Poverty Alleviation through Micro-Credit

Most of you probably know that I'm in grad school right now at Baylor seeking a Master of Science in Economics degree. I started the program this past January and will graduate next May. There are only 11 students and I am the only one who chose to write a thesis (I guess the others knew better?). Anyways, I have a very love/hate relationship with my thesis because it is a really great experience and I do enjoy it, but it is also the most daunting task I've ever taken on. I recently responded to a call for papers and just received notice that my paper “Micro-Credit and Household Productivity: Evidence from Bangladesh” has been accepted for presentation at the 2008 Baylor Symposium on Faith and Culture, Bottom-up Approaches to Global Poverty to be held October 23-25. So my thesis deadline just got bumped up about seven months meaning this summer will be BUSY.

Since my thesis work (and grad school in general) is dominating my life I thought I'd share what I'm working on. My main interest is poverty alleviation in developing countries and my specific area of research is micro-credit. The basic idea of micro-credit is that many of the rural poor don't lack the skills to lift themselves out of poverty, they just lack the start-up cash to get their own small business off the ground. For instance, if a woman in a rural village is talented at basket-weaving but she can't afford the supplies to make her first basket... she is stuck. Traditional banks don't lend to the poor (because of lack of collateral) and independent money-lenders are likely to scam poor borrowers into interest rates of 200-400%. So, the idea of micro-credit programs is to offer very small loans to the poor using a group-based lending model that substitutes peer pressure for collateral. The borrowers use this money to start or expand their business (usually selling commodities or farming) and are able to earn enough income to provide for their family and pay back the loan (micro-credit programs boast a payback rate of over 90%!).

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Here is an excerpt from my paper proposal:

"Micro-credit programs provide small amounts of credit to the poor to aid their self-employment activities or small enterprise involvement. This model for poverty reduction was pioneered by Nobel Peace Prize recipient Mohammuad Yunus and his infamous Grameen Bank and has since inspired the inception of over 3,300 micro-credit programs reaching over 133 million clients, 70% of whom lived on less than US$1 a day. Although these programs may vary in nature, they all strive to lift clients (and their families) out of poverty by providing them access to the credit they need to establish or expand a small, self-sustaining business. Previous research has shown that micro-credit is successful in improving the welfare of borrowing households by increasing and smoothing their consumption, improving the health status of their children, empowering their women, and improving their poverty status. This paper will test the hypothesis that micro-credit also improves the welfare of borrowing households by raising their productivity. An increase in the productivity of a household means that the other welfare improvements that result from the participation in a micro-credit program can be sustained by that household over the long term."