Microcredit

– Addressing an Ongoing Debate
(english version)

In 2006 the Nobel Peace Prize was awarded jointly to Prof. Muhammad Yunus and Grameen Bank, the first of several social business enterprises he founded in Bangladesh. The Nobel committee honored “their efforts to create economic and social development from below”. The concept of microcredits, small loans to poor people, attained global public awareness and their most prominent promoter received international fame. In the course of the resulting „hype“ to help the poor, questionable and even unacceptable forms of microcredit emerged. These developments are not very different from what we have witnessed broadly concerning the creation and promotion of ever more “innovative” financial instruments in the global monetary markets in the time before the crisis breaking out 2007/2008. Financing instruments and the granting of credits are important prerequisites for a functioning economy as a backbone of a wealthy society. However, lacking sufficient regulation all financial products may contain considerable potentials for dysfunctional effects. This negative potential with absolutely unacceptable consequences to the borrowers also emerged in the area of microcredits. Studies were triggered and published, treating microcredits and their impact undifferentiated, focusing exclusively on the negative excesses. Their authors often oppose in principal the idea of small loans to the poor as helpful services by stating that loans cannot substitute for tax-financed community services and social systems and that microcredit therefore in general would be of negative impact to the poor. This judgement is inadequate and above that endangers the future application of valuable financial instruments like microcredits in cooperatives or social networks which do have considerable potential for overcoming poverty. In particular small loans or grants can provide the necessary initial funding to entrepreneurial people capable and willing to work hard to implement successfully their business model, if they are granted free of loanshark conditions, reasonably organized and adapted to the regional and societal circumstances.
The following analogy illustrates, how far from reality and reasonability a one-sided general negative criticism of credit-granting and the microfinance institutions (MFIs) in their entirety is: The latest monetary and economic crisis has shown absolutely unacceptable developments. What if somebody would conclude from what we witness in the aftermath of the latest near-meltdown of the world financial system that the sector of finance and banking in total – cooperatives and savings banks enclosed – is not useful, socially unnecessary, and would not at all support the prosperity of societies and people. All these institutions would be denounced as culprits forcing the world into over-indebtedness and would be made responsible for any kind of social distortion, arguing that the granting of credits belongs to their core business, but social systems cannot be substituted by loans. It would be further argued that loans do have in general no or negative impact since poverty, hunger and underdevelopment cannot be overcome broadly by granting credits. Hence, no credits should be granted. Instead tax-financed powerful, high-quality and efficient community services and social systems should worldwide be provided to guarantee all people in the world their fair share in participation. Neither is there any idea where and by whom the added value necessary for financing such a program should be created nor how the implementation of all prerequisites for value creation could be achieved. This concerns e.g. all infrastructures and institutions of a global economic system that takes into account and overcomes the problems that we already have today. One of these problems is that already today we operate beyond the ecological carrying capacity of our planet. This complex of questions is ignored. So as if the answers to these questions together with the demanded social systems simply fell from the sky.
In this situation, a couple of institutions are collaborating to work out together the characteristic features of socially positively impacting microcredits. All partners of this study have many years or even decades of work and engagement experience in the subject areas of Globalization, Sustainability, “catch–up” strategies for Development, World Financial System and International Cooperation. The aim of this joint effort is to provide the public with a scientific analysis of microcredit in the context of a complicated global environment. We intend to figure out conducive institutional and organizational conditions and decisive prerequisites that make microcredits an effective instrument of a successful strategy to fight poverty. On the one hand the historical movement has to be respected. On the other hand, development-supporting forms of microcredits within suitable social and economic structures should be differentiated from those forms of exploitative microcredits that financialize poverty, meaning worsening the situation of the borrowers instead of improving it. Indeed, the misuse potential of loans to the poor is considerable, not least because of the high „vulnerability“ of economically badly positioned people. However, the world financial crisis made it clear that misuse of financial services and products is also possible in the wealthiest structures of the world. The magnitude of opportunism of conceived financial market innovations, making use of a lack of transparency and regulatory loopholes, is up to a much higher extent.

Microcredit study (english)