Microcredit (not) for the Poor

-A Misleading Panacea Assumption -

by
Henky Widjaja

Abstract
Microcredit has been considered globally as an important instrument for poverty
reduction with the potential for far-reaching impact in transforming the lives of poor
people and to help the achievement of MDGs. Despite the rigorous evidences of
microcredits contribution to poverty reduction, the microcredit practitioners are now
facing reality that microcredit is not the missing ingredient or a panacea for poverty
reduction, in fact setting expectation too high will risk the genuine contribution that
microcredit can bring. This essay seeks to critically discuss the limitations of microcredit
in poverty reduction.

I. Introduction
Over the last decade, microcredit has been widely considered as an important instrument in
combating poverty
1
. Numerous claims have been reported world wide about the success of
microcredit in lifting the poor out of poverty. It addresses the failure of credit market in
providing financial services to the poor by developing new lending methods that focusing on
non-collateral small size group loans. Not only that, the sustainability of microcredit institutions
is also assured by various ample evidences showing that the poor are reliable to repay the
uncollateralized loans and are willing to pay the full cost of providing them, since access is more
important to them than the cost because there are opportunities for them to make a profit and
return the loan. This then claimed as an opportunity for innovative banking services and
microfinance institutions to be commercially sustainable.
While significant achievements have been made, microcredit has no shortage of criticisms.
There are many criticisms questioning the effectiveness of microcredit for poverty reduction.
This paper aims to critically discuss the effectiveness of microcredit for poverty reduction by
reviewing the existing pro and con views. The next part of this paper is organized as follows.

1
Microcredit is considered as a very important tool in achieving the MDGs. Evidence shows the positive impact of
microcredit on poverty reduction as it relates to the first six out of seven Millennium Development Goals. The
attention on its important role in poverty reduction was further increased when UN declared 2005 as the Year of
Microcredit, and when Muhammad Yunus of Grameen Bank received the Nobel Peace Prize in 2006.
1
Section II provides brief discussion on the definition and characteristics of microcredit. Section
III will present several criticisms against microcredit as a viable means in reducing poverty. The
final section then presents the conclusion of analysis on the effectiveness of microcredit for
poverty reduction.

II. The Definition and Characteristics of Microcredit
The Microfinance Gateway defines microcredit as very small loans for unsalaried borrowers
with little or no collateral, provided by legally registered institutions
2
. According to ADB (2000),
microfinance services are provided by three types of sources:
- Formal institutions, such as rural banks and cooperatives;
- Semiformal institutions, such as non government organizations (NGOs); and
- Informal sources, such as money lenders and shopkeepers.


Box 1. The Importance of Microfinance for the Poor
(i) Microfinance can be a critical element of an effective poverty reduction strategy.
Improved access and efficient provision of savings, credit, and insurance facilities in
particular can enable the poor to smoothen their consumption, manage their risks better,
build their assets gradually, develop their microenterprises, enhance their income earning
capacity, and enjoy an improved quality of life. Microfinance services can also contribute
to the improvement of resource allocation, promotion of markets, and adoption of better
technology; thus, microfinance helps to promote economic growth and development.
(ii) Without permanent access to institutional microfinance, most poor households continue to
rely on meager self-finance or informal sources of microfinance, which limits their ability
to actively participate in and benefit from the development opportunities.
(iii) Microfinance can provide an effective way to assist and empower poor women, who make
up a significant proportion of the poor and suffer disproportionately from poverty.
(iv) Microfinance can contribute to the development of the overall financial system through
integration of financial markets.
Source: Cited from ADB (2000: 5-6)


The field of microfinance was pioneered by specialized NGOs and banks to address the
failure of capital market to provide service to the poor. Most formal financial institutions do not
serve the poor because of perceived high risk, high costs involved in the transactions, perceived

2
See www.microfinancegateway.org.
2
low relative profitability, and inability of the poor to provide physical collateral usually required
by such institutions. The business culture of these institutions is also not geared to serve poor and
low-income households (ADB, 2000: 9).
Microcredit challenges this conventional wisdom by developing innovative lending methods
that becoming the unique characteristics of microcredit as follows:
The use of village banks. Many of microcredit institutions are located close to clients
and loan disbursement and collection often happens on the clients premise rather than at
the Bank. MFIs operate in this way are known as village banks. The poor infrastructure
problem faced by the poor makes difficult for them physically to get to the bank to take
out or repay a loan (Swope, 2002: 7). The village bank model is established to address
this problem. This model is characterized by its mobility, the efficient operational
structure, the use of the unique relationship between clients and loan officers to control
the repayment of loan, and the application of small, weekly (even daily) payment instead
of conventional monthly payment to ascertain the payment this strict requirement is
usually compensated with the provision of subsequent loan after a certain period of
successful installments as a reward for the positive performance.
Trust and group lending. The main idea behind microcredit is that poor people, who
can provide no collateral, should have access to some sort of financial services. The most
popular collateral substitute used by MFIs is the group lending model. In this model, the
joint liability serves as collateral since every member of the group (usually a manageable
number of about five) is liable if one or more members default on the loan. As long as all
members in the group repay their loans, the promise of future credit is extended. If any
member of the group defaults on a loan, then all members are denied access to future
credit. The success of group lending is primarily due to the intimate settings in the rural
areas. Any borrower who defaults is visible to the entire village, which imposes a sense
of shame. This societal pressure provide high disincentive to default on the loan
(Sengupta, 2008: 12). However, it should be noted that social collateral is not appropriate
in all circumstances since it requires a degree of social cohesion within a community
(Swope, 2002: 12).
3
Focus on women. According to Microcredit Summit Campaign Report 2007, 85% of the
poorest clients of Microcredit in 2006 were women
3
. Women are exclusively targeted in
most cases of microcredit due to several factors: (1) their proven high loan repayment
rates in compare to men; (2) women are less risky, they tend to take out smaller loans
than men and invest the money in safe business ventures; (3) an effective way to alleviate
poverty because the income really goes directly to the family in terms of providing better
health, nutrition, and educational opportunities for their children; and (4) to promote
gender equality (economic, social and political status of women)..
High interest rates, subsidy and financial sustainability. Targeting the poor and
charging them with high interest rates is another unique feature of microcredit. The
reason behind this policy is because MFIs can not afford to subsidize loan. The issue of
sustainability is very important for MFIs since they can not rely on governments and
donors as long term sources of funding. In order to be sustainable, MFIs have to charge
interest rates to ensure that revenue covers the full costs of operations to enable
profitability within a reasonable period of time. The relatively small loan sizes demanded
by poor and low-income clients may result in costs per loan that require interest rates
significantly higher than commercial bank rates (though generally lower than informal
sector rates). After all, it has been proven that reliable access to financial services is more
important for the poor than the cost because there are opportunities for them to make a
profit and pay the loan. Furthermore, the CGAP on their website
4
wrote:
Interest rates, while still too high in some places, are dropping on average 2.3 percent a
year. The microcredit industry has placed a lot of emphasis on improving efficiency in
order to bring down these costs, so that poor clients are not paying unnecessarily high
rates. New technology also offers to help reduce costs, so we expect rates to continue
dropping as institutions become increasingly efficient at delivering services to poor
people.

3
Over 3,300 microfinance institutions reached 133 million clients with a microloan in 2006. 93 million of the clients
were among the poorest when they took their first loan. 85% of these poorest clients were women (Microcredit
Summit Campaign Report 2007).
4
See the CGAP (http://www.cgap.org/p/site/c/template.rc/1.26.1309/).
4


Box 2. The Increasing Commercial Orientation
There is growing awareness that building financial systems for the poor means building
sound domestic financial intermediaries that can mobilize and recycle domestic savings.
Foreign donor and social investor capital diminishes as individual institutions and entire
markets mature. For this reason, increasing numbers of MFIs are getting licensed as banks or
specialized finance companies, allowing them to finance themselves by accessing capital
markets and mobilizing deposits from large institutional investors as well as poor clients.
MFIs are beginning to tap into mainstream credit bureausan important strategy to increase
productivity, improve portfolio quality, and reduce spreads between borrowing and saving
rates. This not only reduces risk for the MFIs but also allows their clients to build a public
credit history that makes them more attractive to mainstream banks and retailers. Creative
new delivery channels and new information technology also hold promise for reducing risk
and cutting delivery costs.
Source: Cited from Littlefield (2004: 39-40)

The provision of additional services beyond the microcredit itself. As a tool in
combating poverty, microcredit also has potential to be used as a platform for multiple
development services, rather than as a purely financial product
5
. Many of the leading
MFIs have started to use the existing infrastructures in the microcredit sector to provide
social services to their clients. The regular meetings between group members and the loan
officers, for example, have been used for the provision of add-on services, such as
training in health or financial management (Dunford, 2006: 2). Some MFIs have
developed several financial products related to health and education, such as
education/health saving, credit for education/health, health micro-insurance, and the
selling of essential health products. Many have also developed cooperation with health
care providers to provide better quality and affordable services to their clients.

III. The Criticisms of Microcredit
Together with the advantages, there are also many criticisms to the microcredit approach to
poverty alleviation. This section presents six main criticisms against microcredit as follows:


5
This concept is known as the Microfinance Plus Concept, the integration of financial and non-financial services to
amplify the development potential of microfinance (Nedderman, 2007: 2).
5
Microcredit does not reach the poorest of the poor
Despite the claim that microcredit is aimed at the poor and the existence of numerous stories
of MFIs that succeeded to lift the poor out of poverty, there is a big debate about whether
microcredit really reaches the poorest of the poor. Hashemi (2006: 1) gives example of MFIs in
Bangladesh who are strongly focused on serving the very poor, however given the certain
inherent limitations of microcredit, they are operationally only able to reach the second poorest
quintile group, and leave the real poorest quintile (those who are at the bottom of poverty scale)
unserved.
There are several causes of this problem.
Discriminations against the poorest by the loan officers. As with all loan systems, the
higher the loan, the greater a profit to be made by the lender. Consequently, loan officers
tend to favor the richer poor
6
who can afford to take out larger loan and have bigger
capacity to repay the loan. Moreover, the performance of a loan officer is measured by
the level of non performance loan (NPL) of his clients. When a loan officer finds a
recruit, he/she becomes responsible for making sure that the new client repays the loan on
time. Most of the time, the remuneration of the loan officer is based on the number of
his/her clients who repay a loan promptly. This situation gives the officer an incentive
to be prudent in selecting his/her potential clients (Swope, 2005).
The discrimination among the poor themselves. It is commonly realized that even within
the poor themselves there is a social segregation between the poor and the destitute (very
poor). Sometimes, it is the discrimination from the richer poor that drives the destitute
away from the society, and consequently, away from MFI programs (Ibid: 23). In an MFI
that uses a group loan methodology, the self selection and collective responsibility in
group lending method tend to make the poor to be selective about whom they include in
the group, which in many cases they do not include the poorest since they will increase
the risk.
The lack of capacity (entrepreneurial skill) and their poor physical conditions and social
status make them not to have enough confidence to take out loan. Simanowitz (as cited in
Swope p. 23) suggests that microcredit is not always an attractive option for the very

6
By Berner (2008), the term used for this group is growth oriented (upgradable) entrepreneur to make it distinct
from the poorest of the poor, which is described as survival entrepreneur.
6
poor. A destitute family that struggles everyday to survive will rarely has the energy to
launch into an ambitious business enterprise. They tend to think debt is more likely to
hurt rather than to help them. The obligation to make a regular weekly or monthly
payment will make them more vulnerable than less, especially considering the given
large percentage for a start up microenterprise to fail. Arguably some of these fears
maybe more about confidence than reality and can be addressed through capacity
building, but the problem is that if training were to be provided by the MFI, it is out of
the interest or core activity of an MFI to do so (it is contrast to the same service that
available for the richer poor who are dominantly becoming the targets of MFI services).

In addition to above explanation, it is very important to understand the difference
between survival and growth-oriented entrepreneurs in looking at the causes why the
survival entrepreneurs require different approaches from the growth-oriented
entrepreneurs. Christian Rogerson (as cited in Berner, 2008) suggests a useful conceptual
distinction between those two:
First, are those survivalist enterprises which represent a set of activities undertaken by
people unable to secure regular wage employment or access to an economic sector of their
choice. Generally speaking, the incomes generated from these business, which tend to be run
by women, usually fall short of even a minimum standard of income, with little capital
expansion into viable business. Overall, poverty and a desperate attempt to survive are the
prime defining features of these enterprises. The second category are micro-enterprises or
growth enterprises which are very small business, often involving only the owner, some
family members and at most one to four paid employees. These enterprises have only a
limited capital base and their operators only rudimentary business skills. Nonetheless, many
micro-enterprises have the potential to develop and flourish into larger formal small
business enterprises.

Further it is also said that, even when the survival entrepreneur receive assistance
services (credit, bulk purchases, technology, and export promotion schemes), their
survival-oriented motivation still persists (described by Berner that they tend to use their
business as a buffer more than a means to aim for upward mobility). Therefore, Berner
suggests that more dedicated attention should be given to specific policies for this group
(Berner 2008, 11).
Many of the poorest desperately need nonfinancial support, such as food, grants, or
guaranteed employment, before they are in a position to make good use of loans or
7
deposit services. Addressing the problem of basic needs itself is not the area of interest of
microcredit. It requires other approach, such as safety net programs that are usually better
suited to the circumstances and needs of the poorest and enable them to graduate from
their existing level of poverty to a level where they can make good use of access to
appropriate financial services (Hashemi, 2006: 2). It is believed that the basic needs of
the poorest must be met before they can proceed to higher economic goals. Once they
feel secure with their basic needs and once their capacities have been built through
sufficient education and training, they should be confident enough to take out loan.

Financial sustainability
The second main criticism is that financial sustainability of MFIs is rarely achieved.
Advocates for microcredit approach to poverty alleviation are continuously haunted by statistics
statement that only 1% of MFIs are financially self-sufficient (Swope, 2005: 26). Most of the
MFIs were aimed at charity purposes at the beginning of their establishment and were fully
subsidized by governments or donors. They are charging subsidized interest rates to the clients,
and in many cases also providing capacity building activities. Being operated in such way makes
many MFIs are becoming not able to sustain their operation once the governments or donors stop
their funding because the failure to establish an efficient system and to prepare the clients for a
full-cost interest rate system. In order to be sustainable, MFIs should not rely on governments
and donors as long term source of funding. They must be able to generate their own income from
revenues, including interest and other fees. They also have to operate in an efficient system,
including by not mixing charity with business; increase saving mobilization; and be able to
access capital from commercial financial markets.
The obligation for MFIs to be financially sustainable itself is a paradox in regards to its main
objective to serve the poor. One should note that almost no program directed at the poor is
financially sustainable. By forcing MFIs to commercialize their portfolio means that their
operational will no different from the conventional financial institutions, since they will focus on
cost recovery and selective selection of clients.
Berner, Gomez and Knorringa in their paper presented at the UNU-WIDER Workshop
Entrepreneurship and Economic Development, in Helsinki (Berner, 2008: 15) give a very
strong comment against the cost recovery and financial sustainability of MFIs as follows:
8
The dogma of cost coverage and financial sustainability of interventions has to be radically given
up. Survival entrepreneurs are in no position to pay market rates for credit and BDS, less so as the
necessary tailor made service are relatively much more expensive than the standardized ones for
other groups. To cover the massive transaction costs of very flexible and very small loans and
saving schemes would require a three-digit interest rate, still discounting the hardly calculable
default risk caused by high volatility. Moreover, few agencies can claim the expertise necessary to
give meaningful advice, and it would require a large non-retrievable investment to build that kind
of capacity.

Their argument is understood as the emergence of importance to establish different type of
services for the poorest of the poor. It should be realized that the contemporary MFI services are
not aimed at servicing this group. To perform the suitable services for the very poor group will
require intensive and continuous supports through subsidies to cover the operational and interest
costs. One main characteristic of this kind of support is the difficulty to expect instant graduation
of the targets after receiving the supports due to the nature utilization of the given support mainly
for survival (fulfillment of basic needs). However, empirical evidences from several
breakthrough programs that are targeting this group
7
show significant improvements in terms of
the ability of this group to benefit from the given supports and further graduate to access the
services provided by the commercial MFIs
8
.

7
Examples of this program are the Rural Maintenance Program by CARE Bangladesh, the Income Generation for
Vulnerable Groups Development by BRAC Bangladesh, the Towards Self-Employment Project by Alexandria
Business Association in Egypt.
8
Many of the destitute can save, start building assets, and eventually gain the resources and confidence to engage
in sustainable economic activities, at which point they can make good use of loans and other financial services
offered by MFIs (Hashemi, 2006: 3)
9

Picture 1. Sequencing for Graduation to MFIs
(Source: CGAP No. 34 February 2006)

See Box 1 on the Income Generation for Vulnerable Groups Development (IGVGD)
Program as an example of special program for destitute group to help them to graduate to
conventional MFI services.


Box 3. BRAC/Bangladesh: The IGVGD Program

The Income Generation for Vulnerable Groups Development (IGVGD) program in Bangladesh is
a partnership program between the government, the World Food Program (WFP), and BRAC, a
leading MFI. Its goal is to build a bridge that helps participants move from a highly subsidized
survival program into a sustainable microcredit program. IGVGD is built on a government safety
net program that provides free grain for 18 months to destitute, female-headed households that
are at the highest risk of hunger.
Program participants are destitute rural women who have little or no income-earning opportunity.
BRAC discovered early on that it is difficult to include the very poorest in its conventional
microfinance operations because they need immediate grant assistance for basic survival, rather
than credit. BRAC also knows that government assistance does little to solve the long-term
problems of limited and unpredictable access to food among the destitute and that there are not
enough government funds to serve all the destitute over long periods.
This program is implemented by a BRAC unit which is completely separate from the regular
microfinance operation. It organizes women into groups, collects savings, and provides skills
training, such as vegetable gardening or raising poultry and other livestock. After the skills
training, participants receive tiny loans ($50) to use in funding small scale income-generating
activities. The payments on these loans are so small that they can be financed out of the grain the
women receive. BRAC makes no effort to recover its finance and administrative costs on these
loans, so these costs, along with the rest of the services, have to be subsidized with grants. By the
10
time the cycle of free grain ends, participants have received training, managed credit, tried some
kind of entrepreneurial activity, and accumulated savings that can be used as investment capital.
They have also gained confidence through group participation. At this stage, most participants are
ready to engage in income-generating activities and become clients of regular microfinance
programs.
The results of the program are impressive. It succeeded to reach 1.6 million destitute women
since its inception. Nearly two-thirds of these participants have graduated from absolute
poverty to become microfinance clients who have not slipped back into requiring further relief
assistance. Surveys of IGVGD clients show increases in client incomes and material assets (e.g.,
homestead plots, land, beds, and blankets), as well as decreases in begging. Studies of client self-
perceptions indicate that IGVGD participants feel more confident after being in the program and
believe their lives have improved.
The IGVGD model is being replicated in Bangladesh. The government and WFP collaborated
with ten other MFIs to deliver a similar package of grain and financial services to about 44,000
women in the 200304 cycle.
Source: Cited from CGAP No. 34, February 2006

Potentially harmful to women and children

There are several arguments proposed by the opponents of microcredit on the possible
negative outcomes on women.
Access to finance and employment can lead to the escalation of domestic violence against
women in some cultures where traditional patriarchal power still in place (Swope, 2005:
30). It is also noted that in many cultures, women who are baring responsibility to operate
business still constrained from networking with men and this seriously impedes their
ability to access information, markets and business services (Berner, 2008: 10).
Women sometimes have little or no control over their loan because of (1) lack of
knowledge on how to use the loan productively; (2) still under the influence of male
family member in making decisions, and (3) have no control over supporting resources
(Kabeer, 2001: 63).
Although defaults are almost zero (as claimed by many MFIs), many women are
becoming repeat borrowers and have become dependent on loans for household
expenditures rather than capital investments.
Women may also struggle with the heavier workload created by the responsibility for
loan repayment. In most cases, working women are still expected to assume
`responsibility for all domestic tasks which gives enormous double burden to women. As
cited from Berner (2008: 9-10), it is said that most if survival-oriented entrepreneurs are
11
women struggling to balance their productive and reproductive roles. Most women have a
micro-enterprise because they are responsible for the food security in their households,
instead of as the result of their personal choice. Basically they prefer to expand only to
the limits of their own labor and management capabilities, so not expanding their
business makes a lot of sense to them.
From an institutional standpoint, MFIs may decrease the percentage of women clients as
they move to upper market in search of better financial returns or even transform into
commercial banks (ILO, 2007: 2).

In regards to the effect of microcredit on children, there are several arguments that in many
cases of microcredit, children have been taken out from school to work at the family business as
the only available option to save labor cost (Swope, 2005: 33).
Although the arguments mentioned above are supported by empirical evidences, but it has
also been proven that microcredit has lots of positive impact on women. Microcredit services
lead to womens empowerment by positively influencing womens decision-making power,
promoting their capacities through various trainings and enhancing their overall socio-economic
status. Children of women microcredit borrowers also reap the benefits, as there is an increased
likelihood of full-time school enrolment and lower drop-out rates. Studies show that new
incomes generated from microenterprises are often first invested in childrens education,
particularly benefiting girls. There are also many rigorous evidences showing improved health
and nutrition practices by mothers who attended regular meetings where microcredit transaction
and health education were provided by the same field agent (ILO, 2007: 2).

Creates large debts
Microcredit has been criticized for giving loan with substantial high interest rate to poor
people that have no capacities or previous business experiences. This is seen as a debt trap.
Kunzemann (2008) wrote that between 2002 and 2006 more than 87,000 farmers in India
committed suicide because of falling harvest and debts. He also quoted a statement of
Sudhirendar Sharma, a former World Bank analyst who commented the suicide phenomenon as
cast a dark shadow on the fledging microfinance sector. Sharma criticized the usurious interest
12
rates up to 40 percent and forced loan recovery practices that intimidate the poor beyond their
limit.
In practice, the over burden of debt happens because of several factors, such as the lack of
business skill, misuse of loan for unproductive activities, and multiple loan taken by a single
client without proper business plan. Here, the massive competition between the MFIs themselves
also contributes to the increasing debts of clients. The continual availability of loans and the light
pressure for repayment encourages borrowers to take out money. Many borrowers maintain their
regular repayment schedules through a process of loan recycling (paying off previous loans by
acquiring new ones) that considerably increases the borrowers' debt liability
9
.
Advocates of microcredit response to this criticism by pointing that even though MFIs charge
substantial high interest rates but they are still far below the rates charged by moneylenders. In
addition MFIs also provide capacity building trainings to the clients to promote their capacities
in using the loan for productive activities. Furthermore, many MFIs have already started to use
micro-insurance product to protect their clients from potential default.

Disconnect Clients from Conventional Banking
Despite the glorious claims made by the advocates of microcredit on their successes in
helping the poor, many of the successful MFIs are facing problem in graduating their borrowers
to conventional financial institutions. Successful MFIs tend to keep their clients by increasing the
size of loans instead of forcing them to graduate. The motivation to do this is understood as the
way of a MFI to maintain its profitability. Having a successful and growing costumer is good for
the portfolio of the MFI. Familiarity with the history of such clients will make easier for the MFI
to increase the loan size, and this is also an easier option rather than to recruit and support new
clients and being exposed to the potential of high NPL. Most of the time also, the conventional
banking is not ready yet to accept credit proposals from ex-MFI clients, unless if they have
already had credit programs for SMEs.

9
Most of the time new loan was taken to repay the previous loan. Many have been trapped in vicious cycle of debt
without being able to break the cycle.
13
However, this condition has potential to drift the MFIs from their mission to serve the poor,
at least it will reduce the quality of their services to the poorest
10
. One solution for this problem
is to separate the commercial activities from the relief activities. Example of this is the case of
Bangladesh Rural Advancement Committee that divides their business into two separated
entities: BRAC Bank and BRAC-NGO. This allow them to perform the functions of commercial
bank to serve their clients that graduated from the microcredit program that provided by their
NGO unit.

Not universal in application
Although microcredit is aimed to help the poor to access credit but there are still many
conditionality applied in the process that limit the poor in accessing the services. Microcredit is
not accessible by the very young, the old, the sick, or physically or mentally handicapped.
Microcredit is very rare to be available in remote and isolated areas due to high operational cost
risk. Further, microcredit tends to automatically exclude those who do not have entrepreneurial
skill (Swope, 2005: 33).
Though universality is not a feature of microcredit, but those who are not able to access the
services can still benefit indirectly from microcredit. The success of a family member who
participates in a microcredit program will extend to all members of the family, not only in
monetary term but also in better life practices (better health and nutrition and education
awareness). While for the sick, mentally ill, and others who form a minority of those living
below the poverty line are typically not good candidates for microcredit. Most researchers agree
that this group of people would be better candidates for direct basic assistance (Morduch, 2002:
2). In answer to the problem of lack of services in remote and isolated areas, there are many
MFIs that have been successfully providing services in those areas by developing innovative
solutions, such as using local resources as extension of the MFIs. While in solving the
entrepreneurial requirement, it has been proven that group lending method or cluster model of

10
Mosley (1998: 788) wroLe: () such lnsLlLuLlons Lend Lo charge relaLlvely hlgh raLes of lnLerest, which act as a
screen to deter borrowers whose projects have relatively low rates of return; they tend to operate savings
schemes, which provide a limited degree of insurance to protect repayments if projects fail to yield expected rates
of return and serve to screen out prospective borrowers who lack financial discipline. They also tend to collect loan
lnsLallmenLs frequenLly on or close Lo Lhe borrowers premlses, whlch Lends Lo deLer borrowers wlLh pro[ecLs
yielding low returns.
14
cooperation can be a solution for the poor to complement each other. Moreover, the spill over
effect of successful entrepreneurs can spread benefits to the others, including generating
employment and using local vendors to supply materials for the businesses, which finally leads
to the improvement of local economic situation (Swope, 2005: 37-38).

IV. Conclusion
Microcredit has emerged globally as an effective instrument for poverty reduction with the
potential for far-reaching impact in transforming the lives of poor people and to help the
achievement of MDGs. Microcredit is proven to improve the living standard of many poor
families to such a degree that they are completely lifted out of the impoverished situation. By
targeting the poor entrepreneurs who are normally excluded by the conventional financial
services, it helps them to increase income, build viable businesses, and reduce their vulnerability
to external shocks. Furthermore, microcredit contributes significantly to women empowerment.
Women particularly benefit from microcredit as many microcredit institutions (MFIs) target
female clients. Microcredit services lead to womens empowerment by positively influencing
womens decision-making power and enhancing their overall socio-economic status. The
empowerment of womens economic capacity itself is considered as an effective way to address
various poverty issues because the income really goes directly to the family in terms of providing
better health, nutrition, and educational opportunities for their children.
However, despite the positive achievements and promising potentials of microcredit, it
should be realized that microcredit is not the missing ingredient or a panacea to address all
different issues related to poverty. Microcredit can be a powerful strategy that complements
other interventions, but microcredit itself is not an overall solution. It requires policies and
regulations to back up its implementation. Setting expectation too high risks undermining the
genuine contribution that microcredit can bring.

V. Reading List
Ahmed, S. (2007), Examining Muhamad Yunus Grameen Bank, The Current, Columbia
University, Fall 2007 edition.
http://www.columbia.edu/cu/current/articles/fall2007/the-current-in-conversation.html
(accessed on 8 June 2009).
15
Asian Development Bank (2000), Finance for the Poor: Microfinance Development Strategy,
ADB.
http://www.adb.org/Documents/Policies/Microfinance/financepolicy.pdf (accessed on 18 May
2009).
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