United Nations Centre for Human Settlements
Community Development Programme for Asia
Supporting effective and equitable financial services for the urban poor in Asia
1-3 April 1998
While cooperatives, savings and credit groups and micro credit have long been recognised as effective tools for poverty alleviation and economic development in rural areas, community based savings and credit systems and micro finance schemes have emerged only quite recently as strategic ways of improving the economic circumstances (and hence living conditions) of the urban poor. This has been partly due to the increasing emphasis on self employment and the need to find finance and credit mechanisms to support small enterprises and self help activities. In less than a decade savings and credit movements and micro finance schemes have become a vogue within international, government and non-government organisations dealing with development issues in slum and squatter communities in Asian cities.
Many NGOs that were formerly confronting the status quo on social and economic issues and decrying the market system's impact on the poor are now devoting the bulk of their efforts to setting up savings and loans groups and micro credit schemes. Whilst international NGOs and bilateral donors are very willing to fund savings and credit movements, multilateral funding agencies are increasingly eager to promote and fund micro credit or micro lending schemes. Savings and credit groups, especially poor women's savings groups, have become the Aleading edge@ in socio-economic development. This was clearly demonstrated in the Best Practices initiative of Habitat II when organisations like the Self Employed Women Association (SEWA) in Ahmedabad, India, and the Women's Bank movement in Sri Lanka won awards and special commendations. In some circles the micro credit approach is being touted as a panacea for a spectrum of problems that ranges from poverty alleviation through small enterprise development to shelter development. How did this all come to be?
There are very good arguments for emphasising access to credit in poverty alleviation strategies. The poor remain enmeshed in poverty firstly because they are underpaid or earn an inadequate return for their time/labour if they are self employed. Secondly, having little or no savings or assets of their own, the poor are cut off from conventional credit sources at market interest rates and forced to borrow at what seem in comparison to be usurious interest rates from landlords and informal sector/local money lenders. The two issues of low income and lack of credit are interdependent in many ways. For example, petty traders usually have to borrow to buy the items that they hawk and repay the loans in the evening, which cut into their profits and further reduce their incomes. Any emergency from sickness to a social obligation like a marriage or funeral for a family member, even a bad day when their income falls below subsistence, can plunge the poor into further debt, which further erodes their incomes. The perception is that if you are going to help people overcome poverty, in addition to helping them increase their incomes through better livelihoods, you are going to have to build in some carefully targeted and tailored credit mechanism. As mentioned earlier, this is especially the case when better livelihoods are achieved through self employment in newly created small enterprises.
Community based savings and credit groups have emerged as an effective medium through which credit can reach the poor. Most of these community savings and credit schemes were pioneered by local and international NGOs. In community based savings and credit schemes, the poor community members play the central role in accumulating the savings, setting the terms of credit and guaranteeing that monies borrowed are paid back. The solidarity that is developed through the successful functioning of the groups strengthens the confidence and commitment of the individual members and helps them to improve their livelihoods and lifestyles. It also feeds their capacity for community development.
Witnessing the success of different savings and credit schemes, national government agencies and international and bilateral donors became impressed with the impact that even the limited access to credit that community based schemes provided had on the lives the poor. Organisations like the Urban Community Development Office in Thailand which was established in 1992 promote the formation of savings and credit groups in urban low income communities and provide them with loans for income generation and environmental improvement from a revolving fund. The Government of Thailand financed the UCDO with US$50,000 lent to the savings groups at 8-10 per cent per annum. The groups add a margin of 2-5 per cent when they give loans to their members. This additional interest remains at the community level to cover administration and other costs.
However, in many other community savings and credit schemes the interest rates from the donor or organising institution are much higher than the market interest rates. This tendency to charge interest rates much higher than the market rates in the formal sector soon attracted the interest of international banks and finance institutions. This was reflected in the first privately organised development Summit on Micro credit held in Washington in 1997. It was sponsored by Citicorp, Chase Manhattan and American Express among others. Obviously, it has dawned on the international financial community that there are enormous profits to be won from micro lending where interest rates can range from 20 to 100 percent. With more than a billion poor people in the world, the market for micro lending is enormous!
Supporters of commercially inspired micro credit like the Consultative Group to Assist the Poorest (CGAP) of the World Bank seems to see micro lending as an end in itself. Following its all out effort to get governments to repeal their respective anti usury laws, CGAP has been urging countries to completely privatise their micro lending institutions and remove all subsidies for banks that service the poor. The latter measure has been urged, the World Bank argues, because such subsidies place banks like the Grameen Bank at an unfair advantage over private banks in the market place.
At the Micro credit Summit micro credit was presented as a Awin win@ process in which investors gain impressive profits and the poor gain access to financial resources that enable them to help themselves. In reality this is not always the case. For example, a survey of NGOs in India engaged in micro credit with self help groups found that individual borrowers from the self help groups paid up to 30 percent interest on money which the savings and credit group paid 15 percent and the NGO in turn paid only 9 percent. Whilst such high interest credit is promoted as a vehicle for poverty alleviation when the poor use their loans as capital for income generating ventures, studies have found that the loans are largely used by poor people to meet their daily subsistence needs. Ironically, one of the strongest arguments for savings and credit groups is to rescue the poor from the clutches of slum moneylenders with their usurious rates of interest. Critics note that earlier credit provision schemes provided lower interest rates as a means of targeting subsidies to the poor. Such critics argue that rather than alleviating poverty, micro credit will simply keep the very poor enmeshed in poverty while those who are better off can eventually move beyond the savings and credit groups and obtain credit at market (read cheaper) rates.
Many of the development oriented micro finance institutions, in particular those like the Grameen Bank and the UCDO that emerge within the countries themselves, have many positive dimensions. Among their fundamental achievements are the promotion of a savings culture and the access to credit that they can provide to their members. The preponderance of successful grassroots community savings and credit groups have proved that the poor can be trusted to pay back thus overcoming a longstanding prejudice against the poor in the banking community: the scale of bad debts among middle and upper income groups would seem to be much higher. Organisations like the Grameen bank have been extremely successful in reaching people whose only traditional access to credit has been through landlords and loan sharks which in turn led to ever increasing indebtedness and bondage.
There are obviously many organisations which are using savings and credit groups as a vehicle not just for the provision of credit to their membership but also for building members' solidarity, self-esteem, political awareness and organisational capacity to address their social, economic and environmental problems. The Urban Community Development Office in Thailand, the Self Employed Women's Association in Ahmedabad, India, are good examples of this. They are focussed on empowering their members by promoting a savings culture and creating solidarity through group guarantees on individual loans and shared ownership and control of the movement by the membership. In this model the focus on savings and credit is just a part of a human development package which includes advocacy, training and health care.
Another welcome feature of a savings and credit group is that it provides an organisational base in poor communities that can endure. Community based organisations that have been set up for implementing physical shelter or infrastructural development have often fallen apart once those goals have been achieved. Groups organised around savings and credit have a continuing relevance to people's lives even when their economic situation has significantly improved.
On the other hand there are some aspects of the savings and credit movements that warrant concern. There is a tendency among savings and credit institutions to report unrealistic levels of repayment (around 100 percent), year in and year out. Whether this is to impress their donors/financial backers or to outdo their competitors, it creates an unnecessary pressure on their low income membership and prevents the development of mechanisms to deal with default. Similarly there is a growing body of experience that suggests that savings and loan movements bring far more benefit to people on and just below the poverty line than they bring to those who are far below it. This means that the high interests rates that the very poor pay on small subsistence loans ultimately contribute towards the capital for larger loans to the more entrepreneurial and better off. Donors who are trying to reach the poorest of the poor might be somewhat disappointed with such an outcome.
A continuing problem for savings and credit movements, particularly as they grow into big organisations and the amounts of money become large, is reliable leadership and competent and transparent management. Some have come to grief through the corruption of office bearers or inadequate management systems. The increasing availability of overseas development funds for such groups has naturally created enormous temptation for unscrupulous community leaders. Indeed the problem of finding genuine and ethical leaders that has traditionally plagued CBOs is even greater with savings and loan organisations for the poor.
There is concern in some quarters that savings and credit as well as micro credit organisations are seeking to provide financial services that might be better delivered by other financial institutions. Housing loans, for example, tie up too much of a savings and credit organisation's capital over too long a period thereby preventing access and use by others.
Another criticism raised is that micro finance institutions do not alter the status quo in countries in which they are operating. In Bangladesh, for example, despite the presence of the Grameen Bank and many other savings and credit schemes, highly distorted patterns of wealth distribution continue to persist. Are savings and credit movements and micro finance schemes a mere palliative and, at the same time, a subtle means of promoting money based solutions (instead of political and economic reforms) to the problems of the poor - economic exploitation, political impotence and social exclusion?
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