Microcredit was pioneered in Bangladesh by Muhammad Yunus in the 1980s as a means to address extreme poverty. Encouraged by the growth of microcredit into a large-scale financial-services industry, Nobel Prize winner Yunus argued that “‘every single human being, even one barefoot and begging in the street, is a potential entrepreneur.”
That logic was accepted by the World Bank, the International Monetary Fund, the Organisation for Economic Co-operation and Development as well as private-sector banks.
In the case of Rwanda, the country’s post-genocide development plan laid down in 2000 targeted the creation of an entrepreneurial economy built on small and medium-sized businesses by 2020.
The aim was for Rwanda to become an “Asian Tiger”, a middle-income country. Now, Rwanda is still a “least developed country” as measured by the United Nations. The government and many people in Rwanda, Poole notes, have followed the prescription given the major development institutions, and in terms of incomes, considerable progress has been made, albeit from a very low starting point.
Yet the vision has failed to become a reality.
- As Poole writes, Rwanda’s economy remains dominated by informal microenterprises, which are often simply workers struggling to make ends meet on their own account, whilst being supported by unpaid family workers.
- The truth is that Rwandans are no more likely than anyone else to succeed in business. Poole bases his work on in-depth interviews with 21 aspiring Rwandan entrepreneurs. There was, writes Poole, “no pre-existing massive reservoir of entrepreneurs-in-waiting that could be called forth, at will, by government policy.”
Profit over development
Most people in Western countries are not entrepreneurs and have no wish to become one. The skill set needed is diverse and ever-changing, the levels of persistence required often enormous. Most of those who try to start a business fail. Yet the myth that people in developing countries are all potential entrepreneurs has held a tenacious grip.
Meanwhile microcredit, in Rwanda and many other parts of Africa, has lost its original aim of contributing to economic development and become simply a license to lend money to the poor at high interest rates.
- This is despite the fact that most robust statistical evidence does not support the notion that microcredit helps in tackling poverty – and among the very poorest is in fact damaging.
- The result is individuals who have large debts used to fund businesses which had little prospect of succeeding – with the collateral which they used to secure the credit now lost.
- “Having failed to catalyse entrepreneurial development,” Poole writes, “one might be forgiven for wondering why microcredit continues to persist at all.”
The reason, of course, is that it’s a hugely profitable industry.
Poole calculates that microcredit providers may have earned about $37bn in 2020 from the globe’s poorest communities.
If the book has a weakness, it is the relative lack of attention given to the role of savings and insurance in promoting small-business growth.
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The claims made for microcredit are accurately debunked, but insurance and savings are not simply user-friendly padding on a microcredit portfolio. Both insurance and savings are much less profitable than microcredit, but they have historically been associated with economic growth.
The dangers that Rwanda’s experience highlights are clear. “Other low-income countries in Africa that might be contemplating following the same path as Rwanda should carefully consider the lessons,” Poole says. Otherwise, he writes, the chances are that they will experience similar outcomes.
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