The success of micro-credit programmes all over the world has given rise to a new train of thought – one that on the basis of experiences I have had here in Bangladesh; seem overly optimistic about the nature and extent of positive changes they can bring about. My last blog highlighted the features of BERDO’s micro-credit programme. This entry points out a few general caveats of micro-credit and is meant to be a quick reality-check. 

First, the high interest rates charged by micro-credit programmes drive down demand for loans. Poor households are extremely sensitive to these rates of interest and are automatically excluded from such programmes.

Second, extension of insurance and mobilisation of savings are crucial for upward mobility and act as social safety nets at times of crisis. The holy trinity of savings, credit and insurance performs considerably better together than credit alone can ever hope to.

Third, access to credit does not automatically translate into successful micro-enterprises. Business and technological inputs, training and education and establishing links with the market are critical for the success of any business initiative.

Fourth, micro-credit programmes assume that self-employment alone can pull people out of poverty. Such an assumption sometimes threatens to create a new breed of reluctant entrepreneurs.

Fifth, micro-credit fits with the idea of ‘targeting’ – a means to identify specific kinds of households and persons as opposed to a Universalist approach. 

These drawbacks, however, are no reason for despair. They provoke us to view micro-credit objectively and with guarded optimism. They also tell us that micro-credit, though empowering to an extent, cannot be a substitute for state investment in health, education and infrastructure (which is where advocacy comes in), and should complement state engagement in issues of unfree labour and class exploitation.

The use of micro-credit to draw on local knowledge and resources and to create and improve access of disenfranchised sections of the population to vibrant, new markets is a novel idea. Without a strong legal and institutional framework and more liberal screening criteria, it threatens to remain just that.