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29 Dec 2004: LA Times – Credit's Lifting Ability
28 Dec 2004: The Financial Times – A Little Credit Can Go Far
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LA Times -- 29 December 2004
Editorial: Credit's Lifting Ability

Especially this time of year, many Americans bemoan the fact that they are drowning in debt, the victims of too much available credit. If only people in the developing world could be so lucky. One of the most formidable roadblocks to escaping poverty in much of the world is the lack of credit.

Even the smallest loans can make a huge difference in places where people struggle to get by on a few dollars a day. A loan of as little as $100 could help a woman start a business that would radically improve her family's living standards. There are more than 50 million so-called microcredit (or microfinance, the broader term) clients around the world who have been given such loans, typically by enterprises that have stepped in where traditional banks haven't dared to go. Until recently, that is.

Astonished by poor borrowers' high repayment rates in many countries, even the likes of Citibank and Deutsche Bank are becoming involved. Many nations of South Asia so devastated by this week's tsunami have been models for microfinance's promise. Secretary of State Colin Powell recently promoted the notion that microfinance programs could stimulate development across the Middle East as well, and the United Nations has proclaimed 2005 the year of microcredit. Doing well by doing good — and packaging it in capitalist-friendly terms — has never seemed more attractive.

But trendiness shouldn't be allowed to subvert this proven development strategy. The danger is that well-meaning donors and opportunistic governments will hijack market-based microfinance programs and turn them into charitable handout schemes, thereby destroying their credibility. Nancy Barry, president of the respected Women's World Banking network, based in New York, wonders whether the U.N.'s designation for 2005 can make a difference. "Only if the powerbrokers get with the program and stay with it," she concludes warily.

The world's poor don't need to be feted by the U.N.; they need access to credit far into the foreseeable future.

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The Financial Times -- 28 December 2004
A little credit can go far
By Matthew Bishop

On Tuesday a coalition of development charities delivered an open letter to Tony Blair, urging him to use Britain's chairmanship next year of the Group of Eight leading industrial nations to fight poverty worldwide. The campaigners have chosen their moment well. Even without their intervention, the fight against poverty looks set to be near the top of the global policymaking agenda in 2005.

January will bring a special United Nations report on how close we are to reaching the UN's Millennium Development Goals, which include halving poverty worldwide by 2015. In September, this will be discussed by world leaders in a special session of the UN General Assembly. In March, the Commission for Africa established by Mr Blair is expected to outline proposals for reviving that impoverished continent. In July, a G8 summit will focus on Africa's problems. In December, a deal to liberalise global trade further, which would certainly benefit poorer countries, may be struck at the World Trade Organisation meeting in Hong Kong.

And last, but by no means least, the UN has designated 2005 the International Year of Microcredit, in a push to promote access to finance for the poor as a way to reduce poverty.

Seasoned observers of the UN's themed years may be sceptical. They have been unimpressed by such past efforts as the Year of Eco-tourism, the Year of Dialogue Among Civilisations and the Year for Mountains (slogan: "We are all mountain people").

But there are many reasons to hope the Year of Microcredit will buck this unhappy trend. For the counter-intuitive notion that making it easier for poor people to get into debt can reduce poverty is an idea whose time has surely come. Traditionally, microcredit - small loans to poor people - has been much loved by non-profit campaigners and many on the sentimental left, who wax lyrical about co-operative groups of (typically) Bangladeshi women who borrow $10 to buy a goat and in doing so change their lives.

Yet most world leaders who think about poverty dismiss microcredit as too micro to make much difference. That is a big mistake. One of the the most important questions they should now be asking is: "How can we improve access to finance for poor people?"

Such a question challenges the outdated view of poor people as victims, not as capable people desperate for a chance to help themselves. Studies have found huge, pent-up demand among poor people for affordable financial services of all sorts - not only loans, but also bank accounts, insurance policies and cheap money transfers for migrant workers to send income home. That is not surprising. Just like the wealthy, poor people want somewhere safe to keep what money they have, and they have business ideas that need credit if they are to be pursued.

The idea that poor people remain poor simply because they have no capital is no longer widely believed. Indeed, it has been thoroughly debunked by Hernando de Soto, the Peruvian economist, in his book The Mystery of Capital. He notes that many poor people possess some form of capital, ranging from land and property to skills. What condemns them to remain impoverished is that in poorer countries, this capital is often "dead" in economic terms. It lacks legal protection and can be taken from them. Crucially, it cannot be used as collateral for a loan.

Affordable financial services in poor countries are usually the preserve of the rich elite. Studies suggest that more than 80 per cent of people in poor countries lack access to banking facilities, compared with a nominal percentage in developed countries. When finance is available to the poor, it is usually prohibitively expensive. A recent survey found that in India more than 50 per cent of poor people getting a loan had to pay a bribe. Yet in the few areas where affordable financial services are available to the poor, there tends to be significantly faster economic growth than in comparable communities that lack affordable microfinance.

Policymakers have largely ignored the role of access to finance in development. The UN's "human development index", for example, combines measures of health, education and income per head, but entirely ignores financial development. Yet an increase in the percentage of a country's population with access to financial services may be the best leading indicator that poverty will fall in that country.

A big danger in the coming year is that policymakers will focus exclusively on macro, top-down solutions - debt relief, big infrastructure projects, trade liberalisation. Focusing as well on access to finance for all, may be the best way to ensure that these macro changes benefit the world's poor, not just the poor world's rich elites.

For why is affordable finance in the poor world limited to such noble yet imperfect examples as those loans to Bangladeshi women? Part of the answer is that the poor are largely denied the good government and rule of law that is essential for a financial system to thrive. That denial is the root of much poverty. Yet, happily, the steps needed to improve access to finance - rooting out corruption, establishing enforceable property rights for all, creating an environment in which big and small business alike can thrive - are the same steps that can bring the excluded poor into mainstream society.

Without ending that exclusion, all the macro action in this coming year is unlikely to do more than scratch the surface of global poverty. To succeed, policymakers must think micro.

The writer is business editor of The Economist and a member of the adviser group for the UN International Year of Microcredit.

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Aishwarya Rai

Aishwarya Rai, actress and Year of Microcredit spokesperson
"Throughout my travels, I have learned that we can do much more to help women and children who are economically vulnerable. By giving low-income women access to credit and savings, they can increase their incomes, build assets and better the lives of their families. They are able to spend their money on what is important to them: medical care, better food and education for their children. In my home country of India, I have seen the beauty in empowering women. It is up to us to give them a chance and along with the United Nations and microfinance we are doing just that."
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