Study warns against expecting too much of microcredits

The German government is putting its weight behind a new microcredit fund for Africa. Development minister Heidemarie Wieczorek-Zeul is calling for the fund to be brought into being at the G8 summit in Heiligendamm in June. The minister told the Financial Times that such a decision would be a “positive signal” for the poorest people in Africa. The newspaper reported that the proposal has met with approval within the G8. Wieczorek-Zeul said the fund could be managed by the World Bank; she expects that the G8 countries will pledge additional funds for it.

Meanwhile, the conservative US think tank Cato Institute is warning against over-rating the development benefits of microcredit. In a study presented by the Institute in February, it states that microcredit does little to contribute to economic growth in developing countries. Rather, according to the paper, it is used primarily for consumption or, at best, contributes to maintaining a subsistence economy shaped by micro-enterprises. Most poor people for whom microcredit is intended, are not “real entrepreneurs” interested in the growth of their businesses. They simply need the money for necessary daily expenses and to maintain their standard of living. “We should not expect microfinance to noticeably affect growth or successful business development,” maintains the study.

The author, Thomas Dichter, gives primarily historic reasons for his scepticism. Economic development in the advanced countries of Europe and North America today was not set in motion by “credit-for-everybody”. According to Dichter, ambitious small businesspeople who needed investment capital to expand have generally tended to tap informal sources such as family or friends rather than drawing on formal credit. The “democratisation of credit”, which the microfinance approach also follows, only began in today’s industrialised countries after a certain level of development had been reached – not, however, to make investment capital available but to boost consumption. In the rich nations, according to Dichter, at the beginning of economic development for the poor population the focus was on saving schemes and insurance policies, not loans. The microfinance movement of today does it completely the other way around: for a long time, only loans were available, then savings opportunities arose, and it is only recently that insurance policies for the poor have been discussed.

Microcredit practitioners agree in part with Dichter’s findings, but not with his conclusion. It is true that microcredit alone cannot eliminate poverty, says Martin Rohler from LFS Financial Systems, a micro-finance consultancy company based in Berlin. In this respect, the Cato study corrects the very high expectations vested in microcredit, which recently found expression in awarding the Nobel Peace Prize to Muhammad Yunus, the founder of the Grameen Bank. However, the contribution microcredit makes to poverty reduction is undisputed, as is its high level of efficiency compared with other development aid instruments. That most microcredit is used for consumption, as maintained by Dichter, is nonsense, says Rohler, who headed the credit department of the Mozambican microfinance bank Socremo in Maputo for many years. Furthermore, in the microfinance business, it is not always possible to differentiate precisely between consumer spending and investment. (ell)

On the Internet:
The Cato study: