For this week, you are reading about micro-credit and its limit. What is the basic argument for and against micro-credits that Banjeree 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?
Micro-credit is a financial trend that began in Bangladesh in the 1970s and has since grown in popularity, with up to 200 million borrowers globally, many of which are women. According to Banjaree and Duflo, the authors of Poor Economics, micro-credit is moneylending reinvented for a social purpose. Backers of micro-finance believe in this model because it has the ability to transform lives. The idea is that you lend a very small amount of money to impoverished individuals who do not have the credit score or employment history to qualify for a normal loan. This allows them to purchase machines or utensils so that they can support themselves and possibly open a small business. For many, this could lead to a future that they hadn’t been able to imagine before because they were never given the resources to enact goals for themselves. Many believed micro-credit could help achieve the Millennium Development Goals before they expired last year. Others were, and still are skeptical, asking for hard evidence and numbers to prove that these improvements are worthwhile and substantial.
While micro-credits can open a world of possibilities for impoverished people who are striving towards a better life, there are significant limits as well. Firstly, these types of loans are very rigid in structure and there are many rules, including weekly payments. This is a turn off to many poor people because they cannot make this type of commitment when they may run into unexpected costs, like caring for a sick child. Further, micro-credit has a zero-default policy meaning you had better know what you are getting into because collectors will be at your door each week. Under these conditions, it is difficult for entrepreneurs to flourish because there is always a certain amount of risk that comes with starting a new business, and micro-credit does not allow for failure. According to the authors, micro-credit is beneficial for poor individuals who have long-term goals and are willing to make short term sacrifices in order to see their plans through.
In Angola, a nonprofit called Development Workshop (DW) began a micro-finance program as a post-war economic strategy to help individuals create small businesses in order to pull themselves out of poverty in 1996. Using KixiCredito, a micro-credit institution, DW has been able to support over 13,000 clients, 60% which are women. KixiCredito gives loans of 50-150 USD to poor individuals who would otherwise have no access to bank loans. In Angola’s informal economy, this has allowed individuals to set up businesses selling fish, baked goods, and charcoal. Often these are group loans, which offer more stability for families and ensures there is no default on payments. As of 2015, KixiCredito has injected 400 million USD into Angola’s national economy.
Of course, much of this information was found on the DW website, so while I want to believe that micro-finance is having a profound impact on Angola’s economy, much of what I read in Poor Economics makes me question this. According to the book, no significant numbers were ever extrapolated to prove that lives had been significantly improved. Rises in income sometimes went from 5% to 7%, but this was not seen as a fantastical improvement. I agree with the authors who concluded that progress is relative. By American standards a 2% increase is not significant, but in other countries, this is the difference between true poverty and having a small disposable income. In my opinion, I think that micr0-credit works in an informal economy like in Angola because the businesses that many of these women are starting are ones they already know will be profitable. If they see other women selling fish, they know that if they can come up with the resources to obtain fish, they can sell it and be successful.
In terms of technology, Angola is limited, yet the outlook is promising. Science and technology will allow Angola to develop in other industries such as agriculture and energy, which are currently areas of struggle. Maximizing natural resources and minimizing environmental harm is on the forefront of this struggle. Innovation is something that many African countries are just starting to excel in. There are amazing individuals, like Celio Garcia, who won a continent-wide competition in Africa for app building on Android devices. His app allows people to send free SMS messages to anyone in the world. The key to prosperity in this field is education because it is the only way that more individuals like Celio can learn all of the necessary skills. Micro-credits are linked to technological advancement in that if a woman can receive a small loan, she may have enough money to educate her child and eventually send him or her to a university where he or she can have access to technology. From there, the possibilities are endless.