The focus of micro-credit has been the alleviation of immediate poverty.
1. Introduction Micro-credit has often been used as a poverty alleviation strategy. However, there is little evidence to suggest that micro-credit alone can promote economic activities because micro-credit does not teach anything by itself (Brett 2006; Mayoux 1999; Sievers & Vandenberg 2007). Mistakenly, the focus of micro-credit has been the alleviation of immediate poverty, rather than the development of economic activity that would provide a long term solution. Paraphrasing the age old saying, “Give a man a fish and you feed him for a day, teach him to fish and you will feed him for a life time” microcredit enables the fisherman to buy a net, but in many cases does nothing to ensure that he knows how to use it to benefit his family and the community. If the borrower doesn’t know how to use the net, he will return to his old way of doing things – but with the added burden of having to pay back the debt. Given the state of extreme poverty experienced by the vast majority of the population in developing countries, borrowed money is often used for purposes other than creating the foundations for a sustainable economic growth. Typical examples of how micro-credit is generally used include covering funeral costs, buying food, medicines, and other similarly important necessities. The main problem that derives from using loans in this way is that apart from not improving living conditions in a sustainable manner, borrowers are also exposed to the risk of over-indebtedness, with its subsequent human and social implications. On the contrary, using microloans for the development of entrepreneurial activities can help achieving a sustainable elevation from extreme poverty (GEM 2005; Baumol 1996). The World Bank suggests that micro-credit as part of an entrepreneurial development approach that also focuses on education, skills improvements, and innovation (Acs & Virgill 2010) can indeed have a lasting effect on economic development and the reduction of poverty. This paper responds to recent calls for more studies to understand micro-credit and its effects on enterprise development for people living in extreme poverty. It is our hope that this study will not only stimulate future research, but also suggest new ideas and structures for development agencies and governments to further improve entrepreneurial development programs. We asked the question: What are the factors needed for the successful implementation of micro-credit in developing entrepreneurs in desperate poverty settings? Given the research context, the term micro-credit in this
paper refers to the loaning of small sums of money to the poor for the establishment of micro-enterprises, without traditional collateral (Charitonenko & Campion 2003; Mwenda & Muuka 2004). With regard to entrepreneurship the definition by Hisrich and Peters is used, which allows for a wide range of cultural contexts and stages of development (Acs & Virgill 2010) describing entrepreneurship as: “the process of creating something new with value by devoting the necessary time and effort, assuming the accompanying financial, psychic and social risks and receiving the resulting rewards of money and personal satisfaction and independence” (1998:9). This study considers a sample of survival entrepreneurs who benefited from the delivery of micro-credit to help them take down one of the main barriers to entrepreneurial activity (i.e. access to finance). The investigation also reports the importance of gradually developing an appropriate entity, rooted in the local community, to deliver services in a socially responsible manner.
2. Background Literature The terms micro-credit and micro-finance are often used interchangeably. Micro-credit focuses on overcoming the structural barriers to the poor accessing credit. These barriers include: lack of information, lack of collateral, high cost, high risk and systemic market bias against the poor. Micro– finance on the other hand can be defined as a development approach that provides, credit, savings and insurance services (Elahi & Rahman 2006). When exploring the role of micro-credit it is important to understand the population served. Particularly in Africa, many countries have 50% or more of their populations below the $1.25 a day poverty line (World Bank 2010), there is no significant middle class to service, illiteracy rates are often high, infrastructure inadequate, and the health of the population is plagued by diseases no longer existent in the developed world. While the word micro-credit did not exist before the 1970s, it has now become a ‘buzz’ word often simplistically seen as the answer to all development issues. Some of the conflicting findings concerning the impact of micro-credit may reflect not a weakness in the idea, but in the delivery mode. Three different types of entities generally provide micro-credit to the poor: formal (i.e. banks) and informal (i.e. money lenders) profit-oriented institutions; development banks and semiformal institutions, such as NGOs, specialized in the offering of preferential loans; and community development initiatives. Issues arising from lending practices are summarised in Table 1.
Micro-Credit is Necessary but Not Sufficient for Entrepreneurs in Desperate Poverty • 17