ABSTRACT
Providing small amounts of credit at a heavily subsidized rate of interest to rural poor farmers has been put forward as a policy for poverty reduction. However, established financial institutions have failed to offer this service in many developing countries (Adams, Graham, and Pischke 1984; Hoff and Stiglitz 1990). Many of the earlier state-driven financial programmes had weak incentive structures, were heavily bureaucratic, politicized and wrongly chosen (Adams, Graham, and Pischke 1984; Sobhan 1998; Bastelaer 2000). The bureaucrats and local wealthy and powerful elites siphoned off subsidized aid money meant for the poor (Adams and Vogel 1986; McGregor 1988). Unlike in industrial economies, the most economically disadvantaged and vulnerable people in developing countries often do not have access to financial organizations and are regarded as credit ineligible because they cannot put up the collateral that is acceptable to formal banking organizations. Dr Muhammad Yunus first launched a systematic ‘group-based’1 microcredit programme in Bangladesh through the Grameen Bank (GB) in the mid-1970s in reaction to these
shortcomings of the formal banking systems and to alter the lives of the world’s poorest. The bank earned an almost ‘mythical reputation’ among aid donors and the policymakers as a panacea for alleviating poverty, particularly among women. In the 1990s, the World Bank and other donor agencies indeed touted the microcredit programme as a central policy intervention for poverty alleviation that helps the poor’s access to financial services and contributes to gender empowerment in developing countries (Binswanger and Landell-Mills 1995; Mayoux 2001, 2002).
