Suddenly, it appears, everyone is jumping on the microcredit bandwagon. The Microcredit Summit, organised in early February in Washington DC was only the latest and most high-profile activity (see accompanying article). The reasons for this trend are as varied as the players. Microcredit has the support of many women´s advocates who view expansion of microcredit as a potential bellweather for women´s empowerment. Multilateral development banks, in an era of budget cuts and disbursement reductions, are embracing microcredit as an opportunity for them to move away from the capital-intensive "development as charity" model to the potentially more profitable "development as business". But perhaps most significantly, the financial community has woken up to the fact that there is a great deal of money to be made in microlending, where interest rates can range from 20 to 100 percent.
Microcredit is often portrayed as a "win-win" option, wherein investors profit handsomely while the poor gain access to resources that allow them to help themselves. The reality, however, is not always so rosy.
In India, a number of self-help groups (SHGs) were created in the 1980s to provide credit facilities to the poor, especially women, in both urban and rural areas. These SHGs stumbled upon a surprising finding: by targeting women, repayment rates came in well over 95 percent, higher than most traditional banks. Impressed by those repayment rates, institutions like National Bank for Agriculture and Rural Development (NABARD) and Small Industries Development Bank of India (SIDBI) began increasing their lending to SHGs in India. However, the lending rates of SHGs to borrowers were not cheap. For example, SIDBI lent to NGOs at 9 percent; NGOs were allowed to onlend to SHGs at rates up to 15 percent; and SHGs, in turn, were allowed to charge up to 30 percent to individual borrowers. Although such high-interest credit is touted as a vehicle for poverty alleviation wherein the poor use the funds to undertake commercial ventures, studies have found that the loans are largely used by poor people to meet their daily consumption needs.
Nevertheless, similar microcredit operations are now being established elsewhere in India, with liberal grants from international donor agencies like the Ford Foundation, UNDP and the Swiss Agency for Development and Cooperation (SDC). This seed money, in turn, will attract additional capital from the corporate sector and financial institutions. Loans are to be provided to borrowers through a network of subsidiary lending institutions. In order to assure investors a good rate of economic return, these corporate entities will lend at market rates. Critics charge that such microcredit, rather than resulting in poverty alleviation, will simply keep the poor on the treadmill of debt or bypass them altogether in favour of those who can afford credit at market rates.