Post 5: Micro-credits and saving in poor communities

For this week you are reading about micro-credit and its limit. What is the basic argument for and against micro-credits that Banerjee and Duflo make? Are micro-credits working in your country? Do you agree with its limits?

What is happening in your country with micro-credits or any other way to handle money, savings, trade? Is digital technology making a difference?

microcredit-burundi

Photo: http://www.fivetalents.org/microcredit

Microcredits are small loans with affordable rates available to millions of poor people. In Poor Economics, Banerjee and Duflo explain many of the benefits of microcredits. Microcredits help many small businesses run by the poor to stay in business and therefore enable the owners to survive. Microfinance gives the poor a way to plan for the future, rather than planning for the short-term. They can save and use a loan to buy something that works toward a vision of a life they want, things like a TV or cooking supplies.

On the flip side, farmers and other users of microcredits often find it hard to hold on to small sums of money for the time period between harvest and planting. There is always something that comes up, whether it be an unexpected expense, sick family member or otherwise. Many people don’t utilize the access to savings accounts that are available to them, especially men. Another point Banerjee and Duflo make is that “saving is less attractive for the poor, because for them the goal tends to be very far away and they know that there will be lots of temptations along the way.” Many businesses run by the poor don’t generate much profit, so the idea of a microcredit would not necessarily lead to a big improvement in their welfare and “money is not the only barrier to expansion.” Many problems arose from intense pressure from loan officers to repay loans which even led to 57 farmers committing suicide because they couldn’t repay what they owed. Microcredits have positives and negatives, much like other “solutions” to ending poverty. Even with the downsides, many poor people have been able to create better, more financially-stable lives for themselves because of the tool.

According to the article “Unruly Entrepreneurs – Value Creation and Value Capture by Microfinance Clients in Rural Burundi,” the microfinance sector in Burundi is fairly new and exposure to microfinance institutions is low compared to other African countries. With a lack of competition for the organizations, there is low competition, which is not good for customers. They often lack a choice is which bank they use and bargaining power once they get there. One problem with microfinance and micro-credits in Burundi is that much of the money loaned is spent on “non-income generating activities,” things like food, healthcare or emergencies. Many times the loans are used to invest in social activities rather than productive activities. Burundians place value in getting married or holding other religious ceremonies and often wound up using loans meant for their businesses on these events instead. The study reviewed in this article also explains “loan juggling” as a problem in Burundi. People take out different kinds of loans, both formal and informal, and use them to pay off one another, thus leading to multiple kinds of debt. At the same time, multiple borrowing “cements relationships and builds new alliances.” Microfinance and other formal ways of funding are still relatively new and gaining traction in Burundi. The article reviews a recent publication on entrepreneurship that stated that in order to be sustainable in emerging economies (like Burundi), innovations need to be designed with the customers and their ecosystems in mind.

unicef-logo

Photo: http://ba.one.un.org/content/unct/bosnia_and_herzegovina/en/home/un-agencies/unicef.html 

As far as digital technology in Burundi, UNICEF has started an “Innovation Lab” targeted toward bringing technology to children. The idea behind the program is to bring children in Burundi together with technologists, academics and policymakers to co-create solutions for local problems. For example, Project Kira-Mama has been launched in two provinces, allowing community health workers to register pregnant women and follow up with them throughout their pregnancy. The project is aimed at reducing infant mortality rate and monitor overall infant and mother health.
According to the same UNICEF report, only 3% of Burundians have access to the national electricity grid. Even if there were innovations made in the country, having access to the progress would still be a problem. So, I don’t see digital technology as making a big impact in the near future, though current projects  like Project Kira-Mama seem to be successful.

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