What Makes Microcredit Programmes Effective? Fashionable Fallacies and Workable Realities
IDS Working Paper 177
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There is an influential, orthodox explanation of the success of large scale micro-credit programmes, based particularly on interpretations of the Grameen Bank in Bangladesh. There are three core elements: the alleged importance of strong social bonds among small borrower groups; the notion of substantial borrower participation in management; and the belief in the centrality of charging unsubsidised rates of interest.
While it resonates strongly with fashionable development ideologies, this orthodox explanation does not correspond to the facts. The real explanation lies in careful attention to managerial and strategic 'fundamentals': keeping transactions costs low; matching loan repayment schedules to borrowers' income and savings potentials; finding ways of obtaining good work performance from large and widely dispersed field staff; addressing basic client needs in an efficient way; and, above all, attacking on many fronts the perennial micro-credit problem of borrower default.
Creating and sustaining a strong and distinct organisational culture has been an important means of achieving these goals. The main practical conclusion is that there is more than one route to achieving the core objectives that make micro-credit systems viable.