How do we tackle India’s poverty? A question that has been tossed around world summits, discussed by our government leaders, social workers, and any other concerned individual who wants to help incorporate a system of well-being for the country’s poorer classes. Though the world identifies India with its intellect, especially in the fields of software and engineering, somehow the faces of more than half the country’s population who are living in abject poverty fail to be registered. Educated businessmen are given countless opportunities in today’s economy, with five-figure salaries, newly bought BMWs, and renovated bungalows. This might be a bit of an exaggeration, but there is truth in the point that many people are moving up the money ladder while the poorer classes are never getting their chance to prosper. However, with the system of microfinance, this pattern is slowly changing.

Microfinance was born in Bangladesh, initiated by Muhammad Yunus, a young economics professor who wanted to invent a means for under-privileged villagers to be able to fend for themselves financially. “You cannot get a dollar without a dollar in your hand,” was Yunus’s way of explaining the essence of his new concept¹. Commercial banks denied poor people the right to borrow in the fear that they wouldn’t have the sustainability to repay the loan. Microfinance is a system where very small loans are offered to small groups of women. For example, in Bangladesh, a group of five women would apply for a loan and work with eight other such groups, in a centre of 40, to invest in a small business of their own. With this system in place, Yunus founded the Grameen Bank in 1998 in Bangladesh, which has now become a model for Micro-Finance Institutions (MFIs) in the under-developed areas of India, Nigeria, Mexico and others.

The loans taken from the Grameen Bank can range from as small as US $1 to as large as US $100, and are paid back within a short span of time, in an average of about 6-8 months. Each loan is monitored by a Grameen bank officer who goes to the village and discusses the profitability of the women’s ideas. They make simple inquiries, such as whether the women can make good sweets, and if they sell well, or if people are going to buy eggs if they raise chickens. By having this monitoring process, Grameen filters away the unsucessful projects and gives these village women an assurance that they are going in the right direction.

Since its initiation in 1998, Grameen Bank has provided financing for 7 million people in Bangladesh, out of which more than half of these women have been able to lift their families out of poverty. With a 97% repayment rate, Yunus has proven that “all people are entrepreneurs”², and with the ability to repay borrowed money, women are gaining confidence in themselves to the extent of borrowing larger sums of money to gradually expand their businesses. With the success of this microfinance scheme, commercial banks are more and more convinced that there is a profitability in microfinance that they are tempted to take advantage of. India’s leading bank, ICICI, has committed to granting funds to Grameen and other microcredit organizations; this will allow borrowers to take a loan with a lower rate of interest than is offered to the rest of the market, lessening the hindrance to the borrower.

It is this question of interest rates that has caused a degree of controversy in the microcredit system. Grameen charges 20-30% simple interest, which reduces over a declining balance¹. Despite the alarm that this high rate causes for most people, local corporations charge five times as much, and smaller loans taken for a shorter period of time become more expensive. A loan of $50, for instance, borrowed at an annual interest of 30% and returned in 4 months’ time would only give the microfinance institution a return of $5, which is hardly enough to cover overhead costs. However, with the ease of borrowers returning their sums to Grameen, the high interest hasn’t proven to be much of a problem. Additionally, the increasing involvement by commercial banks and the lower lending rates that they offer is reducing the risks of borrowing even further.

Microcredit has, without question, helped a great many impoverished families in decreasing their financial worries, allowing women to raise enough money to send their children to school, save enough for three square meals a day, and provide a better life for their families. But there are other factors that determine the effectiveness of microfinance. Farmers have to be safe from land-grabs by governments, which must first and foremost respect the worker’s rights to his property. Only then would loans assist in lifting them from poverty. Secondly, MFIs have to be in the hands of leaders who aim for development, rather than those who aim for profit. Expansion of MFIs to the commercial banking sector can be a huge improvement, providing access to foreign capital, commercial expertise to move beyond simple loans and better supervision of villagers’ savings. But there have been cases where certain microfinance lenders have charged an interest of over 100% to gain more profit, in turn becoming detrimental to the borrowers, and tarnishing Yunus’s philosophy of helping people in need rather than lining the banker’s pocket.

Poverty alleviation is, in my opinion, the essential issue that needs to be resolved before India’s problems with corruption, literacy and human rights. This is why when effective schemes such as Yunus’s microfinance idea come along, they have to be implemented with great precision to avoid its becoming a profit-making disaster. It is granted that other issues also need attention for this system to really work, but I appreciate the concept and truly believe it’s a very smart step in the right direction.

Footnotes:

1. Simple interest indicates that as the borrower repays there loans through installments, the interest is only charged on the resulting balance that has not yet been paid.

References:

Muhammad Yunus interview-”Banker to the Poor” preview
http://www.youtube.com/watch?v=YxpTFwQx-A8

Photo Courtesy: uncultured
Photo Courtesy: Yodel Anecdotal

Related Articles:

• Riyaaz for AID - A Review
• Billu: A Review
• Holi 2009
• Saving India’s Higher Education System
• Rab Ne Bana Di Jodi: A Review