Microcredit: Reducing Poverty to Lower Income Inequality

1. Microcredit: Reducing Poverty to Lower Income Inequality Tanya Picinich Paige Stillwell April 22, 2009

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

3. Recall… • Gini Index • Measures income inequality in one number • Calculated as the area between the Lorenz curve and perfect equality (y=x) • High Gini Index (close to 1) means high income inequality and a low Gini Index (close to 0) means low income inequality

4. 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.

6. 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

7. Qualifications for Traditional Credit • Assets • Income • Debts • Repayment History

8. 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

9. 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

10. 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

11. History of Microcredit:Struggle 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

12. 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

13. History of Microcredit:Grameen 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

14. History of Microcredit:Microcredit 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

15. 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

16. 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

17. 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

18. 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 Bank’s16 Decisions • BRAC’s 17 Promises • RD-12’s 21 Oaths

19. 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.

20. 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

21. 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

22. Example: Nguyen Thi Minh

23. TYM – Tao Yeu Mai (People loving People) Founded in 1992 by the Vietnamese Women’s 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 Example: Nguyen Thi Minh

24. Example: Lenders to Nguyen • Different lenders that have contributed small loans to Nguyen to help her reach her goal

25. Example: Repayment Schedule • Expected Repayment schedule Nguyen will make to her lenders

26. 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

27. 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\

28. 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.

29. 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

30. 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

31. Moving Forward… • United Nation’s 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

32. 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

33. Questions?

34. 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. <http://www.sustainabletimes.ca/articles/microcredit.htm> • “Microcredit.” Wikipedia, The Free Encyclopedia. 28 March 2009. Web. 31 March 2009. <http://en.wikipedia.org/wiki/Microcredit> • “Muhammad Yunus.” Wikipedia, The Free Encyclopedia. 17 Apr. 2009. Web. 18 Apr. 2009. <http://en.wikipedia.org/wiki/Muhammad_Yunus> • Yunus, Muhammad. “10 Indicators.” Web. 18 Apr. 2009. <http://www.grameen- info.org/index.php?option=com_content&task=view&id=23&Itemid=126>