Micro Credit Programs in Ethiopia

Green Washing or Environmentally Sustainable Development

By Desta Asayehgn, (Ph.D)
Dec. 14 2009

Part I

In an era of unprecedented world-wide economic growth, it is interesting to note that the richest fifth of the world’s people consume 86 percent of all goods and services while about a fifth of the world’s poor population (1.2 billion people) still live on less than US $1 a day and almost half of the world’s population live on less than US $2 a day (UNDP 2002, Gibson, 2009). Poverty is not simply having a very low income. It is a multifaceted phenomenon. In addition to low income, poor people also suffer from illiteracy, unsafe drinking water, and lack of access to basic health services. They live in remote, resource-poor areas, and atrocious slums. Frequently encountered with their vulnerability, the “chronically poor are unable to develop their personal capabilities or provide a good start in life for their children, and often die prematurely of preventable causes.” (Alston and Shepherd 2008-09.)

With the hastening of the global poverty crisis and the absence of an adequate social safety net for those marginalized and vulnerable sections of society in the less developed countries, a number of researchers have moved beyond the relentless pursuit of short-term toward long-term anti-poverty, environmentally sustainable paradigms to assist chronically poor sectors of society. Though a remarkably polarizing issue, in the last three decades microcredit programs have been made available to the chronically poor as a viable option to involve them in the formal economic sector. It is assumed that the disadvantaged groups will become productive members of society if they involve themselves in small businesses that may contribute to powerful changes within their lives. (See Microcredit Summit, 1997, Fisher and Sriram, 2002).

In formal financial markets, the poor are excluded from establishing their own small businesses because they are not recognized as being credit-worthy, i.e. unable to save, lacking verifiable credit history or goods to offer as collateral to secure loans, forcing them to turn to traditional money lenders. (See for example, Zamperetti and Franca Dalla Costa, 2008.) Recognizing the needs, capacity, and the talents of the poor to repay the loans, micro lending programs are loans extended to group members rather than to individuals. In view of the contingent group loan approach, it is generally assumed that group members would have an incentive to monitor their progress and that this would lead to a greater rate of repayment of their loans since each borrower’s creditworthiness would be a factor in the overall creditworthiness of the group (Fisher and Sriram, 2002; Stiglitz, 1990; Varian, 1990; and Becker, 1991). In short, the success of group lending creates positive incentives for members to repay because in case of default, no member of the group will receive future loans. For prompt repayment, there is repeat lending to the group. In group lending, the probability of moral hazard is largely reduced because all borrowers are members of the group and subject to peer pressure, group dynamics, cohesiveness, and the ultimate success of each member of the group (Ajit, A; Sunil, R; and Raman k. R, 2006).


In simple terms, microcredit refers to the process of lending small amounts of seed money to groups rather than to one person, without collateral, to help poor people to establish their own business. Microcredit, especially designed for eco-entrepreneurship, encourages innovation in rural and urban areas to produce environmentally friendly products for the marketplace. Thus, the philosophy of demand-led microcredit finance visualizes the poor not as objects of charity but as socially productive persons. The rationale and objective of advancing micro-loans to the ultra poor is to improve their liquidity constraints, create employment opportunities, and induce sustainable incomes by engaging the poor in the reinvention of everything from the bottom-up, with limited top-down directives. Therefore, the loans accorded to the poor are not only bankable but it is assumed that micro enterprise activities will eradicate poverty and foster sustainable development. As argued by Doocy et al, “Microfinance is a logical approach to development because it functions at the grassroots level, can be sustainable, is capable of involving large segments of the population, and builds both human and productive capacity (Summer, 2005)." Stated differently, microcredit is an investment in people, the poor and their abilities, which sharpens entrepreneurial initiatives, and strengthens developing countries’ economies. Microcredit is a vital tool for economic development because it enables the poor to build assets, increase income, and reach self-sufficiency. Thus, microcredit not only delivers macro benefits but creates a silent revolution in poverty-stricken rural areas (Sharma, 2005).

As a result, in the 1990s the commercialization of microcredit continued to gain force as one of the key tools of development. The World Bank, the U.N. Capital Development Fund, the European Bank for Reconstruction and Development have created full-scale movements to promote the availability of microcredit programs to a number of developing countries. Based on anecdotal assessment of the impact of microcredit as a financial instrument, the United Nations declared 2005 as the International Year of Microcredit. Realizing that chronically poor people merit the greatest international attention, using the year 1990 as a baseline, the United Nations has advocated the reduction of both extreme poverty and hunger by half or more by the year 2015 of those whose income is below US $1 per person/day.

The Millennium Development Goals (MDGs) are seen by many as being overly modest. However, it needs to be mentioned in passing that this assessment omits or glosses over some of the greatest challenges to lowering the poverty rate. For example, one of the most serious issues omitted in the report is the fact that it failed to establish that it is the lack of access to land ownership (micro-landowning program) that has caused many people to remain in poverty, and that microcredit loans have accomplished very little in solving the land ownership systems in developing countries (Prosterman, R. April 2005). Instead, the promotion of microcredit ventures in developing countries have the potential to create private groups (cutthroat money-lenders ), which have vested interests in perpetuating the prevailing poverty situation ( Elahi, K.Q. and Danopoulos , C. P. (2004). Microcredit participants end up borrowing more from other non-institutional sources (double-dipping) to reduce their indebtedness, which is a paradox. As it stands now, instead of reaching the core poor, microcredit improves incomes of the better-off poor. It is more beneficial to borrowers living above the poverty line than to borrowers living below the poverty (Hume and Mosley, 1996). As succinctly argued by Kamani, “…although microcredit yields some noneconomic benefits, it does not significantly alleviate poverty. Indeed, in some instances microcredit makes life at the bottom of the pyramid worse (2007).” Read More