When Mohammad Yunus received the Nobel Peace Prize in 2006 for creating the Grameen Microcredit Bank in Bangladesh he stated, “Poverty is the absence of all human rights.” He seemed to be echoing what Mahatma Gandhi said about poverty being the worst form of violence 60 years before. Around the world, the poor are empowering themselves while taking steps out of poverty through microcredit, small loans for income-generating purposes.
Credit is much more powerful than donations. With much needed credit, poor entrepreneurs without assets and collateral can establish small businesses and use the profits to improve their nutrition, health, education and housing. At this time, about $30 billion is available in the microcredit pipeline to provide loans to about 150 million women in developing countries. With an average loan size of $200, over 90 percent of borrowers are women who can become empowered to be economic stewards and leaders in their communities.
Studies demonstrate that women armed with credit are less apt to tolerate domestic abuse. Overall, microcredit has demonstrated it is an effective strategy to assist the working poor out of economic injustice and into a future life of stability. With over 3.4 billion poor people around the world, microcredit is in much demand. Yet the business of microfinance is still being tested and is not without its challenges. To meet this demand as well as to gain financial benefit, many commercial banks are entering the microcredit market. In some instances, too much investing in microfinance institutions is creating problems that could impact the entire industry.
With too much capital in a microcredit bank, loans are made too quickly without knowing the intentions and plans of borrowers. Further, an increasing number of loans are made solely for profit for these banks, resulting in borrower over-indebtedness, which intensifies the poverty cycle.
Greater attention and due diligence must be paid to how loans are made, to whom, for what, and the interest rates charged and collected by banks. Banks overheated with capital tend to accelerate their loan programs without regard to their clients, as demonstrated by the recent mortgage crisis in 2008, and the forceful loaning in the 1970s when oil prices rose and large international banks made aggressive and immoral loans to the Third World.
As competition expands in the microcredit field, investors will want to be more informed about the impact of their microcredit loans, and it will be incumbent upon microfinance organizations and banks to deliver thorough and accurate updates.
To this end, organizations have begun establishing their own social performance departments, including ours, to assist microcredit banks so that they meet their social mission, and measure the impact of microcredit on improving conditions for poor people. We will release the report in June based on having tested and compared data from the field through a variety of metrics, one of which notably is the Progress Out of Poverty Index (PPI).
The PPI is a tool that that the Grameen Foundation initiated, which measures the level of poverty borrowers are experiencing, what borrowers need to lift themselves from poverty, what the microfinance institutions (MFIs) can do to support that process, and how long the process should take. The data are then used to improve the efficiency of the MFIs, respond to their clients’ needs more quickly, and provide accurate reporting to investors. In one such study it was discovered that loans were not, in fact, going to the poorest of the poor. These findings contributed to a better understanding of the MFI’s clientele and how to better serve them.
Currently the PPI is being used in 17 countries. Cerise, a French organization, pioneered a similar tool in 2001 which Oikocredit’s Uruguay office modified to the needs of local borrowers. It is likely that measurement tools will continue to be developed to gain a deeper understanding of the complex microfinance landscape.
Half of the world’s people live on less than $2 per day. Far more microcredit is needed to help narrow the poverty gap. And more control of corporations must happen for the poor to be respected properly. Better sharing of global resources will help to eliminate poverty as well. Microcredit plays its own pivotal role by enabling local entrepreneurs to take a few steps up the ladder out of economic misery and to futures filled with dignity and hope.
Terry Provance has been Executive Director of Oikocredit USA, in Washington, DC, since November, 2001, and has worked successfully to increase investments and publicity for the socially responsible and development-focused nationwide organization. Terry is an ordained minister in the United Church of Christ. He pastored a local UCC congregation in Pittsburgh for 5 years before administering an international program in the national Cleveland office for 10 years prior to joining Oikocredit.
Terry has traveled extensively throughout the world visiting over 100 countries for peace, economic justice, disarmament and racial equality. Terry received an MDiv from Pittsburgh Theological Seminary and an MA in Christian Social Ethics from the Graduate Theological Union.