Microcredit : A healthy addiction ?

Whether it was Mohammed Yunus and Grameen Bank's Nobel Peace Prize victory , the UN dedicating an entire year to microcredit or even just the irresistible dual bottom line of sustainability combined with impacting economic development, it is pretty evident that development economists, researchers and students around the world have taken a sort of obsession to microfinance ( myself included ! ) . As long as we keep in mind that microcredit is neither the entire solution nor a permanent one, I think this addiction is great.

There is an addiction that worries me though - that of microfinance clients to their loans. During a field visit to a group meeting of SMILE in the outskirts of Chennai, we asked women who had been clients for three to five years, how much longer they expected to take out loans for . The unanimous reply was : " For however much longer they will give it to me ". I was shocked by the response for it went against the commonly perceived strict purpose of microcredit: to give the poor, the financially excluded that little push that would bring out the entrepreneurs in them which, in turn, would help them help themselves.

That these clients show little desire of graduating out of borrowing and have adopted microcredit for the long-term seems acceptable to me as long as their income and thus their livelihood improves with each loan cycle. After all, there is plenty of room for improvement as far as the typical lifestyles of these clients are concerned and it is only natural that they want to advance from one level to the next with the help of a continuous supply of microcredit. However, in the case of the women we interacted with, this wasn't the case at all.

Most of the women engaged in one of few common businesses as a source of supplementary income for their families : supplying breakfast/lunch to offices, flower selling, sari selling and tailoring of sari blouses. Their customers were mostly the other members in the group and the other households within their neighbourhood. Assuming that most of the money they borrowed went towards financing their businesses, which they claimed it did, they spent the loan on working capital - ingredients, flowers, cloth. Most of the revenue went towards weekly repayment of loans ( plus accrued interest ) . The remainder, if any, was spent to narrow the gap between household consumption needs and what their husbands' income could buy.

Thus, even after years of starting their respective micro enterprises, these women were not self-financing the working capital for their businesses. Microcredit may be sustainable for the institutions that provide it, but I wonder if it promotes the establishment of sustainable businesses, especially given that the loan sizes are usually too small for them to tap into possible economies of scale. Factor in the multiple borrowing phenomena in areas with a saturated supply of microcredit, and loans take on the purpose of repaying other existing loans. The question then is whether microcredit had succeeded in uplifting these women from one cycle of poverty with no access to financial services only to entrap them in another cycle of a small business, slightly better income and continuous debt, in which they would be stuck for the rest of their lives ?

What I realized in attempting to answer this question is that the above cannot be the whole picture - it doesn't seem to make sense that the women would so enthusiastically engage in borrowing and repaying if it merely helped them keep their businesses running. Looking for more explanations, I came across two ( and am looking for more ! ) :

The first is that borrowers cannot self-finance their businesses after initial loan cycles simply because they do not save enough. Interestingly, this is not because they do not earn enough to be able to save enough, but because there is a lack of access to savings products ( as illustrated by this article : http://www.philanthropyaction.com/nc/whats_so_hard_about_saving/ ) . Despite the high return to saving, in the absence of good savings products, borrowers fail to save because they spend on emergency situations, which once again they are not prepared for due to the lack of insurance products. Perhaps these shocks are even anticipated and borrowing gives them the opportunity to reserve their savings for such circumstances.

The second, a perspective I was introduced to by someone at Hand-in-Hand, is that the positive externalities from being part of a group - including building a sense of community and empowerment and even expectations of support from members in times of need ( financial or otherwise ), outweigh the negative impact that the financially poor decision of being in a debt-cycle without enterprise expansion has. Moreover, if the charm of microfinance lies is in the benefits of group mechanism, maybe the way out of these cycles is to nurture the growth of micro enterprises by tapping into these very groups ; for instance, by encouraging more joint businesses.