Boon or Burden? Lessons from Microcredit in Bangladesh, Bolivia, and South Africa

Microcredit, or the leveraging of small, inexpensive loans to low-income borrowers, has been both hailed as a boon to third-world entrepreneurs and condemned as a practice that only increases indebtedness and income inequality. In the 2012 Washington and Lee Law Review article, “Credit and Human Welfare: Lessons from Microcredit in Developing Nations,” Valparaiso University Law Professor Alan M. White examines microcredit case studies in Bangladesh, South Africa, and Bolivia to determine what practices makes microcredit programs successful. He argues that microcredit can be both a helpful tool and a harmful force in developing nations, and that successful programs must be both well designed and smartly regulated to yield positive results.

White cites Grameen Bank in Bangladesh as a success story. The Bank was founded in 1976 by Muhammad Yanus, who won the Nobel Peace Prize in 2006, to provide microloans to the Bangladeshi poor. The Bank reports that 98 percent of borrowers ultimately pay back their loans. There is no legal loan enforcement system. The Bank instead relies on a number of social methods to ensure repayment: loans must be repaid in public, loan officers maintain close contact with each borrower, visiting each home at least once a week, and borrowers must successfully pay back a small loan to be eligible for larger loans. Furthermore, borrowers must also have life and disability insurance to minimize unexpected defaults. Grameen Bank also tries to institute social reform; it makes every lender memorize and recite 16 Behavioral Commitments to reduce poverty, including not having too many children, maintaining the house, and growing vegetables. There is evidence that Grameen Banks’ female borrowers have fewer children and participate more in civil and political life. Although there is no evidence that the Bank’s efforts have reduced poverty in Bangladesh as a whole, it has been successful in providing the poor with credit without driving them into a cycle of indebtedness.

Microloans in Bolivia and South Africa, on the other hand, have proven less successful. In both cases, market liberalization led to a microcredit boom, which eventually increased debt levels and drove both countries into financial crises. White argues that the lack of ex ante credit regulation caused the microcredit system to fail in both cases; the poor borrowed too much without strong enough safeguards.

Comparing the experience of Bolivia and South America with the success of Grameen Bank, White develops a set of criteria critical for successful microcredit programs. First, although microcredit requires some trade liberalization to let the market flourish, policymakers need to regulate the system, mandating reasonable and transparent pricing. At the same time, White notes that Grameen’s success is largely extra-legal, and banks need to take a human development approach to their customers. Second, loans need to start small, with short repayment periods. Third, there must be accompanying insurance to guard against unforeseen circumstances. Finally, loan officers need to work closely with defaulters, redefining the terms of the loan while keeping up constant repayment.

White believes that regulations like these could contribute to successful loan programs around the world, including payday loans in the United States. Credit is essential for the poor to improve their lives. However, governments and banks need to plan carefully to ensure credit helps rather than harms the poor.

Feature photo: cc/IRRI Images