The 31st G8 summit was held in Scotland sometime in 2005. One of the issues discussed was world poverty. Over 225,000 people took to the street in Edinburgh, calling on the world leaders at the summit to ‘Make Poverty History’. Live 8, a concert organized coinciding with the g8 summit, was a call for attention to end world poverty by the G8. It is said that if top 10 richest people in thw world to distribute their wealth among the people of the world, poverty would be eliminated.
We need to take steps to eliminate poverty, there is no two ways about it. But the question is, what exactly does it mean to eliminate poverty? If we were to take all the money from the wealthiest and give it to the poor, would we have succeeded in the mission? Is elimination of poverty the same as more money to the poor? I think not. It goes much beyond that. We are talking about establishment of a system that ensures the economic independence of the poor, and a sustainance, if not promotion, of their socio-economic position. That makes the whole Robin Hood sytle scheme of wealth distribution a sure recipe for disaster.
I am not saying that aid doesnt help. It most definitely does, but it is not a solution in itself. This is obvious from the fact that despite heavy aid being given to nations in africa and other third world countries, world poverty continues to be a major concern. One of the primary reason for this the reliance on the top-down style of aid distribution. Money is poured into the institutions at the highest level and mechanisms have been developed to let those funds trickle down to the poor and needy. This, obviously, hasnt worked well. There are a many reasons why it hasnt. One being that of corruption, another being that of inaccurate economic models that world well on macro scale but when scaled to microlevels, it simply breaks down and doesnt deliver.
One of the solutions to the problem of diminishing retruns down the bureaucratic model is to start from the bottom itself, i.e. instead of channeling money through large upper level financial institutions, setup shops to deliver the money to the end recipients themselves and eliminate the middleman. Microcredit has been one of the most successful efforts in this direction.
The most amazing thing about microcredit is that it has historically seen one of the highest repayment rates by any standards. Microcredit, as the term implies, involves giving very small amounts of money as loans to the poor and unemployed who are refused loans by the established financial institutions because they are considered ‘unbankable’. These loans are used to generate self-employment and income. Theoretically, this income is to be used to repay the loan; the repayment risk is coupled with the failure rick of the self-employment itself. In order to ensure repayment, the microcredit bank forms ‘solidarity groups’; they are small informal groups (mostly of women from the same village) who meet with the bank representatives weekly to conduct business. Each group takes collective reponsibility for loan repayment that distributes the risk over more than one individual and has resulted in a very high repayment rate.
This finance model has been deployed sucessfully in rural india and has benefitted immensely from this scheme. One of the most widespread microfinancial institution in India, SKS, has till date provided over Rs. 240 crores ($52M) to over 220,000 women in the indian villages with a repayment rate of over 98%.
There is a reason why most of the microcredit schemes have mostly women as clients. The reason simply is that women are better at repaying their loans, and given the women an opportunity is the same as giving the entire family an opportunity. Especially in rural India, among the poor, the man of the household spends all of the money on liquor and gambling. It is exact opposite with the women. Women have been known to be more responsible and utilize the money to give their families a better life and create more opportunities.
One of the expectations of the microcredit scheme was to see the businesses created by the women to grow as their experience and income increase. But in most the places in rural India, this hasnt happened. It was seen that women use the microcredit given to them to start a sucessful busniness and take more loans to expand the business, but only to a certain extend. After that, they continued to borrow money from the microfinancial institution, but used the money to provide a better education for their children. In almost all the areas in India, this has been a consistent tendancy. All the women strive to provide the best education they can afford to their children. It was a side-effect that wasnt expected when the scheme was first introduced, but seems to have achieved a goal higher than expected. Microcredit was designed to alleviate the poor from poverty through opportunity, but it has inadvertedly provided a platform for the poor to empower their future generations in a manner that will provide them with more opportunites than could have been possible otherwise.
Its amazing how far a little help can go. To use the cliched expression, ‘ Give a man a fish, he’ll eat for a day. Teach him how to fish, and he’ll eat for ever’
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