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Microcredit program definition

microcredit program definition

Do Microcredit Programs Alleviate Poverty and Foster Environmentally Sustainable Development? A Review of African Case Studies

Desta. Asayehgn.   Ph.D. Sarlo Distinguished Professor   of Sustainable Economic Development, Dominican University of California

An Abstract

With the hastening of the global poverty crisis and the absence of an adequate social safety net for those marginalized and vulnerable sections of society in the less developed countries, a number of researchers have moved beyond the relentless pursuit of short-term toward long-term anti-poverty, environmentally sustainable paradigms to assist chronically poor sectors of society. Though a remarkably polarizing issue, in the last three decades microcredit programs   have been made available to the chronically poor as a viable option to involve them in the formal economic sector. It is assumed that the disadvantaged groups will become productive members of society if they involve themselves in small businesses that may contribute to powerful changes within their lives. Based on anecdotal assessment of the impact of microcredit as a financial instrument, the United Nations declared 2005 as the International Year of Microcredit. Realizing that chronically poor people merit the greatest international attention, using the year 1990 as a baseline, the United Nations has advocated the reduction of both extreme poverty and hunger by half or more by the year 2015. those whose income is below US $1 per person/day.  

A review of the existing literature which has burgeoned over the past decades indicates that it would be an over exaggeration to claim that microcredit programs have significantly helped to lift the poor out of poverty. The existing microcredit programs seem to be focusing on borrowers living above the poverty line rather than on the hard core poor.   Based on few analyzed empirical case studies, it can be ascertained that the microcredit programs in Africa   may not be effective in achieving sustainable development unless the projects are based on longitudinal studies that could.   a) systematically address the cause of poverty, b) identify the poverty segments of the population, c) pay special attention to raising the awareness of the chronically poor, and   d) train the participants to specialize in environmentally-sensitive new business ventures.

A Review of African Case Studies

The area of sustainability that appears to be receiving the most attention from microcredit lenders is the reduction in land degradation and the development of healthier, more permanent and less destructive farming practices in Rwanda’s Eastern Province, Kigali city Northern Provinces, and Huye District in the Southern Province.   According to the Rwandan Red Cross- RRC (2009, p.1), “The Rwandan economy is based on the largely rain-fed agricultural production of small, semi subsistence and increasingly fragmented farms. It has few natural resources to exploit, and a small uncompetitive industrial sector. Food security is threatened by a decline in soil fertility and poor crop management, pests, diseases, poor storage. …, scarcity of farm land, poor agricultural practices and population density.” The RRC also indicates that over the past five years, chronic childhood malnutrition rates in the country have increased from 43 percent to 45 percent, and that “Rwandan households are exposed to some vulnerability in access to or consumption of food while 28 per cent of households suffer from malnutrition” (2009, p. 1).

The aim of the microcredit projects spearheaded by the RRC is to improve communities’ livelihoods by contributing to effective poverty reduction and complimentary economic development activities for sustainable food security. As stated by RRC, the overall objectives is to provide a venue for income-generating activities through a rotating microcredit scheme which is aimed at a number of sectors including in-kind agricultural inputs, livestock, commerce, retail, and carpentry. As stated by RRC (2009, p. 1), Examples of projects developed from this microcredit program include preparing agro-forestry and forestry nurseries for cooperatives and associations involved in the program, and the distribution of proper tools, seeds, and fertilizers.

A snapshot of some of the benefits reaped from the microcredit initiatives in Rwanda include:

1. Increased agricultural production and other incomes

2. Improved household nutritional status

3. Boosted communities’ capacity to manage their rotating funds

4. Provided the means for small shops and stock in the community

5. Enhanced knowledge and skills in families to resolve problems, manage projects, and participate in cooperative organizations and group works

6. Replicated new practices in other areas so that more associations and vulnerable communities are being served

7. Improved RRC staff and volunteers’ capacity to plan, monitor, and evaluate their projects

In short, the lessons learned from the microcredit projects in Rwanda are that, “…the fact that in order for projects activities to be sustained there must be a concordant level of understanding between all stakeholders. Additionally, it is imperative that vulnerable groups are encouraged to participate in the steering committees and working groups. It is imperative that assessments of the associations be conducted with all members and that the information is then disseminated to others involved in the same line of activities” (RRC, 2009, p. 2).

Another case study which shows an example of the association between sustainable development and microcredit took place in Machakos in east central Kenya.   As stated by Duran (2002. p. 1), “In the last decade alone, drought periods in 91/92, 95/96, and 98/2000, and the devastating floods in 1997/98, and again in 2002 in different parts of the country have been recorded. These phenomena have had the cumulative effects of reducing household food availability, purchasing power, and coping capacity, impoverishing the rural population”

In 2001, a year after a devastating drought that left 4 million people in dire need of food, the International Federation, in conjunction with the Kenya Red Cross Society (KRCS), developed a program in the Machakos district of Kenya that would deal with the impact of drought and famine before problems developed.   As documented by Duran (2004, p. 1), more than 50 per cent of the residents of Machakos were categorized as the absolute poor (i.e. those who cannot afford to meet the basic minimum food requirement even after spending all their total incomes on food only).

The International Federation of Red Cross initiated a bilateral cooperation with the Kenya Red Cross Society, contributed microcredit funds and designed a Drought Preparedness program for the Machakos District. More specifically, the Machakos program focused on “…developing branch capacities through training to enable the Machakos branch to mobilize volunteers, and through training to work closely with and from within rural communities. The three-year project, implemented by the KRCS – Machakos branch with technical support from the International Federation. aims at strengthening the local and district capacities, through local and innovative mechanisms to predict. cope with and recover from recurrent drought impacts” (2002, 2).

In addition, the microcredit projects implemented in the Machakos District included   agriculture that focused on farming drought-resistant crops, education on storing and developing seed banks on a community level, development of small-scale water systems that were built with community assistance, and the formation of water committees that would provide stable water management practices. Kenya experienced another drought in 2004. The Machakos district.   which was most affected by the 2001 drought, was able to work with the conditions in 2004 and was ultimately unaffected by the drought.   In Duran’s words, “Developing all these activities through microcredits we were able to mobilize the community, to reinforce the social tissues, and support their initiatives for their own development” (2004, p. 4).

For the last five years, with microcredits disbursed for food production in Gambia, Mozambique, Nigeria, and Tanzania, farmers increased their output and attained food security ( Tsogde. 2002). For example, in Tanzania, after the Tanzanian Government approved a national microfinance policy in May 2000, the International Fund for Agricultural Development (IFAD), a specialized agency of the United Nations dedicated to eradicating rural Poverty in developing countries, helped   mobilize savings and disbursed funds as credits to the agricultural sector.   As a result, the poor, including women as user-owners were empowered.   And the country’s substantially improved in food security and income.   Thus microcredits have become a formidable economic tools for agricultural policy makers (2002). In Gambia, the IFAD contributed to a rapid increase of rice growers with increases in different villages ranging from 50% to 200%. In Nigeria, the Cassava multiplication Program increased cassava production in the country, from less than 14 million tons in 1987 to over 30 million tons in 1998, becoming the world’s largest producer of cassava. In Mozambique, microcredits improved the level of income, employment, and food security of fishermen and their families, through the provision of fishing inputs and credit. As summarized by Tsogbe (2002, p. 22), the   examples taken from the   four case studies show that microcredit can be a catalyst for reaching the goal of increasing agricultural production by creating   both backward and forward linkages.

To test their hypothesis that the success of micro-finance institutions is measured according to the extent of their outreach to the poor and their financial viability or sustainability, Adams et al. (2002) studied four case sites on microfinance initiatives in South Africa.   The case studies included the following sites: Mathabatha village) Limpopo Province), Kgautswane   village (Limpopo Province), Oudtshoorn

(Western Cape) and Mtshabe (Eastern cape). The finding of the research indicates that the village banks do not charge interest rates to cover costs. But, the informal group (i.e. credit unions, moneylenders, money keepers, families, relatives and friends, etc) charged   minimum interest rates. Since microcredit financial institutions in the studied regions depend on external funds, Adams et al, proposes that microfinancial institutions need to incorporate interest rates in order to enhance self-sustainability of village banks and other group-based credit arrangements.   In their own words, Adams and his group (2002) suggest that “Micro-finance institutions in South Africa therefore need to encourage clients and support the pooling of material resources. Nonetheless.   since the objective of moneylenders is based on interest-seeking activities and not on altruism, there is a need for appropriate regulation by government” (p.125).

The main findings of the South African case studies included.

1) In Oudtshoorn. most of microcredit lending operations deepen the poverty levels of the poor.

2) Among the microfinancing institutions’ services and operations, there are common aims and objectives, to serve the poor and help them develop sustainability by achieving financial and food security.

3) The microfinancing institutions need to cover the costs they incur. For that, they should charge high interest rates to cover these costs and grow.

4) Except for the Mathabatha Bank the other three microfinancial institutions are highly dependent on outside funding.   Thus, the other banks need to begin weaning themselves away from their dependence on external subsidies.

5) Since funding does not mean money only, the case study village banks need educational advice on how to follow their savings’ progress to determine whether or not they are really valuable to the community

6) Since women are diligent savers at the village bank and are always members of the village savings club, the empowerment of women should receive a lot of attention in the process of development.

7) Since most rural areas are led by traditional chiefs and follow strict cultural rules and formalities, village banks need to work in cooperation with village authorities to ensure the smooth operation of development programs.

8) Incentives should be provided to community-based savings schemes to encourage saving and investment. For example, the model of savings used by the school in Oudtshoorn could be adapted for use by schools and communities.

9) Despite an adequate supply of consumer credit in Oudtshoorn. the research findings concluded that credit was needed for productive purposes in short supply for those with no conventional collateral.

10) The village banks need to improve their marketing/promotion/outreach activities and re-engineering delivery systems.

The South African case studies were very extensive. Although the analysis was based at the village level, the case studies fail to address the status of poverty level of the client or households.   The focus of the case studies seem to be more on the   sustainability of the microcredit village banks and their financiers rather than on the effect that   the sustainability-focused microcredits can have on the participants, the community, and the environment.

Since the issuance of Proclamations No. 40/1996, a number of finance (MFI) institutions were established in Ethiopia as share companies in accordance with the Commercial Code of Ethiopia.   The ownership of Ethiopia’s MFIs is based on the country’s administrative structure. For example, in 2002, six out of 20 MFIs were largely owned by regional governments and non-profit organizations in the regional states. In other MFIs, the equity structures were sponsored by foreign donors who have contributed the initial capital for required registration.   Seventy eight percent of the clients are from rural households and 41 percent of the clients are women (Al- Bagdadi and Bruntrup. 2002).

To minimize recurring costs and improve operational efficiency, and   in order for clients to effectively invest microcredit funds   into productive income-generating initiatives, almost all microcredit institutions in Ethiopia have established training formats for their clients. Though a survey conducted by Amha et al. indicates that business development services (BDS) “ had very limited vocational and technical training (before starting business), received few short-term training, extension and counseling, and marketing services ” (2006) , the African Village Academy’s claims to provide the following seven step training methods. These are:

Step one introduces various types of financial institutions and tools. Step two encourages participants to discuss and examine themselves and their markets to identify potential microenterprise activities, which they then research individuals. In step three, participants discuss in detail their market findings (i.e. materials, transportation, and market costs), and then re asked to form groups of typically four or five people. Step four elaborates the purpose of group formation in creating support and collateral for individuals, as well as developing specific business plans and budget planning. In step five, participants meet each other’s groups in units of up to ten groups, and discuss specific credit arrangements and requirements   of Savings and Credit for enterprise Development program .In step six, group members present their basic plans for final approval of the unit, and in step seven all steps are reviewed to reinforce understanding of the program. (Un/OSCAL Model, 2002, p. 80-81).

To assess the outcomes of an Ethiopian Microfinance program (which was established in Ethiopia, as an affiliate of the World Vision microfinance–WISDOM) on the livelihoods of poor populations. a survey studied 819 rural households in Southern Ethiopia (i.e. Adama. located in the East Shewa   Zone of the Oromiya Regional State and Sodo branches, located in Wolayita. in the State of Southern Nations, Nationalities. and peoples region). The indicators used to asses the socioeconomic status of the respondents were a) monthly households income, b) per capita monthly household income, c) household assets and livestock value, d) household asset, and e) livestock index score. In addition to assess the food security status of the respondents were assessed using household diet, child nutrition status, and food aid receipt. As stated by Doocy et al. (2005) in its methodological design:

The study compared two groups of clients that received loans (incoming clients who had completed one loan cycle or less and had been participating in the program for no more than ten months, and established clients who had completed two or more loan cycle) and one group of community controls who were eligible to participate in the WISDOM lending   program but had not received a loan within the past year and were not seeking a loan. A total of 408 established clients, 205 incoming clients, and 206 community controls participated in the survey. The sample was stratified by survey site   and clients sex, participants were systematically selected   from client lists of the microfinance institutions. (p.82)

As pointed out by the researchers the two case studies are based on a cross-sectional design, thus it was very difficult for the researchers to ascertain whether the clients in the two regions have moved towards sustainability or away from it. However, the aggregate findings of the questionnaire-based interviews indicate that “While the majority of WISDOM clients reported an increase in asset value since enrolling in the lending program, differences in household asset data between clients and community controls were statically insignificant. Findings   from this study also indicate that participation in the WISDOM microfinance program did not result in increased household wealth” ( Doocy. 2005, p. 87).   In terms of wealth, “No significant correlations were observed between length of program participation (time in months or loan cycles) and either measure of change in asset value suggesting that participation in the lending program is not associated with an increase in client wealth” ( Doocy et al. 2005, p. 88). Similarly, it was ascertained that there was no association between participation in the program and monthly household income. Nonetheless, in their conclusion, Doocy (2005) and his group showed that the WISDOM microfinance programs (i.e. in Adam and Sodo. Ethiopia,) improved client retention, increased savings, and increased the active participation of women.

Another study conducted in the Wereda of Atsbi-wemberta in the Tigray Regional State, northern Ethiopia in 2002 analyzed   the impact of formal and informal credit on households’ livelihoods.   As reported by Vilei and Chisholm (2002), the results of a survey in 97 households and 5 group discussions   showed that the interviewed households perceived that having access to credit had a positive impact. It contributed to enhancing the self-esteem of the beneficiaries by becoming less dependent on food aid. However, several of the interviewed households indicated that the local microfinance institutions such as the Dedebit Saving and Credit Institution (DESCI) lent higher sums of money but they imposed inflexible repayment conditions and lacked the skills to monitor successfully the invested loans. Many clients used the credits for food consumption and eventually the beneficiaries were forced to sell their livestock in order to repay their loans on time. Also it was reported that though informal credit from money lenders at interest rates of up to 60 percent are generally very small sums when compared with formal microcredits. they are widely used to cover food consumption or pay for additional social events such as marriage and funeral services.

                      Table 1: Microcredit programs for Sustainability in selected African countries

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