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Thursday, October 25, 2007

Features of Microcredit

Some of the features of the microcredit system that lead me to believe that it may be possible, using this technology, to create sufficiency for all of the people on planet earth, to do this in a manner that is in harmony with the ecology of our planet,

Decentralized control and true freedom

In our system, everything that is built requires the permission of a bank. The bank evaluates each loan request, and approves or denies the loan based on its primary focus – which is – “will this loan be profitable for the bank?” The bank also requires collateral.

The effect of these criteria are (a) Only those with assets are able to get credit, thus resources are always easier to get for the wealthy, and (b) If there is no profit for the bank, the project will not go forward.

In a microcredit system there is no collateral, thus the poor are not excluded. Also, all transactions are public. This is one of the implications of a program designed to work the opposite way to commercial banking – commercial banking transactions are private, therefore microcredit transactions are public.

Loan approvals are carried out by the borrowers peer group, who also assume liability for the loan. This means that while each project is evaluated very carefully by the peer group, it is their decision that determines whether the sister gets the loan. The bank is not the decision maker, and thus central control of the economic process devolves from the bank to the loan recipients peer group.

And the loan application is made in public, and announced to all of the other groups in that center prior to the disbursement of funds. This process ensures that the owners of the institution – i.e. the borrowers, are kept completely informed about how its capital is being utilized. Central control of the decision making process is avoided, and a community-based process is created in it’s place.

Entry into the microcredit circle is restricted always to the poorest people in the community. This ensures that no group can be exploited by another group in microcredit, because the poorest always receive first priority.

In practice an exploited group is immediately absorbed into the microfinance community. As their economic priorities are funded, their status changes and the exploitation is thereby escaped. Cohesive groups of formerly very poor people are enormously resilient, and they rapidly become strong enough to avoid or resist all manner of previously experienced discrimination and abuse.

This is real freedom.

Local production and consumption

In all cases initial economic activities funded by microcredit loans are for the local production of goods and services, which are consumed locally. In more developed microcredit institutions some producers, e.g., handloom weavers in Bangladesh, combine to create cooperative ventures which include trade relationships with other communities, but this is a later development.

These early microentrepeneurs often involve themselves in small scale food production. From vegetable gardens to keeping a few chickens, to growing tea, or husking rice, keeping a dairy cow, or goat. These activities are very susceptible to environmental change, and thus ecological awareness, and the harmony of the natural cycle are much more developed in those whose living is so delicately balanced upon the earth. Huge monoculture agriculture, widespread use of chemicals and oil powered machinery are not part of this equation. The food produced is mostly organic, raised by the people who eat it and trade the surplus. It is easy to see how contemporary knowledge of permaculture and local ecosystems will combine with these activities in a very harmonious and organic fashion.

This new economy must necessarily emulate some of the features of the old one, such as producing enough food for everyone (Oh. Well, let’s say trying to produce enough food for everyone). But this resurgence of village based agriculture and self sufficiency is not a regression to an early feudal age. The internet makes possible a much better informed population. Global communications systems are enthusiastically adopted by micro entrepreneurs. Widespread ignorance is no longer a necessary evil.

The poor are closest to the land

As has been pointed out by Peter Kareiva of the Nature Conservancy, the poorest are the closest to the earth. Does this translate to a lasting sensitivity to environmental concerns as the microentrepreneur gains access to more choices, gains more wealth, and begins to have a greater impact on her environment? These are important questions when you consider the potential impact of billions of people, newly escaped from poverty, all beginning to have a greater say in the decisions which affect their lives. This movement could have either a positive or negative impact.

I believe that the current trends go in both directions, but that microcredit, truly focused on providing services to the very poorest as the continuing and ongoing priority, has a largely beneficial effect on the environment, and that there is every reason to believe that this environmental sensitivity could be enhanced to the great benefit of huge numbers of people, and other living things. (Yunus is clearly aware of the dangers of global warming, and one can expect that this sensitivity will rapidly gain credence among the staff and the borrowers at Grameen institutions.)

A new ethic

Microcredit replaces competition with cooperation as the guiding ethic. This is achieved in the formation of borrower peer groups. Peer groups are an essential element in microcredit, as essential as the avoidance of collateral. In fact, peer groups can be understood as the replacement for collateral in a number of important ways, but collateral replacement is not their primary function.

A peer group works as follows:

The five member borrower group is important for a number of reasons, but the role of the other group members in supporting and developing the income-generating activities of each of their peers is possibly the most significant. The group is formed when a single borrower approaches the project for her first loan. She learns that she must find four friends , who also wish to take out a loan, as the first condition for membership. This gathering of four others turns out to be a difficult project for some. It requires a level of enthusiasm and determination which quickly separates out the truly motivated. And this highly motivated person becomes the group chairwoman in its first year. This sets a standard, and as each group member takes on the role of chairperson, as they all must do, this standard becomes the base, each successive chairperson tries to do the job better than her predecessor, until the job once again roles around to the original chairperson five years later. This spiral of continuous improvement is only one of many such spirals within the microcredit system.

Every member of the group accepts responsibility for all of the loans of each member of the group. If one member fails to repay, the other four must club together and repay her loan before they can qualify for a further loan themselves. In practice this results in a situation in which all five eagerly assist one another. The success of each is important to all, thus repayment rates are extremely high, and yet entirely voluntary. There is no collateral, and no legal instrument between the borrower and the lending institution. Borrowers are trusted to repay, and they almost invariably repay that trust. One could argue that their situation is such that microcredit represents their only viable path to self sufficiency, and that the prospect of loosing this chance by non-repayment of loans is sufficiently negative as to virtually compel repayment. And, having to face four of your closest friends who have been obliged to cover your outstanding debt in order to keep their own hopes alive is a sufficiently daunting prospect that virtually no one defaults, ever.

It is impossible to overstate the importance of the peer group. It is the foundation upon which the entire edifice is built. At weekly meetings, the entire center, (consisting of as many as eight peer groups or forty people) comes together to make their weekly payments, apply for new loans, and meet with their sisters to exchange goods, services, information and assistance. At these weekly meetings the community decides on the investment priorities for that community. Group projects, such as the creation of an elementary school, or the provision of a new well, are decided upon and funded at these meetings. They are the heartbeat of the organization.

It is hard to imagine a microcredit project which functions well without these peer groups. But many organizations who make loans to individuals, some of which even require collateral, describe themselves as microcredit. Don’t accept this description. Microcredit loans are for the poorest people, if collateral is required the poorest are necessarily excluded. For a project to be microcredit there must be no collateral, and the borrowers must be destitute women. Anything that does not meet this basic criteria is not microcredit as described in this publication, no matter what it calls itself.

And the first shall be last, and the last shall be first.

Any microcredit project worthy of the name restricts its new membership by requiring that an individual be demonstrably among the poorest people in the neighborhood - bottom 20% of income. In some communities this equates to an income negligibly greater than zero. Because of this requirement, microcredit organizations have identifiable characteristics, allowing an observer to distinguish between microcredit and other programs of small loans for microbusiness ventures.

Were microcredit loans to be extended to a higher echelon, it would become impossible ever to reach the poorer group. Thus microcredit would fail in its primary goal – poverty eradication.

Yunus is most insistent on this point, and with good reason. It is essential to work with the poorest group because to do otherwise would result in designed in inefficiency. Program overheads would become too great, loan repayments would become erratic, all manner of collateral type schemes would be blended in, and the whole project would become another short-term cash cow for the development elite. This is not an alternative to current economic practice, this is an extension of current practice, and because it excludes the poorest it can never be sustainable.

With this understanding one can see that microcredit programs can run easily alongside the mainstream economy of the global financial empire. It presents no threat, and no purpose would be served by framing microcredit in opposition to the collapsing empire. The empire will collapse under its own weight. Microcredit just takes care of the people deemed “uneconomic” by the system of greed and growth. The faster the old structure contracts, the larger the available pool of impoverished people. The faster microcredit grows.

Each person enters the microcredit system having directly experienced poverty. The poverty that results from the inequalities hard coded in to the economic empire that now encircles the globe. Thus they are disinclined to participate in creating a new set of restrictions and exclusions that condemn many to lifelong poverty simply by virtue of their birth. This ethic informs the foundation of microcredit, it is not something that can be expunged or replaced. Hierarchical structures of exploitation do not function easily in this environment.

The door into microcredit is the eye of the needle.

On the other side, everything spins the opposite way.

It works.

One of the developments microcredit has begun to encounter in Bangladesh, is the phenomena of children from very poor families who have achieved advanced college degrees. This is a new phenomena. Young mothers of course invest in their children’s well being, and this has resulted in large numbers of boys and girls from families who have been illiterate for generations, suddenly becoming highly educated in one generation. A very rapidly growing cohort of educated young people who have skills and opportunities never before available in those families. People who also understand what it is like to be poor. There is no data available as yet, to be able to see what will happen as a result, but I cannot resist a little speculation.

There is no doubt that one of the tasks facing the human population of the earth, is the task of cleaning up the mess, the pollution, the unexploded ordinance, the ravaged landscape, the denuded forest, the disappearing natural habitat for many of the species which share the planet with us. We cannot continue to lose two hundred species each day and expect to survive ourselves. This is madness.

The clean-up job is likely to be expensive, highly technical, and will require the dedicated effort of millions of people. And that’s where the children of microcredit come in. These educated young people could become the backbone of a worldwide movement of social business. Non-profit concerns whose success is determined by achievement of some goal deemed of value to the community by its shareholders. And many of these new social businesses will dedicate themselves to achieving environmental goals.

Oh, and one last thing.

Over the past thirty years, birth rates in Bangladesh have halved. Microcredit has been a significant factor in this change, because microcredit directly addresses the twin problems that lead to rapid population growth – grinding poverty, and the exploitation of women. By putting resources in the hands of the woman, power in the family is rebalanced in her favor. The improvement in her personal situation allows her to adequately care for the children she has, reducing the incidence of child mortality. As a business owner she is motivated to have a smaller family. On a wide enough scale, this could easily be sufficient to stabilize the world population.

In many respects, all of this is happening already, but there are improvements that could be made, and likely will be made, in order to responsibly take advantage of the fact that very soon, most of the world’s people will be taking care of all of their basic needs through microcredit. Widespread poverty will be history.

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