance
  institutions
• Microcredit is offered in more than 100 countries
  
• More than 13 million people have been given
  microcredit loans
• Loan repayment is at 97
• Microcredit banks are now finding more ways to
  help borrowers through agriculture, health, and
  other programs

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Assumptions of Microcredit

• Credit is a human right
• Need a dollar to get a dollar
• Most banks create poverty
• Governments must enable people
• Lending to women empowers communities
• Credit creates self-employment
• Credit makes other human rights attainable

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How Microcredit Works

• Major players All of these groups must work
  together to enable microcredit programs to exist
  and eliminate fraudulent practices which may harm
  the poor.
• Borrowers
• Government
• Banks
• Donors
• Wholesale Funds

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Top 25 Microcredit Institutions

• The success of Grameen lead to the development of
  similar banks in other underdeveloped countries
• Most also lend mainly to women

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Requirements to Borrow

• Willing to take part in a solidarity group
• Money used only for improvements of village life
• Agree to the codes of conduct for members of
  microcredit programs
• Grameen Banks16 Decisions
• BRACs 17 Promises
• RD-12s 21 Oaths

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The 16 Decisions

• The four principles of the Grameen Bank
  discipline, unity, courage, and hard work we
  will follow and advance in all walks of our lives
  
• We will bring prosperity to our families.
• We will not live in dilapidated houses. We will
  repair our houses and work toward constructing
  new houses.
• We will grow vegetables all year round. We will
  eat plenty of them and sell the surplus.
• During the plantation seasons, we will plant as
  many seedlings as possible.
• We will plan to keep our families small. We will
  minimize our expenditures. We will look after
  our health.
• We will educate our children and ensure that we
  can pay for their education.
• We will always keep our children and the
  environment clean.
• We will built and use pit-latrines.
• We will drink tubewell water. If it is not
  available, we will boil water or treat it with
  alum.
• We will not take any dowry in our sons wedding,
  neither will we give any dowry in our daughters
  wedding. We will keep the center free from the
  curse of dowry. We will not practice child
  marriage.
• We will not inflict justice on anyone, nor will
  we allow to do so.
• For higher incomes we will collectively undertake
  bigger investments.
• We will always be ready to help each other. If
  anyone is having difficulty, we will help them.
• If we learn of any breach in discipline in any
  center, we will help to restore discipline.
• We will introduce physical exercise in our
  centers. We will take part in all social
  activities collectively.

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To Make Microcredit Possible

• Government
• Cannot and should not provide credit
• Must create a supportive environment
• Enable companies to lend to the poor
• Protect borrowers from malicious lenders and
  collection workers
• Wholesale Funds
• Act as guarantor
• Package loans to reduce risk

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Example Nguyen Thi Minh

• Internet-based organizations
• Web platforms that facilitate peer-to-peer
  lending
• Number of smaller loans are given at a negligible
  interest rate
• Microcredit Websites
• Kiva.org
• MicroPlace.com
• United Prosperity
• Wokai
• Example Nguyen Thi Minh
• Vietnam
• Needs a loan of 475

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Example Nguyen Thi Minh
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Example Nguyen Thi Minh

• TYM Tao Yeu Mai (People loving People)
• Founded in 1992 by the Vietnamese Womens Union
• More than 23,000 woman members in 7 North
  Vietnamese provinces
• Assisted more than 40,000 poor women
• Women with monthly income below 12.50 can become
  members
• 5 members form a group
• 6-8 groups form a center
• Must undergo 2 day training before given a loan
• Max loan 1,250
• Interest is generally 1 per month

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Example Lenders to Nguyen

• Different lenders that have contributed small
  loans to Nguyen to help her reach her goal

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Example Repayment Schedule

• Expected Repayment schedule Nguyen will make to
  her lenders

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Success of Microcredit Telephone Ladies

• One woman in each village has a phone which
  others pay to use
• Information technology is a human right
• Once people have access to information
  technologies they are able to quickly change
  their lives
• In July 2008 Grameen Phone made an initial public
  offering and is now traded in the Chittagong
  Stock Exchange

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Impacts at Local Level

• Education
• Borrowers children must attend school after age 6
• A 1 increase in credit to a village increases
  school enrollment by 1.9 for girls and 2.4 for
  boys
• Health
• Microcredit institutions run health clinics in
  villages
• Borrowers and non-borrowers have access but
  non-borrowers pay double
• Borrowers eat more healthily and as a result
  children are growing taller and avoid illness
• Codes of Conduct require that borrowers drink
  clean water and use pit-latrines which reduces
  illness\

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Moving Out of Poverty

• 56 of borrowers rise out of poverty
• Must fulfill 10 Indicators to be considered out
  of poverty
• Live in a house with a tin roof where each member
  has a bed.
• Drink pure water.
• Children 6 years and older attend school.
• Pay weekly loan installments.
• Use sanitary latrine.
• Have adequate clothing.
• Maintain source of additional income.
• Maintain set balance in savings accounts.
• Eat 3 square meals a day.
• Can access and afford medical assistance when
  needed.

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Critiques of Microcredit

• Grameen Bank's high repayment rate does not
  reflect the number of women who are repeat
  borrowers
• Women become dependent on loans
• Women act as collection agents for their husbands
• Men spend the money
• Women fall into debt
• Over dependence on external capital
• Too much power given to field officers
• Sometimes violence is used to collect repayments
• Loan recipients could get into a cycle of debt
• Loans from other microcredit institutions to
  repay previous microcredit loans
• High interest rates

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Critiques of Microcredit

• Only works for the top layer of poor people
• Yunus responded to this by forming the beggar's
  program
• Only one rule Must eventually pay back the loan
• Did not have to follow the 16 Decisions
• No interest
• Helped 6,000 beggars in the first year

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Moving Forward

• United Nations Millenium Development Goals 2015
• End poverty by giving loans to poor that enable
  them to work and provide for their families
• Microcredit borrowers children are more likely
  to obtain schooling
• Women are given village power through microcredit
  programs
• Children of borrowers have access to more medical
  services and have better nutritional well-being
• Borrowers are more likely to take part in family
  planning programs and have access to maternal
  care
• Most programs promote local merchandise which
  reduces environmental impact
• Microcredit has created a worldwide platform to
  reduce poverty and empower the poor through the
  internet and social business ventures

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Moving Forward

• Microcredit is currently growing at more than 30
  annually
• With growth of internet programs this rate is
  expected to increase
• Companies like Grameen Bank are hoping to make
  some of their companies public and selling shares
  to microcredit borrowers, thus empowering the
  poor in the global market

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Questions?
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Works Cited

• Banker to the Poor. Ashoka Innovators for the
  Public. Rooy Media, 2006. DVD.
• Building Social Business Ventures. Ashoka
  Innovators for the Public. Rooy Media, 2006.
  DVD.
• Creating a Poverty-Free World. Ashoka Innovators
  for the Public. Rooy Media, 2006. DVD.
• Khandker, Shahidur R. Fighting Poverty with
  Microcredit. New York Oxford University Press
  for the World Bank, 1998.
• Macadam, Murray. Small Change, Big Dreams.
  Credit Where Credit is Due. Apr. 2002. Web. 19
  Apr. 2009. lthttp//www.sustainabletimes.ca/artic
  les/microcredit.htmgt
• Microcredit. Wikipedia, The Free Encyclopedia.
  28 March 2009. Web. 31 March 2009.
  lthttp//en.wikipedia.org/wiki/Microcreditgt
• Muhammad Yunus. Wikipedia, The Free
  Encyclopedia. 17 Apr. 2009. Web. 18 Apr. 2009.
  lthttp//en.wikipedia.org/wiki/Muhammad_Yunusgt
• Yunus, Muhammad. 10 Indicators. Web. 18 Apr.
  2009. lthttp//www.grameen- info.org/index.php?op
  tioncom_contenttaskviewid23Itemid126gt