Orthodoxy regarding the successful microcredit programmes

Dairy farming with microcredit: ASA Mohammedpur branch

With the exemplary success of Grameen in Bangladesh, and programmes like SEWA in India, BRI in Indonesia, K-REP in Kenya, and Banco-sol in Bolivia, the microcredit has been recognised as a poor/women friendly development intervention. The 1997 Microcredit Summit attempted to get the commitment of various multilateral institutions, NGOs and governments to the goal of bringing 100 million poor families under microcredit. An important challenge facing microcredit movement is to learn how to make such programmes expand fast, while still maintaining the current performance and future expectations according to desired norms.

The expansions of successful micro-credit programmes have attracted widespread research attention. This has generated a consensus that takes following factors to be the sine qua non of successful microcredit programmes. (Adams, 1992; Rhyne and Rotblott, 1994, Jain, 1996; Hulme and Mosley, 1996).

Building local people's organisation: The local organisation of borrowers is believed to play a critical role in approving the loans and ensuring recoveries. This forum helps the members to pool the information that they have regarding each other when making credit decisions. This reduces information asymmetry, a major cause of high default of small credit. The local organisation is also expected to become the centre of various development activities that are promoted by the credit programme.

Most successful credit programmes have developed elaborate mechanisms and processes for the development of local organisation of their members. It typically involves careful selection of members from similar socio-economic category, and their training and conscientisation. Most credit programmes keep a considerable gap between the starting of a local group/ organisation and issuance of the first loan to the members. This is to ensure that the members learn to behave as a group and follow group norms, before being considered eligible for a loan. A significant part of the training of credit programme functionaries, and a major part of initial time spent by them with the borrower members is devoted to this aspect.

Self-management and participation by the borrower members in decision-making: The successful credit programmes have typically followed the policy of involving borrower members in decision-making and management of credit programmes. This reduces the cost of information collection and enforcement of repayment norms, thus keeping the transaction cost within acceptable limit.

Group guarantee as social collateral: The borrowers of microcredit programmes are typically poor people with few assets that could be treated as collateral. It has become a standard practice to obtain joint group guarantee of the repayment of the loan by individual borrowers. To institutionalise this arrangement, the borrowers are organised in small groups, e.g., five members in Grameen Bank, and group guarantee is obtained jointly from all members.

Matching credit policy with members' economic and financial credit needs: It has been argued that what the poor want is an easily accessible, reliable and suitably designed package of financial services, and not necessarily subsidised credit (Adams, Graham and Von Pischke, 1984). It is also recognised that effective and productive use of credit is linked to matching credit with the specific needs of borrower's enterprise. Successful microcredit programmes are expected to study the micro-enterprises of the borrower members to ascertain the exact nature of their credit needs, and design the credit package accordingly (Susan and Rogaly, 1997).

Linkages with overall development activities: Recognising that poverty is an outcome of many inter-linked factors that requires multi-dimensional response, successful credit programmes have attempted to promote different packages of development actions that go beyond the prudent and economic use of credit.

Setting up of a local open platform for transparency in credit transactions
A large microcredit programme requires a large number of borrowers and field functionaries to behave as per stipulated norms. Further, the compliance with the norm should take place as a matter of routine, with built-in control mechanisms, and not through organisationally enforced or supervisory pressure, whose cost keeps rising if activated often.

Lessons for scaling up
Expansion and growth has been an important concern for the managers and analysts of development programmes for some time. The seminal paper of Korten (Korten, 1980), that saw programme implementation as a learning process and programme expansion as the sequence of model building and its replication, has been the dominant analytical framework in this domain. Korten's views have informed the views of most other scholars and practitioners, who analysed the development programmes and their growth (Paul, 1982; Abed, 1986; Uvin, 1995). Although later on Uvin (Op cit.) had interpreted the term scaling up more widely to incorporate various methods to enhance the impact of a programme, including influencing others to adopt similar programmes and integration of related programmes, the internal growth of a programme was still seen through the model-building and replication framework suggested by Korten.

Pankaj S Jain is an independent Indian researcher and development consultant.