MICRO CREDIT PROGRAMS IN ETHIOPIA
Green Washing or Environmentally Sustainable Development
Desta, Asayehgn, (Ph.D), Distinguished Professor of Managerial Economics, Dominican University of California.
In an era of unprecedented world-wide economic growth, it is interesting to note that the richest fifth of the world’s people consume 86 percent of all goods and services while about a fifth of the world’s poor population (1.2 billion people) still live on less than US $1 a day and almost half of the world’s population live on less than US $2 a day (UNDP 2002, Gibson, 2009). Poverty is not simply having a very low income. It is a multifaceted phenomenon. In addition to low income, poor people also suffer from illiteracy, unsafe drinking water, and lack of access to basic health services. They live in remote, resource-poor areas, and atrocious slums. Frequently encountered with their vulnerability, the “chronically poor are unable to develop their personal capabilities or provide a good start in life for their children, and often die prematurely of preventable causes.” (Alston and Shepherd 2008-09.)
With the hastening of the global poverty crisis and the absence of an adequate social safety net for those marginalized and vulnerable sections of society in the less developed countries, a number of researchers have moved beyond the relentless pursuit of short-term toward long-term anti-poverty, environmentally sustainable paradigms to assist chronically poor sectors of society. Though a remarkably polarizing issue, in the last three decades microcredit programs have been made available to the chronically poor as a viable option to involve them in the formal economic sector. It is assumed that the disadvantaged groups will become productive members of society if they involve themselves in small businesses that may contribute to powerful changes within their lives. (See Microcredit Summit, 1997, Fisher and Sriram, 2002).
In formal financial markets, the poor are excluded from establishing their own small businesses because they are not recognized as being credit-worthy, i.e. unable to save, lacking verifiable credit history or goods to offer as collateral to secure loans, forcing them to turn to traditional money lenders. (See for example, Zamperetti and Franca Dalla Costa, 2008.) Recognizing the needs, capacity, and the talents of the poor to repay the loans, micro lending programs are loans extended to group members rather than to individuals. In view of the contingent group loan approach, it is generally assumed that group members would have an incentive to monitor their progress and that this would lead to a greater rate of repayment of their loans since each borrower’s creditworthiness would be a factor in the overall creditworthiness of the group (Fisher and Sriram, 2002; Stiglitz, 1990; Varian, 1990; and Becker, 1991). In short, the success of group lending creates positive incentives for members to repay because in case of default, no member of the group will receive future loans. For prompt repayment, there is repeat lending to the group. In group lending, the probability of moral hazard is largely reduced because all borrowers are members of the group and subject to peer pressure, group dynamics, cohesiveness, and the ultimate success of each member of the group (Ajit, A; Sunil, R; and Raman k. R, 2006).
In simple terms, microcredit refers to the process of lending small amounts of seed money to groups rather than to one person, without collateral, to help poor people to establish their own business. Microcredit, especially designed for eco-entrepreneurship, encourages innovation in rural and urban areas to produce environmentally friendly products for the marketplace. Thus, the philosophy of demand-led microcredit finance visualizes the poor not as objects of charity but as socially productive persons. The rationale and objective of advancing micro-loans to the ultra poor is to improve their liquidity constraints, create employment opportunities, and induce sustainable incomes by engaging the poor in the reinvention of everything from the bottom-up, with limited top-down directives. Therefore, the loans accorded to the poor are not only bankable but it is assumed that micro enterprise activities will eradicate poverty and foster sustainable development. As argued by Doocy et al, “Microfinance is a logical approach to development because it functions at the grassroots level, can be sustainable, is capable of involving large segments of the population, and builds both human and productive capacity (Summer, 2005).” Stated differently, microcredit is an investment in people, the poor and their abilities, which sharpens entrepreneurial initiatives, and strengthens developing countries’ economies. Microcredit is a vital tool for economic development because it enables the poor to build assets, increase income, and reach self-sufficiency. Thus, microcredit not only delivers macro benefits but creates a silent revolution in poverty-stricken rural areas (Sharma, 2005).
As a result, in the 1990s the commercialization of microcredit continued to gain force as one of the key tools of development. The World Bank, the U.N. Capital Development Fund, the European Bank for Reconstruction and Development have created full-scale movements to promote the availability of microcredit programs to a number of developing countries. Based on anecdotal assessment of the impact of microcredit as a financial instrument, the United Nations declared 2005 as the International Year of Microcredit. Realizing that chronically poor people merit the greatest international attention, using the year 1990 as a baseline, the United Nations has advocated the reduction of both extreme poverty and hunger by half or more by the year 2015 of those whose income is below US $1 per person/day.
The Millennium Development Goals (MDGs) are seen by many as being overly modest. However, it needs to be mentioned in passing that this assessment omits or glosses over some of the greatest challenges to lowering the poverty rate. For example, one of the most serious issues omitted in the report is the fact that it failed to establish that it is the lack of access to land ownership (micro-landowning program) that has caused many people to remain in poverty, and that microcredit loans have accomplished very little in solving the land ownership systems in developing countries (Prosterman, R. April 2005). Instead, the promotion of microcredit ventures in developing countries have the potential to create private groups (cutthroat money-lenders ), which have vested interests in perpetuating the prevailing poverty situation ( Elahi, K.Q. and Danopoulos , C. P. (2004). Microcredit participants end up borrowing more from other non-institutional sources (double-dipping) to reduce their indebtedness, which is a paradox. As it stands now, instead of reaching the core poor, microcredit improves incomes of the better-off poor. It is more beneficial to borrowers living above the poverty line than to borrowers living below the poverty (Hume and Mosley, 1996). As succinctly argued by Kamani, “…although microcredit yields some noneconomic benefits, it does not significantly alleviate poverty. Indeed, in some instances microcredit makes life at the bottom of the pyramid worse (2007).”
Contrary to the hype about microcredit being the best way to create jobs, increase workers’ productivity, and eradicate poverty, Banerjee and Duflo argue that, “Although some microcredit clients have created visionary businesses, the vast majority are caught in subsistence activities. Participants have no specialized skills and so must compete with all the other self-employed poor in entry-level activities (2006).” In his critique of the newest financial technology of the Washington Consensus, Flynn argues that while the technologies are new, the rhetoric is familiar and suggests that we may be seeing a new form of green washing or “charity washing” in the making. The risk is that new microfinance technologies targeting people with low incomes will be mistaken as benevolence. Bankers are not in the business of charity. They galvanize their activities to the bottom line generating sufficient priorities to stay in business (2007). In addition, Neff argues that microcredit models have been judged disproportionately from a lender’s perspective (repayment rates, financial liability) and not from the borrower’s. Therefore, according to Neff, microcredits have privatized public safety-net programs and stimulated governments to cut their budgets on education, public health, and the early livelihood needs of the poor (1996).
Despite the provocative criticisms enumerated above, the idea of microcredit as a key to socio-economic transformation has taken a prominant place in the international sphere. A number of voluntary associations, non-government organizations, friendly societies, savings-and-credit cooperatives, national and regional government organizations, and commercial banking institutions have joined hands in providing financial services to the marginalized sectors of the world’s developing countries. Nonetheless for microcredit programs to alleviate poverty in the long run, the participants need to demonstrate sensitivity to the environment and be involved in environmentally sustainable projects. (See for example, Gehlich-Shillabeer, 2008).
Following the Grameen Bank of Bangladesh’s model that: 1) the poor are bankable, 2) under non-collateral micro-lending, loan repayment rates are very high, 3) microcredit programs are critical anti-poverty tools, and 4) microcredit is a key to socio-economic transformation and could in the long run contribute to environmentally sustainable development; since 1993, Ethiopia has registered and is operating more than 20 microfinance institutions in accordance with Proclamation No. 40/1996. (See for example, Ageba, 2007.)
Currently, it has been reported by Forbes Magazine that two microfinance institutions operating in Ethiopia are among the top 50 Microfinance Institutions in the World. The Amhara Credit and Savings Institution ranks sixth in the world and Dedebit Credit and Savings Institution (based in Tigray) ranks 31st in the world (Nazret, 2009). The Forbes Magazine study was focused on the size of gross loan portfolio, efficiency (operating expense and the cost per borrower as a percent of the gross national income per capita of their country of operation), risk (looks at the quality of their loan portfolios, measured as the percent of the portfolio at risk greater than 30 days), and returns (measured as a combination of return on equality weighted for an institution’s over all ranking).
Though instructive, the Forbes’ Magazine study pursues the study from the point of view of the lender. That is, the study is based on anecdotal rather than on a rigorous empirical assessment of the repayment rates and it hardly focuses on whether or not microcredit programs have improved the lives of the marginalized participants or beneficiaries. The main aim of the present study is therefore to review the existing literature which has burgeoned over the past decades and to investigate the impact of microcredit programs on the participants. Specifically, the study is organized as follows: the first section reviews the methodological issues used by microcredit ventures to measure and target poverty. It is followed by an account of the marginalized participants of microcredit programs that are involved in environmentally-sensitive business ventures. The concluding section of the paper examines the evolution of microcredit programs in Ethiopia and asseses whether or not microcredit programs have incorporated linkages to environmentally sustainable development, all of which draw policy implications for further research.
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