The present report has been prepared in response to a request contained in General Assembly resolution 52/194 of 18 December 1997. This is the first time the Secretary-General has been requested to prepare a report on the question of microcredit and the eradication of poverty. The prominence given to the matter reflects the recent success of small-scale lending programmes such as the Grameen Bank of Bangladesh. These rely on lending (usually a few hundred dollars) to small enterprises in agriculture, distribution, crafts, trading and similar activities. The participatory nature of these projects, together with the emphasis on women entrepreneurs and employment creation, have raised hopes of reducing poverty through this approach.
The present report surveys current experience and highlights the strengths and weakness of the microcredit approach, including the administrative difficulties and limited linkages with other services for the poor. The report also contains suggestions for strengthening operations, and makes a particular plea for ensuring that microcredit projects are established in a broader context of support to the small enterprise sector. Responsibilities of donor countries in this regard are emphazised.
Finally, the report highlights the activities of the United Nations system and non-governmental organizations in support of microcredit, giving special emphasis to the World Bank-led Consultative Group to Assist the Poorest.
1. The objective of the First United Nations Decade for the Eradication of Poverty (1997-2006), proclaimed by the General Assembly in its resolution 50/107 or 20 December 1995, is to achieve the goal of eradicating absolute poverty through national action and international cooperation. Progress on the anti-poverty front was last reported to the General Assembly in the report to the Secretary-General entitled “Observance of the International Year for the Eradication of Poverty (1996) and recommendations for the rest of the Decade” (A/52/573). An updated report on the Decade has been prepared for the current session.
2. The General Assembly, in its resolution 52/194 of 18 December 1997, noted that, in many countries microcredit programmes have proved to be an effective tool in freeing people from poverty and have helped to increase their participation in the economic and political processes of society. Among other provisions, the Assembly called upon the relevant organs, organizations and bodies of the United Nations system, in particular its funds and programmes and the regional commissions, as well as relevant international and regional financial institutions and donor agencies involved in the eradication of poverty, to explore including the microcredit approach in their programmes as a tool for the eradication of poverty. The assembly requested the Secretary-General, in collaboration with relevant organizations of the United Nations system, including funds and programmes and the World Bank, to submit to it at its fifty-third session a report on the role of microcredit in the eradication of poverty.
3. The World Summit for Social Development, held in Copenhagen in March 1995, also underlined the importance of improving access to credit for small rural or urban producers, landless farmers and other people with low or no income, with special attention to the needs of women and disadvantaged and vulnerable groups. Governments were called upon to review national legal, regulatory and institutional frameworks that restrict the access of people living in poverty, especially women, to credit on reasonable terms; to promoting realistic targets for access to affordable credit, providing incentives for improving access to and strengthening the capacity of organized credit systems to deliver credit and related services to people living in poverty and vulnerable groups; and to expanding financial networks, building on existing networks, promoting attractive opportunities for savings and ensuring equitable access to credit at the local level (1).
II. Role of microcredit in poverty eradication
4. This is the first time that the Secretary-General has been requested to report to the General Assembly on the subject of microcredit. In the broader context of the international fight against poverty, the paper highlights the strengths and weaknesses of the microlending approach, from which some conclusions about the future course of action are drawn. The report, as requested by the General Assembly, provides information from United Nations funds, programmes and agencies on their actions especially in the field.
A. Microcredit and poverty eradication
5. Since the World Summit for Social Development the priority given to poverty eradication has grown. As stated in the previous report of the Secretary-General on the eradication of poverty (A/52/573), it is now broadly accepted that robust economic growth that is labour-intensive and equitable, combined with larger outlays of social expenditures, especially directed towards the poor (now estimated at 1,3 billion people), are a winning combination in the fight against poverty.
6. Several factors have led to increased interest in microcredit in promoting growth with greater equity. There has been a growth in the recognition of the importance of empowering all people by increasing their access to all the factors of production, including credit. In addition, the value of the role of non-governmental organizations in development is receiving more attention.
7. It is in that context that microcredit has recently assumed a certain degree of prominence. It is based on the recognition that the latent capacity of the poor for entrepreneurship would be encouraged with the availability of small-scale loans and would introduce them to the small-enterprise sector. This could allow them to be more self-reliant, create employment opportunities, and, not least, engage women in economically productive activities. Currently, there are estimated to be about 3,000 microfinance institutions in developing countries. These institution also help create deeper and more widespread financial markets in those countries.
B. Characteristics and recent successes of microcredit programmes
8. Informal and small-scale lending arrangements have long existed in many parts of the world, especially in the rural areas, and they still survive. Good examples are schemes in Ghana, Kenya, Malawi and Nigeria (“merry-go-rounds”, “esusus” etc.). They provide the rural population with access to savings within the local area and with a certain cushion against economic fluctuations, and they encourage a cooperative and community feeling. The groups formed provide joint collateral and serve as instruments for spreading valuable information that is useful for economic and social progress.
9. All economies rely upon the financial intermediary function to transfer resources from savers to investors. In market economies, this function is performed by commercial banks and the capital markets. More widespread financial intermediation, as well as increasing depth and variety, are a hallmark of advancing development. But in many developing countries, capital markets are still at a rudimentary stage, and commercial banks are reluctant to lend to the poor largely because of the lack of collateral and high transaction costs. The poor would borrow relatively small amounts, and the processing and supervision of lending to them would consume administrative costs that would be disproportionate to the amount of lending. A study by the International Fund for Agricultural Development (IFAD) has confirmed that complicated loan procedures and paperwork, combined with a lack of accounting experience, limit poor people’s access to formal sources of credit. Other reports cite the fact that commercial lenders in rural areas prefer to deal mainly with large-scale farmers.
10. The absence of commercial banks has led to non-conventional forms of lending. The recent prominence given to microcredit owes much to the success of a relatively few microcredit programmes and their increasing scale. The Grameen Bank of Bangladesh, the most prominent of the successes, now reaches over 2 million people, with cumulative lending of about $2.1 billion. Similar successful examples are known in Latin America (e.g., Banco Solidario in Bolivia), less so in Africa (the Kenya Rural Enterprise Programme is a good example). Progress has also been recorded in several transition economies, mixed in some cases. Such institutions have not only achieved a degree of success, but they have also managed to attract donor support and press attention.
11. These schemes are characterized by relatively small loans, a few hundred dollars at most. The repayment period is relatively short, about a year or so. Women are a major beneficiary of their activities, and the destination of the funds primarily includes agriculture, distribution, trading, small craft and processing industries. The administrative structure is generally light and the entire process is participatory in nature. The impact of microcredit lending varies widely between rural areas and urban areas.
12. In many developing countries, overall interest rates are relatively high to begin with, so that rates charged by microlending schemes are quite high when the risk premium is added. Many of these micro-institutions claim a high rate of repayment. This is attributable to the informal participatory structures, which create an atmosphere in which debtors respect their obligations. While this phenomenon is certainly true of the better-run institutions, it is not possible to verify whether this is a universal feature. There is little by way of “global” research in this area, even though the literature on microcredit has proliferated in recent years.
13. It should be noted that although a large number of studies undertaken so far on the impact of microcredit programmes on household income show that participants of such programmes usually have higher and more stable incomes than they did before they joined the programmes, some practitioners still have reservations about the findings of those studies. Moreover, not many microcredit programmes can afford to undertake impact assessments because they are generally expensive and time-consuming. There are serious disagreements among experts on the validity of methodologies used in some of the published studies. In some cases, even the more rigorous studies have produced inconclusive results. Some studies show that there are limits to the use of credit as an instrument for poverty eradication, including difficulties in identifying the poor and targeting credit to reach the poorest of the poor. Added to this is the fact that many people, especially the poorest of the poor, are usually not in a position to undertake an economic activity, partly because they lack business skills and even the motivation for business.
14. Furthermore, it is not clear if the extent to which microcredit has spread, or can potentially spread, can make a major dent in global poverty. The actual use of this kind of lending, so far at least, is rather modest: the overall portfolio of the World Bank, for example, is only $218 million. In recent international meetings, it has been stated that a target to reach 100 million families by the year 2005 would require an additional annual outlay of about $2,5 billion. This should be compared to the total gross domestic product (GDP) of all developing countries, which is now about $6 trillion. A certain sense of proportion regarding microcredit would seem to be in order.
15. In addition, the administrative structures governing these institutions are commonly either fragile or rudimentary, and often involve large transaction costs. A study by the Organisation for Economic Cooperation and Development (OECD), for example, found that many specialized agricultural institutions were not designed to serve as financial intermediaries. The success of financial intermediation at any time depends significantly on how efficiently the transaction is completed. If the transaction costs, combined with high interest rates, require that the operation in question generate profit margins of the order of 30 to 50 per cent, it is not clear that this would be economically beneficial. It is not surprising that in many microlending operations, trading activity – with quick turnover and large profit margins – dominates.
16. In many cases, microcredit programmes have been stand-alone operations. There is now considerable consensus that lending to the poor can succeed provided it is accompanied by other services, especially training, information and access to land. An OECD study, for example, emphasized that credit needs to be supplemented with access to land and appropriate technology. But such activities require strong support from the public sector. In some of the lowest-income countries, lack of access to land is the most critical single cause of rural poverty, which dominates the poverty situation in those countries. Yet, few countries have substantial land reform programmes.
17. Moreover, in the proliferation of microlending institutions, non-governmental organizations and foreign donors have played an increasing role. Non-governmental organizations vary in quality and strength. The best results are produced, research shows, when developing country Governments and non-governmental organizations work hand in hand. While donor participation can be positive, it should be noted that total official development assistance (ODA) has declined in recent years.
18. Over the past decade, microfinance institutions have adopted innovative ways of providing credit and savings services to the entrepreneurial poor. Two approaches have been advocated on the role of credit in poverty reduction. While supporters of the income-generation approach maintain that credit should be provided mainly to the entrepreneurial poor to enable them to finance specific private income-generating activities to increase their revenues, proponents of the so-called new minimalist approach argue that credit progammes would still be helping the poor fight poverty by giving credit to any poor person who is able to repay a loan without dictating to that person how and on what the loan should be used. Some studies have pointed out that the problem of the non-productive use of credit, as advocated by the minimalist approach, lies in the fact that by consuming rather than investing their loans, the actions of such borrowers, if imitated by other poor people, could produce a negative impact on the future growth of microcredit.
19. Several microfinance institutions have succeeded in reaching the poorest of the poor by devising innovative strategies. These include the provision of small loans to poor people, especially in rural areas, at full-cost interest rates, without collateral, that are repayable in frequent installments. Borrowers are organized into groups, which reduces the risk of default. These are also effective mechanisms through which to disseminate valuable information on ways to improve the health, legal rights, sanitation and other relevant concerns of the poor. Above all, many microcredit programmes have targeted one of the most vulnerable groups in society – women who live in households that own little or no assets. By providing opportunities for self-employment, many studies have concluded that these programmes have significantly increased women’s security, autonomy, self-confidence and status within the household.