Science - October 7, 2009

Micro-credit needs more down-to-earth measures

When micro-credit fails to reach the poorest in Ethiopia, small banks have to break fresh ground.

Farmer in Tigray, Ethiopia
Micro-credit is fast becoming popular in the last few years, including in the Ethiopian countryside. With success. However, the poorest farmers in dry areas have been left out of the picture. Smaller banks could improve the situation by modifying their loans, concludes economist Guush Berhane in his thesis, with which he graduated from Agriculture Economics and Rural Policy at the end of September.
Commercial banks are usually not interested in lending money to the poor because of lack of collateral. Institutions which offer micro-credit in developing countries resolve this by using group pressure. They lend small amounts of money to groups of farmers on the condition that when one member of the group fails to repay the loan, the other members of the group would come to the rescue. If payment is not made, the group - and sometimes even the entire village - would not get any more loans. In theory, credit is accessible for everyone, even the poorest. In practice, however, this is not the case, concludes Berhane after researching into four hundred households in Tigray in the Ethiopian countryside. It seems that in the dry areas, where farmers are at the mercy of their rain-dependent agriculture, the system of group loans is ineffective. Poor farmers shy away from taking part in a group loan out of fear for bad harvests after a drought, because no-one in the group would be able to repay the loan, as every farmer would be affected by the drought.
Those who do have a loan seem to have benefitted from it. They earn more and can improve their houses, a good measurement of well-being in Ethiopia.
To reach more people, loans have to be modified to suit the individual situation of the borrower, suggests Berhane. An example is to offer a separate loan in dry areas which, in the event of a bad harvest as a result of drought, can be repaid in the following year. A special loan for multiple-year investments or one especially for a single purchase of fertilizers could do the trick. Only one type of group loan is available currently, and Berhane feels that the institutions which offer micro-credit could explore more avenues with very little extra cost. / Joris Tielens