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The development equation: Microcredit + basic social services

Microcredit is the extension of small loans to groups of poor people, especially women, for the purpose of investing in self-employment programmes1. It is a way of improving the earning capacity and therefore the standard of living of the poor. Nevertheless, a poor woman who generates income through microcredit but who does not have adequate access to health care for herself and her family, who lacks essential information about health and nutrition and who is unable to send her children to school is still living in poverty.

There is a greater reduction in poverty when microcredit programmes are combined with increased access to basic social services than when the programmes focus on credit alone.

When microcredit is linked with access to basic social services and key social development messages, the health and nutrition of borrowers' children -- particularly girls -- improves; school enrolment increases; safe water and sanitation use broadens. This combined approach, therefore, is an important strategy for achieving the year 2000 goals for children. Microcredit also empowers women, by enabling them to make economic decisions and become the source of increased household income. Experience shows that with the empowerment of women come significant improvements in children's survival rates, health, nutrition and development.

Successful experiences with microcredit involve a combination of credit and savings. When borrowers are obliged to set aside a minimum amount of savings on a weekly or a monthly basis, this savings component reinforces the discipline of the borrower to make regular repayments of the borrowed money. It also creates a sense of 'ownership' on the part of the borrowers that is vital in ensuring the scheme's sustainability.

Group-based lending has helped marginalized groups gain access to credit. Because the poor lack material collateral, group-based lending allows for the sharing of risks. The group collectively works to ensure that all loans are repaid on time so that other members of the group are not deprived of credit if a member defaults. This creates a sense of joint responsibility and generates peer pressure to comply with the repayment schedule.

Experience with microcredit has shown that the poor can be disciplined borrowers and savers, able to repay loans on time and to save. If poor families are to pull themselves out of poverty, they need access to the successive loans that microcredit programmes provide.

1 'Microfinance' better describes the activities involved, which include credit, savings and capacity-building. However, because of its general acceptance, the term 'microcredit' is used to cover all these components.

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