The Limits of Microcredit: A Bangladesh Case
Food First Backgrounder, Winter 2008, Vol. 14, No. 4
Since its emergence in the 1970s, microcredit has grown in popularity as a tool for development. Today, microcredit organizations have assets well in excess of $22 billion USD and serve more than 113 million clients.1 Microcredit has enormous potential as a tool for poverty alleviation. Yet as this strategy moves into the development mainstream there is an urgent need to reflect on its role in market-led development initiatives and its limitations, as well as its historic successes. There is significant risk in microcredit’s often uncritical adoption. This risk is compounded by the systematic failure of many microfinance institutions (MFIs) to engage the communities where they work in the process of designing and evaluating microcredit programs. As with many development programs, the voices of communities and individuals who are the supposed beneficiaries of microlending are conspicuously absent from the projects that seek to determine their futures. As debates over the pros and cons of microcredit rage and donor support encourages rapid adoption, it is crucial to evaluate the impact of microcredit from the perspective of those who have the most to gain and lose—the recipients.
This Backgrounder outlines the results of a study on the impact of microcredit on recipient livelihoods in rural Bangladesh. It is a story that highlights the dangers of viewing microcredit as a “silver-bullet” for development and the limits of employing purely market-led development approaches as strategies for poverty alleviation. Microcredit claims to improve the lives of recipients by providing them with small loans to purchase productive assets for entrepreneurial activity. Advocates of microcredit argue that this helps recipients break cycles of poverty, reduce dependency on “charity” and other forms of aid, and empowers women as economic decision makers within the homes by targeting women as loan recipients. While microcredit has helped accomplish these goals in particular situations and contexts, it also relies on economic integration as the primary mechanism for development and assumes that all poverty is a function of the inability to enter into market relations.
In rural Bangladesh, microcredit is not achieving its core goals of poverty alleviation, financial independence, and gender equality.
While lack of credit is a critical issue in impoverished rural regions throughout the world, it is only one structural aspect of poverty. Food insecurity, lack of access to health and education, and gender inequality (not just in economic but also in social and cultural contexts) are realities for those living in rural poverty that microcredit may not be suited, in-and-of-itself, to address. Indeed, donor and practitioner enthusiasm for such market-based development strategies, at the expense of addressing these other critical issues, threatens to make conditions of poverty worse.
In Bangladesh, the “birth-place” of microcredit, microcredit is seen as a key strategy in overcoming many of the hurdles of rural life, including low per-capita land holdings, underemployment, poverty, and gross wage disparity. As microcredit has grown in popularity with funders, it has become relatively easier to fund microcredit projects in Bangladesh than other kinds of programming. Not only are many new NGOs forming specifically to deliver microcredit, but other organizations are increasingly shifting their funding away from social safety net programs and towards microfinance. This has led to a marked reduction in the diversity of services available in rural areas.
What follows is an exploration of what happens to recipients in an over-saturated microcredit market; a market in which microcredit has become the, as opposed to a, mechanism for poverty alleviation. In rural Bangladesh, microcredit is not achieving its core goals of poverty alleviation, financial independence, and gender equality. While this is very much a story about Bangladesh, we stress that with the increasing global popularity of microcredit, it is also a cautionary tale for donors and practitioners alike. This research was conducted cooperatively with a group of landless laborers living in Arampur, a village in Northern Bangladesh. Using digital voice recorders, they conducted unstructured interviews with their peers and neighbors, gathering life histories and experiences with microcredit. What follows is based directly on villagers’ words, concerns, experiences, and ideas.