Microcredit offers a helping hand to hundreds of millions of poor people, especially women. Saif Islam and Catherine Cheney question whether it’s solving the problems of poverty or just softening them.

From the archives: This article originally appeared in the October 08 edition of the Cape Town Globalist

Veracruz, Mexico.

Twenty-two-year-old Claudia Apala Pacheco lives with her six-year-old daughter in San Andres Tenejapan, a small village in the central-eastern part of Mexico. “My husband left Mexico when I was three months pregnant,” she said. “He said he would come back, but now he says he will not.”

Pacheco is one of many women in this region left behind by their husbands. Every week, a van pulls into the nearby town of Tequila, luring workers with the promise of a better life across the border. Men from the area pay coyotes — human smugglers — in hopes of safe passage to Alabama, in the United States, where better-paying jobs await them.

Many men leave their families behind. Some dutifully send money over the border to support their loved ones at home, but others stop sending money altogether, leaving their families to fend for themselves.

Pacheco and her daughter gave The Cape Town Globalist a tour of their future home, which is now under construction. As the child traced her small fingers across the stucco walls and danced barefoot on the dirt floor, Pacheco said that the existence of this home is only possible now that she has access to credit and financial services.

Mexican credit unions use a model created by the World Council of Credit Unions to bring small loans and savings education to isolated, poor communities, creating possibilities for people who traditionally receive no financial support. It’s a system of fighting poverty that has gained recognition across the globe.

How a little can help a lot

Since its inception in Bangladesh 30 years ago (see article, opposite), the microcredit revolution has spread through Asia, offering the chance of economic upliftment to families like Pacheco’s in Latin America and Africa. According to a report by the Microcredit Summit Campaign, by the end of 2006 there were over 3300 existing microfinance institutions worldwide, reaching an estimated 133 million clients. About 92 million of these people were among the poorest of the poor when they started the programme.

At the core of microcredit is the belief that, under the right conditions, the very poor can make reliable candidates for small loans. Loans as tiny as a few dollars can be enough to start a small business or secure the basics needed to stabilise the pockets of poor families.

The success of microcredit institutions in recovering these loans is largely due to the fact that they are usually granted to a group rather than an individual. The borrowers are incentivised to help each other not to default on the manageable and regular repayments. Interestingly, women are by far the more dependable borrowers – the fact that the vast majority of microcredit clients are women is fast-changing the gender dynamics among the poor in the communities reached.

Just one piece of the puzzle

Although it’s mushroomed in underdeveloped economies elsewhere, microcredit has only a modest presence in South Africa, where economic inequality is rife. Thus, it remains to be seen whether microcredit brings real economic development.

According to Professor Gerhard Coetzee, director of the Centre for Microfinance at the University of Pretoria, microcredit could be a long-term solution to poverty alleviation in South Africa, but only if a wide range of microfinance activities are in place for the poor. “You cannot solve all challenges with group lending methodology alone,” he says. “You also need other products, individual lending, micro-insurance and savings services.”

Others are sceptical that microcredit alone can solve global poverty. In an article titled “Microcredit Misses Its Mark”, University of Michigan’s Professor Aneel Karnani gives a nod to the positive impact of microcredit in education, healthcare and social development, but doubts its economic benefits. He argues that employment in large industries can do more to solve poverty than microcredit can.

Dr Imraan Valodia, in the School of Development Studies at University of KwaZulu-Natal, shares Karnani’s suspicions: “I agree that microcredit can play an important role in poverty alleviation but I think that too much emphasis is placed on microcredit.” He continues, saying, “It is incorrect to see the poor as all ‘budding entrepreneurs’.”

Most poor people lack skills and entrepreneurial attributes; they end up competing with other self-employed poor people instead of accumulating wealth or creating jobs.

The World Bank has also been reluctant to lend its full support to microcredit, and until recently the Bank refused to allocate more than one percent of its loan portfolio to microcredit programmes. The Bank claims that for the poorest families, living on less than a dollar a day, the focus should stay on immediate safety nets and handouts.

Many believe that charity from the World Bank is not the answer to poverty alleviation; the poor will only cross the poverty line, and stay there, even once they become financially self-sufficient.

The road ahead

The Microcredit Summit Campaign plans to reach 175 million people by the United Nations Millennium Development Goal deadline of 2015. The World Bank is also slowly starting to invest more in microfinance, with its initiatives reaching the poor in war-torn countries such as Liberia, Sierra Leone and Afghanistan.

Yet microcredit can’t hope to reach every poor person in the world by 2015, if ever. It would also be naive to think a small loan is all every poor person needs to become a successful entrepreneur and start creating jobs for others in flourishing new microenterprises.

Nonetheless, microcredit is already playing an important role in human development and social reform. For women’s empowerment alone, the potential is enormous.

In Mexico, at a roadside restaurant down the hill from where Pacheco lives, The Cape Town Globalist met Rosaura Cerezo Lopez. She’s only 14 years old, but left school after third grade to support her family financially. For over three years she has earned a salary helping her mother make fried tortillas with sauce, cheese, and pork rinds on a street-side patio. Rosaura now makes 500 pesos a week and has already learned the importance of savings. “Every 15 days I save 20 pesos,” she said. “I think my life will be better in the future because I am starting to save now.”

Saif Islam is a second-year student at the University of Cape Town, majoring in print production and politics.

Catherine Cheney is a third-year student at Yale University, majoring in politics and international studies. She is a senior editor at The Yale Globalist.