Microcredit in Developing Countries: The Facilitative Roles of NGOs
In recent decades, microcredit has emerged as a key development tool for solving a range of problems faced by low-income households in developing countries. Donors and microenterprise development program specialists initially voiced doubts about extending financial services to low-income households. They assumed that with underemployment and low incomes, and hampered by class, social and gender barriers, low-income households could not develop successful enterprises, pay back loans, or generate enough loan volume to be financially sustainable.
But practical examples from the field however, has demonstrated that microcredit has in fact enabled these people to expand and diversify their enterprises and increase their incomes to a level sufficient to repay loans at market rates and make savings deposits.
In many developing countries, with limited formal employment opportunities and self-help being the only available choice, microbanking services and microcredit has emerged as a way of survival for many low income people, particularly in developing countries. This is particularly due to the fact that commercial banks and other financial institutions, citing credit risks and defaulters, have systematically kept low income households outside their credit delivery networks, forcing them to resort to informal and non conventional systems of mobilizing credit.
The positive features of such informal loan systems and credit markets are only now being recognized [Srinivas, 1991]. Informal loans are usually small in size since money is acquired only for a part of a larger activity. These small amounts contrast starkly with loans from banks, which tends to be large, and for lump sum investments. Loans are usually made for very short periods. Borrowers prefer to repay loans quickly to avoid long term commitments in repayments. This also reflects the insecurity of borrowers' jobs and income. Loans are unsecured, with little or no collateral or guarantees. Lenders rely on personal information and close proximity links to "keep an eye" on borrowers' expenditures and ensure repayment. Since services are localized, and only well known borrowers serviced, the rate of repayment is also very high .
Before we explore the facilitative role that NGOs play in microcredit programmes in more detail, it is important to understand the NGO itself, and the organizational and operational framework within which it functions.
What is an NGO? An NGO is a non profit making, voluntary, service oriented/development oriented organization set up for the benefit of either its members (a grassroots organization) or of other members of the population (an agency). It is an organization of private individuals who believe in certain basic social principles and who structure their activities to bring about developmental benefit to communities that they serve. NGOs are social development organizations assisting in the empowerment of people. The World Bank defines an NGO as -
"The diversity of NGOs strains any simple definition. They include many groups and institutions that are entirely or largely independent of government and that have primarily humanitarian or cooperative rather than commercial objectives. They are private agencies in industrial countries that support international development; indigenous groups organized regionally or nationally; and member groups in villages. NGOs include charitable and religious associations that mobilize private funds for development, distribute food and family planning services and promote community organization. They also include independent cooperatives, community associations, water user societies, women's groups and pastoral associations. Citizen Groups that raise awareness and influence policy are also NGOs" [World Bank, 1990]Thus NGOs are organizations or groups of people working independent of any external control with specific objectives and aims to fulfil tasks that are oriented to bring about desirable change in a given community or area or situation. It is independent, democratic, non sectarian and not affiliated to political parties, but are engaged in working for aid, development and welfare of the community.
NGOs are involved in a wide range of activities and initiate programmes that essentially create a better living environment for low-income households. They include, for example, development, operation and maintenance of community infrastructure such as water, sewage, community services, etc.; supporting innovation, demonstration and pilot projects; facilitating communication - interpersonal and inter-organizational, cutting across horizontal, vertical and diagonal hierarchies; technical assistance and training; research, monitoring and evaluation; and advocacy for and with the poor
NGOs offer a distinct advantage in their involvement in community development programmes, particularly savings and credit programmes [Cousins, 1991]. These include (a) the ability to experiment freely with innovative approaches and, if necessary, to take risks; (b) flexibility in adapting to local situations and responding to local needs and therefore able to develop integrated projects, as well as sectoral projects; (c) good rapport with people and can render micro assistance to very poor people as they can identify those who are most in need and tailor assistance to their needs; (d) the ability to communicate at all levels, from the neighbourhood to the top levels of government; and (e) the ability to recruit both experts and highly motivated staff with fewer restrictions than the government.
Participation of an NGO in developmental activities at the local level, particularly to develop microcredit programmes, is dependent on its internal human and other resources, and external networks that it can tap into. There are many skills that are required of an NGO if it can effectively intervene to mobilize and organize a community:
Since the 1980s, two parallel developmental forces can be discerned: a growing awareness of the effects of human activity on natural resources, and decentralized and localized decision making systems that empower ordinary citizens to decide on aspects that affect their life. Microcredit's role in these processes, particularly in developing countries, is undoubtedly important as a supportive and facilitative resource.
Its ability to directly and indirectly influence and enable community sensitive actions has also been recognized. Microcredit's viability and success lie in four key features [Srinivas and Pallen, environ.html] - (a) incorporation of savings mechanisms, in providing an opportunity to save, regularly and in small amounts, which also improves the savers' credit rating; (b) externalities of credit per se the availability of the right quality and quantity of credit at the right time, has generated several positive externalities; (c) enablement of very local/grassroots activity that are essentially people centered; (d) adoption of a poverty eradication focus with community organizing and development as its primary gateway.
The dimensions of microcredit from a developmental perspective is explored under the following themes: community development, poverty, microenterprises, women, and macrofinance.
There are a number of microcredit lending in operation all over the world. The existence of these mechanisms demonstrate the fact that there is no one single 'microcredit mechanism', but several, with varying characteristics and operations.
The reluctance of financial institutions to serve low-income households is another reason for such a wide variety of mechanisms. The parameters that have influenced these mechanisms include the socio-economic situation of the region, legal and legislative frameworks for financial activities, rules and regulations concerning the organization and operation of NGOs, etc.
The primary role of an NGO in a microcredit programme is that of an intermediary between lenders (such as banks, local governments or aid donors) and borrowers (mostly low-income households and microenterprises). There have been several common characteristics of the intermediary intervention of NGOs. They have essentially emphasized on the target community forming an organization that would serve as a voice to the community as a whole. Such organization also channel the activities and resources to the target households. They have also emphasized savings first as a part of the community's initial activities - no credit without saving. The accumulated savings is pooled in a central 'community fund' and used as partial collateral.
NGOs have provided bank-negotiated loans for the community organization, for onlending to members, where most credit decisions for onlending to members are taken by the community and its leaders. Interest rates and other terms and conditions for loans to members are also decided by the community. Thus, by using joint liability as a substitute for physical/asset-based collateral, and by ensuring that the ratio between savings and credit is contingent upon credit worthiness of the group as a whole, they have ensured good repayment records and financial sustainability in the long run.
In a very abstract way, there are three models that characterize the intermediary position of an NGO in a microcredit programme:
Developing a Hypothetical Triangle between NGOs, Community Organizations and Lending Institutions.
It is clear from the above discussion that three primary actors emerge in the development of successful microcredit programmes: the local community organization, the intermediary NGO, and the funding organization, usually local commercial banks. A hypothetical interaction between these three actors (with a bank as the funding institution) is illustrated here to demonstrate microcredit practices.
There are three phases to the interaction: initiation, consolidation and institutionalization. These three stages are essential due to the unique/differing factors in each community. Since microcredit programmes also need flexibility and adaptability to adopt to such unique needs, this is done in various ways: internally by setting up the community organization, and the stage-by-stage development which allows for monitoring and evaluation; externally by the involvement of the many secondary and tertiary actors who bring in the necessary experience and resources in order to make it flexible and adaptable (see Figure 4). Such features are to be entrenched into the programme by including it in the aims and objectives, and vision statements [Srinivas, 1996].
The primary focus of this phase is on internal savings of the community. As the community develops organizationally, it demonstrates its ability to save regularly into a central fund that is created at the community level, with 'Savings First!' as a slogan. The NGO may provide block grants to this fund, either to raise the equity levels, or to fund training and development activities of the community that are not renumerative in nature. Thus the NGO also focusses for its part on social welfare issues to raise awareness and increase participation among the community residents. In this phase, the bank is an observer, watching the proceedings of community development and understanding the dynamics of community mobilization.
During the phase of consolidation, the community has formed an organization with regular meetings where leaders are elected, discussions and decisions are taken, and the future activities are charted. With further increase in the CO's capital fund, small loans are now made to members in need of finance. The focus of this phase is to develop the credit-worthiness of the members. The NGO plays the role of a mediator bringing various actors together to interact with the CO. The bank upgrades its role from that of an observer to a supporter. It helps in loan making processes, procedures for keeping records, advises in disputes, and arbitrates in cases of default, if necessary.
The focus of this phase is on making the CO bank-worthy. Only the link between the bank and CO remains strong. The NGO has begun to gradually withdraw and is involved only in consultations with the CO and the bank. The bank itself has upgraded its role from that of a supporter to a partner - it now makes group loans to small groups of five to ten borrowers simultaneously, when loan sizes are small and are for upgradation, repairs, maintenance purposes. On the recommendation from the leaders of the community or officials designated by the community organization, it may provide individual loans directly to member when they are sufficiently large, for example for capital investment in microenterprises.
It is this dynamic nature of the stakeholders/participants entering the microcredit programme, providing pertinent resources unique to itself and then withdrawing after the task has been completed, that enables programme replicability and scaling up. Specificity of the participation ensures that there is no overlap of activities or objectives. The use of existing actors and their actions/resources obviates the need for the setting up of separate networks and institutions for microcredit programmes.
With the current explosion of interest on microcredit issues, several developmental objectives have come to be associated with the it, besides those of only "micro" and "credit". Of particular importance is that of savings as an end in itself, and as a guarantee for loans. Microcredit has been used as an 'inducer' for many other community development activities, used as an entry point in a community organizing programme or as an ingredient in a larger education/training exercise.
By emphasizing the strength of bringing the community together as an organization, microcredit methodologies are now entering a new evolutionary phase as they become more responsive to market demands. This change in approach reflects the evolving needs of low-income households and microentrepreneurs, the maturation of microcredit institutions, and changes in the markets in which microcredit institutions and programmes operate. In this new phase, these institutions are attempting to balance three potentially competing objectives: 1) to reduce transaction costs for both borrower and lender; 2) to widen the range of microcredit products available to the clients; and 3) to reduce credit risk. These three desired objectives are not independent of each other, and may require trade offs.
Different types of micro and small enterprises have different characteristics and demand different services. Hence it is desirable to encourage a range of institutions that use specialized methods to serve their particular market niches. These can include commercial and development banks, credit unions, mutual or community banks, NGOs, finance companies, cooperatives, savings and credit associations, and other specialized intermediaries. At the same time, however, fundamental principles of financial sustainability have to be applied widely and must be observed by all institutions if they are to succeed. Moreover, support mechanisms have to be designed in ways that are consistent with best international practices and long run development of a sound financial system.
But the concept of microcredit is more than just money and access to credit. A broader perspective needs to be taken, emphasizing roles for local governments, and the larger civil society, and incorporating community development issues, and resource networking. Education and training, including the design of microcredit policies and programmes should also receive prominence. Of greater significance from a long term and broader view is the role and effect of microcredit on environmental problems and sustainable development. Supporting and inspiring these objectives with pertinent and timely knowledge and information on microcredit methodologies should be pursued. NGOs, due to their inherent organizational and operational structures and advantages, play an important role in developing such scenarios.
Cousins, William (1991), "Non-governmental initiatives" in ADB, The urban Poor and Basic Infrastructure Services in the Asia Pacific. Manila: Asian Development Bank.
Microcredit Summit (1997) Declaration and Plan of Action. The Microcredit Summit. Results Educational Fund. Washington DC, 1-4 February, 1997.
Srinivas, Hari (1991), Viability of Urban Informal Credit to Finance Low Income-Housing: a Case Study of Three Squatter Settlements in Bangalore, India. Unpublished Masters Thesis. Bangkok: Division of Human Settlements Development, Asian Institute of Technology.
Srinivas, Hari "So, what is 'microcredit' ??" [http://www. gdrc.org /icm/what-is-ms.html] Tokyo: Department of Social Engineering, Tokyo Institute of Technology.
Srinivas, Hari and Dean Pallen, The Environmental Colours of Microfinance. [http://www.gdrc.org/icm/environ/environ.html]. Department of Social Engineering, Tokyo Institute of Technology, Tokyo, Japan.
VLM, Virtual Library on Microcredit: Conceptual Framework . [http://www.gdrc.org/icm/concept.html] Global Development Research Center, Kobe, Japan.