Micro credit vs. micro grants

Development workers have debated for ever and a day on whether the best method of alleviating the poverty of the absolutely poor and landless is micro credit or a once and for all micro grant.

Historically Sri Lanka’s experience of taking landless peasants from the densely-populated South Western quarter of the island and settling them on newly-cleared jungle land, under irrigation, in the North Central parts of the island, was seen as the way forward.

It was certainly successful, as is proved by the thriving population and fertile agriculture being carried out today in Sri Lanka’s rice bowl. But it was very expensive, heavily subsidised with the settlers being provided with homesteads, cattle and basic agricultural equipment and inputs. Further there was no charge for the irrigated water.

This was no one-off micro grant – the process had to be sustained by virtual continuous subsidies, including guaranteed prices for the purchase of paddy.

Land area was also limited and the ability of subsistence agriculture to support large families after the infant mortality reduced and general health and nutrition condition of the population improved after malaria was brought under control and basic health care and education was provided free of charge.

So micro land grants, free irrigation and heavy subsidies were the way to go and it worked. But it was not sustainable in the context of availability of land and budget deficits to finance the subsidies.

Co-operative movement

A parallel development was also taking place at around the same time with the co-operative movement being introduced into Sri Lanka. Co-operative Rural Banks were introduced to promote savings among members and began a small loan scheme, to support the standard of living of the borrowers and also what was then called cottage industries to fight the curse of rural indebtedness to the usurious village money lender.

Primarily these were traditional crafts or service providers in the community who needed to raise operating capital and found the Co-operative Rural Bank a more reasonable affordable alternative source of funds to the usurious village money lender or the pawn broker.

The first Co-operative Rural Bank opened its doors in Menikhinna in the Kandy District in the eary1900.With the co-operative movement being allowed to run autonomously with the light hand of the State in a regulatory mode, the movement spread rapidly to all parts of the island.

Leading and respected members of the community were involved in developing the co-operative movement. However in the early 1960s the autonomy of the movement was negatively affected by the Commissioner of Co-operative Development being given enhanced discretionary powers over the co-operatives by an amendment to the law.

The increased politicisation of the administrative machinery of the Government led to unprecedented political interference in the co-operatives and resultant corruption, nepotism became rampant and decent citizens refused to get involved leaving the field to political stooges. This is the sad story of development in many fields.

While the Co-operative Rural Banks paid an important role in poverty alleviation, it is debateable whether their target was the absolute poor and marginalised or the more well off members of the community. However the importance of the Co-operative Rural Bank as a secure place where the poor could save money securely in the community itself and raise a loan in an emergency or for economic activity should be noted.

Fortunately around the time the co-operative movement was losing its credibility and the unavailability of a secure institution to save money and draw emergency loans or funding for economic activity was becoming an issue, two parallel developments took place.

State-owned banks went on a huge binge of opening branches and one of them the National Savings Bank, the successor to the Post Office Savings Bank, aggressively canvassed the opening of savings accounts among the rural and urban poor.

Again, whether it was the financially better off members of the community who engaged with these institutions is the issue, rather than the poor and marginalised. I recall one rural farmer telling me that he felt challenged by the need of getting passed the armed security guard at his local branch of the State bank to get inside!

Micro finance

The other parallel development was the emergence of non government institutions into the area of micro finance. These interventions were based on the highly successful Grameen Bank intervention by Prof. Yunus in Bangladesh. It was based on collateral free, group lending with inter se guarantees and market rates on interest.

Women basket weavers living in poor communities around Chittagong University, where Prof. Yunus was teaching economics, were borrowing operating finance from uncurious village money lenders and this left them hardly any profit and the end when they marketed their produce.

Prof. Yunus advanced them the cash to buy raw material, at the going commercial rate of interest, far below the local money lenders’ usurious rates, and the women were able to repay the loan to the Prof. after making a much better profit.

Instead of collateral, the security for the individual loans was the group guarantee, the small group of basket weavers provided the certainty that they would not let a member default, and in the event of a default, due to death, sickness or such economic shock, the others would contribute and support the defaulting borrower.

Sri Lanka

In Sri Lanka the community development organisation Sarvodaya was the pioneer in setting up such a savings and credit movement for the poor and marginalised members of the communities they worked in. International donor agencies both Government and private supported this initiative and in time it developed into an organisation called Sarvodaya SEEDS. Today it is registered as a finance company.}

Other smaller initiatives of this nature were also being developed in various parts of Sri Lanka. The other Government-led initiative resulted from the expansion of vocational and technical training in the late 1970s by the expansion of the National Apprentice Board (NAB), the National Youth Services Council (NYSC) and other vocational and technical training institutes.

When the output of these programmes reached the market, the economy had not expanded quickly enough to absorb their skills. It was only when the Accelerated Michaela Development Scheme, the housing development programs and foreign employment in west Asia, hit full pace were they absorbed fully.

In the interim, it was decided to provide to those who interested, among these skilled trainees with funding to start up their own small scale service businesses. The National Youth Services Savings and Credit Co-operative (NYSCO) was begun with this idea, skilled youth invested in shares in NYSCO and they could borrow in proportion to their investment, on a collateral free, inter se guarantee provided by other members.

Loans were also provided to purchase a basic tool ticket, which was an attraction for contractors to employ them. For those who wanted to start an enterprise, with the assistance of the International Labour Organization (ILO), the Small Scale Enterprise Development Division (SSED) of the Ministry of Youth Affairs and Employment was set up to provide business training based on the highly successful model of ‘Start Your Business’ based on a program conducted by Sweden’s Chamber of Commerce for their members and promoted worldwide by ILO.

Seeing the success of these initiatives, the Central Bank of Sri Lanka also started the Isuzu program funded by the Japanese Government, small groups taking small loans for economic activity through collateral free inter se guarantees.

Janasaviya

The next big initiative was the poverty alleviation project of the Janasaviya Trust Fund, a multipronged integrated approach to poverty alleviation through, community infrastructure projects selected by the community, implemented by community participation with a cost contribution, a nutrition intervention, a micro credit facility and a community mobilisation fund.

This was implemented through partner organisations in the community. Over 100 community organisations which had no previous experience in micro credit were inducted into the field through this initiative. This was probably the largest expansion of micro credit ever.

At this same time, the Janasaviya Program of the Government was launched, which was designed to give a poor family a monthly grant, for a fixed period, to held them to graduate out of poverty.

This program reflected the argument that microcredit is no panacea to an extremely poor family, which are thereby being put under a debt burden, out of which they cannot escape, and that initially a micro grant will help them more. This same concept was carried through into the Samurdhi program, but there was no time limit for the micro grant, it was open ended.

One-off micro grants

A recent study by Esther Duflo an economist at the Massachusetts Institute of Technology, presented at Harvard University, seemed to strengthen the argument for one-off micro grants rather than micro credit.

Duflo evaluated a project implemented in the India state of West Bengal by an Indian micro finance institution called Bandhan. Bandhan implemented a program designed by BRAC of Bangladesh, working with families living in extreme penury. Bandhan gave each of them a small productive asset – a cow, a couple of goats or some chickens.

It also provided a small stipend to reduce the temptation to eat or sell the asset immediately, as well as weekly training sessions to teach them how to tend to animals and manage their households.

Bandhan hoped that there would be a small increase income from selling the products of farm animals provided, and that people would become more adept at managing their own finances.

In fact Duflo’s research showed the results were much more dramatic. Well after the financial help and the handholding had stopped, the families of those who had been randomly chosen for the Bandhan program were eating 15% more, earning 20% more each month and skipping fewer meals than people in a comparative group. They were also saving more.

The effects were so large and persistent that they could not be attributed only to the direct effects of the grants; people could not have sold enough milk, eggs or meat to explain the income gains. So what was the real reason?

Duflo’s research showed that the recipients worked 28% more hours; mostly on activities not directly related to the assets they were given. The researchers found that the beneficiaries’ mental health improved dramatically, the program had cut the rate of depression sharply.

Duflo argues that the programme provided these extremely poor people with the mental space to think about more than just scraping by or surviving day-to-day. In addition to finding more work on existing activities, like casual agricultural labour, they also started exploring new lines of work.

Duflo reasoned that the absence of hope had helped to keep these people in penury; the Bandhan intervention injected a dose of optimism into their desperate lives.

Providing hope

The idea of providing hope to desperately poor people in order that they can seriously think of working their way out of poverty is not a new idea. Development economists have long surmised that some very poor and marginalised people may remain trapped in poverty because even the largest investments they can make, whether eating a few more calories or working a bit harder on their miniscule businesses, are too small to make a big difference in the economics of their lives.

So getting out of poverty seems to require a quantum leap – vastly more food, a modern piece of equipment or a machine, or an employee, to assist their income generating activity.

A micro grant, properly targeted, effectively monitored and supported with collateral activity, may indeed be more effective than a micro loan in such circumstances.

To succeed with micro credit, the borrowers need a certain level of capacity that the desperately poor may not have. But if the activity is there, even latent, the discipline of micro credit, of the peer pressure of an inter se guarantee, the support provided by the group of borrowers, the absence of collateral will bring in more effective results.

The bottom line for micro grants to be effective, they must be time bound or preferably a one-off, like the Bandhan program. There also must be very effective monitoring and support. The fact is that even micro credit needs this. But in addition micro credit needs some degree of capacity and ability and potential that the desperately poor may not have.

Hopelessness of abject poverty

The hopelessness of abject poverty is a factor to which sufficient attention is not paid in poverty alleviation programmes. It manifests itself in many ways. One is a sort of pathological conservatism and risk averseness where desperately poor people even forgo feasible things they can do with potentially large benefits, for fear of the risks involved which might result in them losing the little resources they already posses and survive on.

For example, in South Asia it has been found that poor people stay on in drought hit villages when the city is just a bus ride away. An experiment in rural Bangladesh provided men with the bus fare to Dhaka, the capital city, from a poor village nearby, at the beginning of the season of low productivity, between planting the new crop and taking in the harvest, during which time there was hardly any economic activity in the village and little to except sit around and do nothing.

The offer of the bus fare, as a micro grant, an amount which was not large and most of the men could have afforded if they were willing to take the risk of spending their own money, led to a 22% point increase in the probability of migration to Dhaka to find temporary work until the harvesting season begins.

The money the migrants sent back led their families’ consumption to soar. Having experienced the $ 100 increase in seasonal consumption per head by their families that the $ 8 micro grant made possible, during an otherwise lean season of penury, half of those offered the bus fare the first time migrated the next year without an inducement of the cash.

Spurring hope

Hope can be spurred by the most surprising things. The Indian law on the Panchayats, the fourth tier of government at the village level, prescribed that compulsorily, women should head the Panchayats in one third of the villages at every election by revolving roster.

After several years had elapsed, research showed that that this legal requirement had resulted in a clear effect on the communities’ attitude to the education of girls.

Previously, in the community studied, prior to the compulsory requirement that the Panchayats be headed by a woman, both parents and children had far more modest education and career goals for girls than for boys.

Girls were expected to get much less schooling, stay at home and do the biding of their in-laws. But within a few years of exposure to a female-headed Panchayat in their village led to a striking degree of convergence between the educational goals and aspirations for sons and daughters.

The opportunity and possibility of their daughter some day in the future actually heading the local Panchayat seemed to have expanded the girls’ and their parents and male siblings sense of a life beyond the traditional domestic drudgery.

It was really worthwhile investing in the education of the daughter – she now had the potential to be the head of the village Panchayat! A classic example of the ‘Law of Unexpected Consequences’ if there was ever one!

It should be noted that a senior British Law Lord has said that “after 30 years on the Bench, the only law that I really believe in is the Law of Unexpected Consequences”!

The debate on whether it is micro credit or micro grants, seems to hinge on the level of capacity of the beneficiaries. If they are desperately poor, then targeted micro grants, one-off and supported by a stipend for a limited time, effective monitoring and training may be best.

But if an income generating activity already exists, a collateral free micro loan, at market rates, compared to the money lenders usurious rates, combined with the support of a peer group and promotion of savings seems the way to go.

The difference between the Bandhan experiment and the Samurdhi scheme is that, while Bandhan was a one-off micro grant, Samurdhi gives a regular monthly payment, without a time limit which creates a dependency and negates self reliance.

(The writer is a lawyer, who has over 30 years experience as a CEO in both government and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)