[From Savings Revolution blog, 3 November 2011]
Microcredit is now under challenge from many quarters. This may be an inevitable over-reaction given how it was oversold as a path for personal and economic development for the world’s poor. Once the hype bubble was pierced, it became okay to question some of the common practices that have made microcredit so successful. What’s going on beyond the happy group gathering?
Much of the discussion on the appropriateness of microcredit has centered on two issues: the high cost (interest rate), and the heavy-handed sales and collection practices that are sometimes employed. I’d like to put the spotlight on a third: the perpetuation of debt cycles.
The principle of progressive lending has been a key tool for people to build up microcredit. This pushes people into entering into new loans which they may not need in order to be able to opt to higher credit ceilings when they really need it in the future. Once you are established in a credit group, your goal is to stay in there and maintain access to credit. With those high interest rates, it can become a costly way of building up and maintaining a credit history.
There is now much talk of financial education. What kind of financial education are we giving people through these microcredit groups, when the message seems to be that it’s ok to live in debt 365 days a year, year after year? Do you have the habit of rolling over your short-term debts? Why should they?
Microcredit institutions need to devise ways for people to go fallow: to sit out this loan cycle and maybe get back in later and be treated as if I had been an integral part of the group all along. But that’s hard to do when there is group liability: why should I back other people’s debts when I am not taking any? As the practice of enforcing group liability wanes, it should become easier to introduce the notion of inactive group members.
May I propose this as an eighth principle for the Smart Campaign: freedom from endemic debt? This goes beyond the issue of over-indebtedness (quantity of debt) and product design (unless you interpret the basic microcredit product to be lifelong debt).Incidentally, the notion of alternating (rather than continuous) debt cycles is built into the more traditional savings-led groups, where half the time one is a net saver and half the time a net borrower. And since groups break up and re-form routinely, it is easier for people to simply sit out the next round. This arrangement may not give people as much flexibility as they’d ideally want, but at least it does not turn them into perpetual debtors.