Micro-credit is a coping device. It is a big help in countries where legal contracts with individual borrowers may not be worth the paper they are written on, where the judicial systems are slow and overburdened, where the poor have little legally acceptable collateral to offer, and where credit history is worthless because no one is recording or disseminating it.However, Mukherjee doesn't think group lending "is the best way".
In such a situation, as Yunus has so successfully demonstrated over the past three decades, creditor rights can be profitably protected by transferring the liability from individual borrowers to a group.
Yunus had to come up with a working model for lending to the poor. Poor across the world tend to be mostly illiterate, because in most countries in the world, getting an education costs money. Even if education is free, food and other needs or not, so poor have to go to work as early in their lives as possible, rather than going to school. Poorly educated people invariably get low paying jobs and that is how poor remain poor throughout.
Poor can be given free or subsidised food, education, training and good job opportunities so that they come out of their current state. But this calls for lots of spending, very active Government intervention and sustained monitoring. In the absense of money and a functional Government (example: Bangladesh, India), the next best thing is to work bottom up and provide minimal credit to poor people, educate them of the need to pay that money back in small installments, and also provide them guidance, social values etc. Grameen Bank has done this and more. For example, Grameen teaches people to drink clean water and supplies them with Aluminium Sulphate tablets to purify the ground water. Diarrhea, which is a major killer in Bangladesh - more than TB or AIDS or any other (The Week, UK, Oct 16 issue) - does not impact the Grameen members as much.
Grameen teaches its women members family planning and use of contraceptive devices, dignity for women, transfer of property for women (only such families are given the housing loan), and general healthcare and discipline for women etc. In poor countries and poor families, women empowerment is the best way of providing nutrition for the children and education for the children. More of Grameen member's children go to school than the national average in Bangladesh. That generation is more likely to come out of property, faster.
All these benefits will not be available if, as Mukherjee says, countries take a relook at their "contract laws" and banks start lending only to individuals. Most western writers do not understand poverty, or ways of resolving poverty. They think if laws are framed whereby "contracts are respected" and "creditor rights" are firmly established.
The trouble is in looking at micro credit as purely businesses run by cold individuals. Yunus and a few others have to sell micro credit as "sustainable business" because otherwise, the scheme will be dismissed as dole by investors and lenders. Micro credit is a sustainable business, but it can be made a sustainable business only by organizations which are sympathetic to the poor and work towards uplifting the poor. After all, the poor are their customers, and in case of Grameen, the poor are also 94% shareholders of the company.
Asian countries have to work towards improving the laws and law enforcement. But that will not solve the problem of poor people. Micro credit and responsible social organizations that offer micro credit can at least go far in achieving poverty eradication and wealth creation amongst the currently poor.
Muhammad Yunus does not seem to be proposing anything against Adam Smith. He seems to have simply enhanced the theory to conditions prevalent in his country. Others can take the same model and tweak it to their needs.
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