Thursday, November 16, 2006

Microcredit and poverty alleviation

Can microcredit be a poverty alleviation programme?

In a well reasoned article Mritunjoy Mohanty has argued that while it serves as a useful complement to the survival strategies of poor households, it is not a strategy of povery alleviation and growth. Read the full article here.

Important contributions made by microcredit to development practice:

  1. It demonstrated that creditworthiness and collateral do not go hand in hand.
  2. It is possible to use a collectivist ethos to ensure proper usage of the funds and their repayment.

Benefits of microcredit:

  1. Microcredit does make a difference to the ability of poor households to cope with some kinds of adverse shocks and hence can be considered as useful complement to the overall strategy of employment generation and poverty alleviation.
  2. Empowered women: gave them a sense of agency i.e., they have the capability of influencing some of the decisions affecting their lives and livelihoods.

Downside:

  1. Because of close supervision involved in the management of the loan – disbursal and recovery, the costs are naturally very high which in turn results in a high interest rate.

Caution & conclusion: Microcredit by itself cannot be a substitute for poverty alleviation and growth strategies. The loans advanced are too small to make a big difference in terms of sustained growth and poverty alleviation. For sustained growth and poverty alleviation the answer lies in asset accumulation and employment generation.

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