Danita Topcagic

Danita Topcagic (Blind Education and Rehabilitation Development Organization - BERDO): Danita was raised in Bosnia and Herzegovina, but moved to the United States with her family at the age of fourteen as a refugee. She is passionate about humanitarian work and earned her BA in international relations from University of Missouri – Columbia. Danita received her MA in global finance, trade and economic integration with a focus in international development from University of Denver.



Common misconceptions about micro-credit

25 Jul

(Read the comments bellow – great information added)

Microfinance approach to development and alleviation out of poverty has spurred many arguments and debates. Wide agreement about the goal of microfinance – to improve the welfare of poor – has been criticized as just another business venue with no honest intention of alleviating poverty in the world. Many studies have proven that micro-credit can help alleviate poverty for some people because it gives them access to credit which then can be used to generate income, people can even get help at debtconsolidationusa.com for more financial assistance. Just as an overview, here are some common misconceptions and debates regarding microfinance to introduce this topic for now because I will be writing about BERDO’s involvement in micro-credit in my next blog.

MYTH ONE: Microfinance institutions cannot reach the poorest groups because it would be too costly to identify them and provide motivation for income-generating activities.
WHY IT’S A MYTH?
It’s argued that microfinance institutions cannot reach the poorest groups because operating costs are high and because it is costly to identify who are the poorest people in the community. However, for the past thirty years, microfinance institutions have been able to do both – cover their operating costs and identify the poor people. Of a total global population of 6 billion, the percentage of persons living in extreme poverty (those who live on less than $1 per day) is over 21 percent of the world population (Gail Arch, Microfinance and Development). Microcredit Summit Campaign reports that as of December 2004, 3,164 institutions have reported reaching 66,614,871 people who live on less than $1 per day when they took their first loan. Well people can buy a car with easy loan facility. By all means there is more work to be done, but microfinance institutions have proven themselves successful many times over in providing financial resources to the poor people. And in regards to high costs of identifying poor persons in the village, Microcredit Summit Campaign launched a poverty measurement tool-kit to show that poorest families can be identified at low costs and it includes: a participatory wealth ranking and CASHPOR house index. Participatory wealth ranking is a method where the community identifies who the poor people are and CASHPOR method is based on the ranking of the house for each family. These methods show creative and inexpensive ways that can be used when identifying poor people proving that microfinance can minimize some of their costs.

MYTH TWO: If an institution succeeds in reaching the very poor, it cannot become financially self-sufficient.
WHY IT’S A MYTH?
Critics argue that many microfinance institutions cannot reach the poorest and be self-sufficient at the same time. However, case studies conducted by Microcredit Summit Campaign show that full self-sufficiency can be reached by organizations serving the very poor clients and an analysis of 114 microfinance institutions also proves the same (Simanowitz and Walter). SHARE and CRECER mostly provide micro-credit to poor women requiring no collateral of them, and most of the loans are under $100. Most of the times, the borrower employes a scottish trust deed if they are not able to repay back the loan.

This gives them more time to slowly repay the low without falling into bankruptcy when if they do they will need a bankruptcy attorney as a legal aid at court. The allure of minimum payments combined with the trap of high-interest rates might leave you crippled with credit card debt. To make matters worse, if you miss even one payment, creditors and debt collectors can come after you and demand immediate compensation. Put an end to the harassment with the help of a credit card debt attorney. With the help of the Scottish Trust Deed, many people have been able to repay their loans by at least 85%. These microfinancial institutions serve large number of clients, whom they charge higher interest rates than what other credit institutions charge, therefore thy can cover the costs for their operations. Furthermore, these institutions use their resources more effectively and pay their staff lower wages in order to minimize operating costs. Some also avoid bringing in new technology – but this can be dangerous in case of disasters or accidents.

MYTH THREE: An institution that reaches the very poor and charges them high interest rates will only add to the debt burden of these families.
WHY IT’S A MYTH?
There is a general belief that when a microfinance institution is self-sufficient while serving the poorest people, it will only burden the poor persons because it will charge them high interest rates which can force the family into deeper burden if they cannot make payments. This is a valid argument because of the high interest rates charged by the microfinancial institutions, typically between 10 to 35 percent (Chowdhury, The impact of micro-credit on poverty) and also because these poor persons live in unstable environments. Poor people are affected more deeply by droughts, excessive rainfalls, sudden deaths and/or illnesses which can halt the repayment of the loan, to which, they are compelled to resort to sources like this stop bailiffs site which provides free advice on how debts can be dealt with. With that said, repayment rates of micro-credit are somewhere around 95 percent which means that most of them did not end up getting further into debt. I don’t know the repayment rate for regular credit, but just remember of all the news about home foreclosures, and you’ll get the picture.

Whether microfinance can reach the poorest people, whether it’s moral to charge such high interest rates, and whether their intentions of alleviating poverty are sincere are all debatable concerns. What’s not debatable is the fact that poor people do not have access to credit, and now thanks to microfinance institutions this is changing. It is argued that the due to the expansion of micro-credit in the developing countries, families are experiencing significant impact because it leads to stabilization of income and therefore access to food, health care, education and other services. Another major contribution of microfinance is the impact on society by allowing and insisting on women to be part of the market.

Access to financial services and micro-credit is not the answer for everyone but for those poor people who are seeking financial services. Micro-credit alone cannot be the sole factor for the “extremely poor” who are in desperate need of clean drinking water, medicine, nutrition, basic education and some training skills or empowerment to embark alone on a income-generating activity. I don’t believe that micro-credit or microfinancial institutions have the capacity to lift people out of poverty because extreme poverty is a condition of hunger, low income, lack of services, exclusion and powerlessness, and therefore poverty alleviation encompasses a spectrum of degradation requiring a spectrum of policy programmes – not just financial services. But it will create an income for the poor.

Posted By Danita Topcagic

Posted Jul 25th, 2008

122 Comments

  • Daniele

    July 25, 2008

     

    The new frontier of micro-credit – kiva.org – deserves a few words in the context you described, Danita. Kiva.org is one of the first and certainly the most successful Internet-based peer-to-peer social networks for lending money to indigent people. Here is how it works in a nutshell:
    You are a Bangladeshi woman who would like to open her own tailoring shop. You post your project on the website and you ask for a small loan to start up your business. I respond to your request and I wire to you, let us say, $25. And some of my friends do the same. This way, you get the amount of money needed and once you begin your activities my friends and I can follow your progresses and keep track of the money lent through an Internet diary on Kiva website.
    It is a very simple but effective and successful mechanism.Figures speak by themselves: 270,000 members, 40,000 loans made, 550 loans repaid every week. And many other Kiva-like initiatives have mushroomed in the last years.
    Internet-based micro-credit, above all, is able to neutralize operating costs and it is basically self-sufficient. Kiva asks the lenders to pay themselves the transaction fees for the loans they make ($2,50 on average) and 70% of them give even more than requested!
    This is the powerful evolution of Internet-based social networking for solidaristic purposes. Needless to say, most people in developing countries do not have access to the Internet and are computer illiterate, but I can see one short and medium-term tactic and one long-term tactic to address the problem. In the short and medium term, local and international NGOs can provide the technological tools and act as intermediaries for people in need for a loan. NGOs should simply organize an informational campaign on Kiva and post projects and updates on the website for the poor. In the long run, these NGOs should aim at teaching the poor how to use a computer and the Internet and allow them to use their PCs and Internet connection for connecting to Kiva and with the lenders. Computer literacy and access to ITs is key and the international community should invest more resources in these aspects of development cooperation.

  • Danita

    July 26, 2008

     

    Daniele – thank you for the info 🙂

    http://www.kiva.org is a great example of how microfinance has adopted creative and innovative ways to overcome operating costs and to provide credit to people who don’t have access to financial services because they are poor and don’t have collateral.

    Just like you said, Kiva isn’t for everyone because a borrower has to have access to a computer – but there are plenty of people who are involved and maybe this will inspire some to become computer literate which is great for many other reasons.

    Many people say they would like to help but are baffled on what to do and how. This is a great way to get involved and to give a hand to those in need!!!!

  • Brian

    July 27, 2008

     

    This whole micro credit topic is a new one to me and rather interesting. I am not entirely certain what exactly it entails, but from your blog and Daniele’s post, I think I have the gist of it figured out. The Kiva thing is a really neat concept and hopefully can become a regular method where people with regular incomes can help the impoverished. I am looking forward to your upcoming blog on this topic…

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