From Food First's latest newsletter:

On-line Microcredit
A Double-Edged sword

Microcredit operations have been given a publicity boost as of late. Beginning with the 2007 Nobel Peace Prize Award to Bangladesh ’s Mohammed Yunus, founder of the Grameen Bank and one of the first bankers to recognize the potential of small loans to local business ventures, microfinance became a household word. Now, with the recent popularity of online lending sites such as Kiva (www.kiva.org) and NamasteDirect (www.namaste-direct.org), even suburban housewives can lend a hand to global poverty alleviation and foster a sense of self-sufficiency in the Global South.

One recent lender on Kiva.org’s online fund manager, Ara Chakrabarti, was motivated to lend directly because, he says, “all it takes is someone to front the capital needed for even the smallest business ventures to become successful.” Spurred by a recent PBS Frontline documentary detailing the success of microcredit operations and praising Kiva for its mission to match individual donors with loan recipients on a personal basis, he decided to join the online network to “teach people how to take a small investment, grow their business and eventually become self-sufficient.”

To some, microcredit sounds like a miraculous panacea to world development. The availability of online lending sites abound, represented by such sites as Nobel winner Yunus’s Grameen Foundation (www.grameenfoundation.org) and Global Giving (www.globalgiving.org). Amidst the popularity and political conversions (Sen. Hilary Clinton speaks frequently about the power of microcredit to “transform lives and revolutionize societies”), a growing number of concerns have been raised about the sustainability of such operations; especially with respect to long-lasting poverty alleviation targeting the world’s poorest.

Microcredit’s critics argue that besides the myriad of problems relating to exorbitant interest rates and hoax financing schemes (in 2002 Kenyan government officials conducted a series of bank foreclosures on the basis of deposit-taking scams), there is a graver issue with the “gospel of small lending.” Economic journalist Gina Neff has been quoted in The Nation saying that “after eight years of borrowing, 55% of Grameen households still aren't able to meet their basic nutritional needs—so many women are using their loans to buy food rather than invest in business.” This brings into question the social mobility of loan recipients, especially the poorest of the poor. Scholars argue that microcredit is more often used by business-owners as a form of disposable income—allowing access to a lump sum of money previously unavailable, rather than being reinvested into the business.

Development expert, Thomas Dichter, has noted “[microcredit clients] are living in economic environments that do not provide them with opportunities, that do not offer them the protections and encouragements of a system of institutions that functions even remotely well,” and are thus only temporarily helped by capital investment. As is so often the case, those who would really benefit from microlending are not in a position to utilize these resources, at least not until the dominant structures of inequality are broken down, and that can only be accomplished through capital-intensive, government-driven development.”