To Microcredit or Not to Microcredit?

There has been a lot of debate recently on the effectiveness of microcredit solutions. Competing theories on international development are not uncommon. Many organizations and individuals have their own unique perspectives and strategies to work toward a shared vision of a world without poverty. So what exactly is microcredit, and what is the debate all about?

Microcredit is the fairly common practice of giving out very small loans to impoverished borrowers who typically do not have access to traditional financial services. Many people have praised microcredit as the most effective way to end poverty and promote entrepreneurship in the developing world. Muhammad Yunus, founder of the Grameen Bank, won the Nobel Peace Prize in 2006 for implementing microcredit programs in Bangladesh. Following his success, many organizations quickly adopted the microcredit method.

FXB took a different approach.

Seen as radical at the time, our founder Albina Du Boisrouvray rejected the microcredit model and focused instead on creating an integrated methodology that would address people’s basic human needs, such as access to running water, food and shelter. She did not see microcredit as the solution for all, and particularly not for the ultra-poor who do not have the means to pay back loans.

FXB believes that microcredit is extremely effective for people living just under the poverty line. However, we also believe there is work that must come before microcredit to lift people out of extreme poverty—defined as living on less than $1.25 per day. Using the FXBVillage methodology, we aim to fix the root of the problem rather than use money to produce a quick but ultimately temporary fix.

When deployed responsibly, microcredit can be effective in promoting sustainable businesses, but the foundation needs to be laid before it can be successful. That’s why, during the first year of our program, we set out to simultaneously tackle the five drivers of poverty: health, business, education, food and housing. As a pioneer of this approach for the past 26 years, we are so happy that recent studies support our belief that a multi-pronged approach yields far better results than microcredit programs alone. At FXB, we only introduce microcredit as an option once we feel individuals’ basic human needs have been met and they have financial stability to repay the loans.

One of the biggest critiques of microcredit is the high interest rates, which often are similar to loan shark rates. This is another reason why introducing microcredit during initial stages of international development work can be dangerous. At this point, most families will not yet have established a sustainable income to be able to start making payments on their loans. As an alternative, we provide in-kind grants to families to support an Income Generating Activity. With this money, participants can buy all of the materials necessary to start their own business. Once a week, a member of the FXB team will visit participants to help with any problems that arise and provide ongoing business training.

In an FXBVillage, only after the first year (i.e, once participants have a self-sustaining business) are microcredit plans introduced. It is essential that participants are coached in “microcredit education” and have reasonable interest rates below 18% before microcredit can be accessed.

Microcredit shouldn’t be viewed as a one-stop solution for poverty–or completely dismissed as an ineffective approach. It is one of the many steps in a complicated journey to breaking the cycle of poverty.

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