Microcredit: Exploring the Fight against Poverty Lesson Plan and Outline of Videoconference Series Tuesday, September 30 and Thursday, October 12
“Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Microcredit is one such means. Development from below also serves to advance democracy and human rights. – The Norwegian Nobel Committee, 2006 ”
Introduction: In 2006, Muhammad Yunus 1 and the Grameen Bank won the Nobel Peace Prize for developing a model aimed at lifting millions of people worldwide from poverty: microcredit. Microcredit, the act of providing very small loans to poor or unemployed entrepreneurs, typically serves people in developing countries who do not qualify for a traditional loan. Now with more than 10,000 microcredit lending institutions worldwide, an estimated 16 million people are borrowing loans on this burgeoning system. On Day One of this two-part PULSE series, students will discuss the basic principles of microcredit, including the benefits and disadvantages of the system. Students have the opportunity to debate whether microcredit should be one of the cornerstones in the fight against poverty. Finally, students will be asked to compare and contrast microcredit to the American entrepreneurial culture. During Day Two of the PULSE series, students will meet Matt Flannery 2 face-to-face and delve into the topic of microfinance with one of the world’s leading figures in microcredit today. Overall Objectives: Through the lesson and interaction, students will: Understand the concept of microcredit, how it came about, how it works, and who benefits from it Explore the role of microcredit and microfinance in the fight against poverty Deliberate the pros and cons of microfinance as a leading tool in fighting poverty Familiarize themselves with the growth of microfinance through mathematical exercises Problem-solve on a case-by-case basis for entrepreneurs seeking microcredit loans Engage in discussion with students around the U.S. about the merits of microcredit Engage in high-level discussion about microcredit with Matt Flannery, founder of Kiva.org Making This Lesson Plan Work for You 1 Muhammed Yunis is the author of a book called Banker to the Poor. You and your students may wish to read an excerpt. You can find Chapter Four on-line at this link: http://www.bankertothepoor.com/bankertothepoor/ 2 Matt Flannery is the founder of www.kiva.org , Kiva’s mission is to “connect people through lending for the sake of alleviating poverty ” .
This lesson plan begins by providing teachers and students with a foundation of knowledge to prepare ALL participants for the videoconferences. This section is divided into the following parts: 1. Background on microcredit 2. Case studies of microcredit in practice 3. Introduction to the Grameen Bank and Muhammad Yunus Beyond this foundational component, teachers have the option of using the extension activities, which follow two tracks: 1. Business track – practice writing and evaluating business plans for microcredit 2. Mathematics track – problem-solving with real figures in microcredit These tools will help teachers provide their students with hands-on education appropriate to their class subject and level and transform the lesson on microcredit into a multidisciplinary learning experience. Please note that the content of the videoconferences will focus on the broader social and political issues in microcredit, rather than any of the skills gained while completing the optional business and mathematics exercises. Pre-conference Preparatory Activities for All Participants ACTIVITY ONE: Introduction (30 min) To begin the lesson, provide students with some basic background information on microcredit (complete background found in Appendix 1 ). Explain that there are many different systems for fighting poverty, and microcredit is one that has been gaining ground since the 1980s when Muhammad Yunus founded the Grameen Bank. What is microcredit? Microcredit is a small amount of money loaned to a client by a bank or other institution. Microcredit can be offered, often without collateral, to an individual or through group lending . Group lending, also known as solidarity lending, is a mechanism • that allows a number of individuals to provide collateral or guarantee a loan through a group repayment pledge. The incentive to repay is based on peer pressure; if one person in the group defaults, the other group members make up the payment amount. • Individual lending, in contrast, focuses on one client and does not require other people to provide collateral or guarantee a loan. What is microfinance ?
• Microfinance refers to loans, savings, insurance, transfer services and other financial products targeted at low-income clients. Microcredit, then, is one component within the broader spectrum of microfinance. Source: www.yearofmicrocredit.org Ask students to discuss the following questions: • Based on the definition of microcredit, how do you think this system could help reduce poverty? What are other ways to reduce poverty? • ACTIVITY TWO: Frequently Asked Questions (10-15 min) Refer students to the list of Frequently Asked Questions compiled and answered by the International Year of Microcredit 2005 ( Appendix 2 ). Have them read these in the large group, making sure each point is clear before moving on to the next. ACTIVITY THREE: Homework/Journaling Assignment (20 min) Ask students to write a journal entry in response to the following prompt: Think of a time when you tried to make some money (whether through a lemonade stand, garage sale, small business, or other). Why did you want/need the money? Where did you get the money to buy the raw materials? Was your venture successful? Why or why not? What obstacles can you imagine people in developing countries have to face when they are trying to start their own businesses, and how are those both similar to and different from your own? ACTIVITY FOUR: Case Studies in Microcredit (30-50 min) To familiarize students with the real-world applications of microcredit and the individuals who are involved, tell them they’re going to read stories of beneficiaries. To do this, divide students into groups of 3-4 and give each group a different case study (linked below either from the Kiva.org or Aga Khan Agency). Students should read the case studies in their small groups and then complete the handout in Appendix 4 as a group.
Case studies from Kiva.org borrowers : (This includes a 15-minute video and a brief article, either of which you can use depending on time.) http://www.pbs.org/frontlineworld/stories/uganda601/video_index.html Case studies from Aga Khan Agency for Microcredit: http://www.akdn.org/microfinance/case-studies.html ACTIVITY FIVE: Profile of the Grameen Bank and Muhammad Yunus Screen the following 10-minute piece, a “Portrait of Muhammad Yunus” produced by NobelPrize.org, for all students. Muhammad Yunus in Brief: http://nobelprize.org/mediaplayer/index.php?id=146&view=3 If you have more time, there are other great related videos linked below the video. Afterwards, lead students in discussion: • Why do you think Muhammad Yunus won the Nobel Peace Prize? • Do you agree? Why or why not? • What are your impressions of him and the Grameen Bank? • What were the reactions of his fellow Bangladeshis? • What do you think it takes to make a big positive change in the world? ACTIVITY SIX: Debating the benefits of microcredit Explain to students that while microcredit has been praised throughout much of the world for improving the situations of many poor people, there are also many critics of the system. Divide the class into two groups and explain that one group will look at the benefits of microcredit, while the other will look at microcredit’s shortcomings. Below are two articles that support microcredit as a major tool in fighting poverty: • CommonDreams.org: “Microcredit Best Tool to Fight Poverty” http://www.commondreams.org/archive/2007/10/23/4750/ • New York Times: “How to Fight Poverty: 8 Programs That Work ” http://select.nytimes.com/2006/11/16/opinion/15talkingpoints.html?pag ewanted=3&_r=2&sq=microcredit&st=cse&scp=10 And below are two resources that cast microcredit as overrated in the scheme of fighting global poverty:
• Reuters article on UN Report: “Role of Microcredit in the Eradication of Poverty ” http://www.gdrc.org/icm/reuters.html • Foreign Policy in Focus: “Microcredit: False Hopes and Real Possibilities” http://www.fpif.org/fpiftxt/4323 Tell students they will become experts on one of the sides and then present their findings to the class. Have groups present at least ten statements in support of their position. After both groups have done this (and you may want to record on the board), lead a discussion on microcredit’s merits. • How does microcredit stand apart from other methods for alleviating poverty? • What can microcredit do that nothing else can? • What do you think needs to be done alongside microcredit to reduce poverty further? • What are some of the most serious considerations against microcredit? • If you were a global official spearheading a brand new poverty reduction program, what would you recommend? Would microcredit be included in your plan? What else might you want to include? Where would you focus the majority of your resources?* *This question can be assigned to students for a short paper. Students can reference the entire “How to Fight Poverty: 8 Programs That Work” article, among other resources, to help support their ideas. OPTIONAL ACTIVITIES: BUSINESS TRACK Microcredit for Sustainable Development Facing the Future This lesson asks students to create a business plan from the perspective of microcredit borrower. The lesson contains other useful material, including action projects. http://www.facingthefuture.org/Portals/0/documents/GSRLibrary/34.Mi crocredit.pdf Case Studies Global Education Project, Professional Development Initiative Presented in the following package are two case studies of borrowers and their businesses in Indonesia. Follow-up activities include calculating earnings, preparing graphs, suggesting ideas for more profitability, and more.
http://www.globaleducation.edna.edu.au/microfinance/case-studies.pdf OPTIONAL ACTIVITIES: MATHEMATICS TRACK Microcredit: Growth in the implementation of microcredit, 1997-2003 Australian Bureau of Statistics, Education The lesson linked below asks students to calculate percentage differences and ratios using figures in a chart of statistics about microcredit. It also asks students to graph the information in groups. http://www.abs.gov.au/websitedbs/D3310116.NSF/85255e31005a191885 2556c2005508d8/be55683b798455f3ca25704a001dbd76/$FILE/Microcr edit%20Growth.pdf Case Studies Global Education Project, Professional Development Initiative Presented in the following package are two case studies of borrowers and their businesses in Indonesia. Follow-up activities include calculating earnings, preparing graphs, suggesting ideas for more profitability, and more. http://www.globaleducation.edna.edu.au/microfinance/case-studies.pdf
Appendix 1 Background What is microcredit? Microcredit is a small amount of money loaned to a client by a bank or other institution. Microcredit can be offered, often without collateral, to an individual or through group lending. • Group lending, also known as solidarity lending, is a mechanism that allows a number of individuals to provide collateral or guarantee a loan through a group repayment pledge. The incentive to repay is based on peer pressure; if one person in the group defaults, the other group members make up the payment amount. Individual lending, in contrast, focuses on one client and does not require • other people to provide collateral or guarantee a loan. What is microfinance? • Microfinance refers to loans, savings, insurance, transfer services and other financial products targeted at low-income clients. Microcredit, then, is one component within the broader spectrum of microfinance. Source: www.yearofmicrocredit.org Why is microfinance necessary? If you want to buy something or start a business but do not have the money you might try and save the money, sell or pawn something you own, or borrow the money from family, bank or lending institution. To save money assumes you have a way of earning it and there is somewhere safe to keep it. To borrow money from family assumes they have it and are able to do without it until you are able to pay it back. To borrow money from a bank, credit union or other lending institution assumes you can demonstrate an ability to pay it back. Lending institutions will not lend to people unless they have some kind of security, or collateral, for the loan, to ensure that if it is not paid back, the bank or other institution will be able to recover part of the debt. Poor people often do not have spare money to lend other family members, access to banks or the collateral to guarantee a loan, so they find it difficult to try to improve their situation through loans. Yet a very small loan can make a great difference to a poor person. Microcredit is helping millions of poor people, especially poor rural women, with tiny loans so they can start small, create self-employment and improve their lives. There is a common view that poor people cannot or do not want to save. But the reality is different. Because the poor have little money, making the most of what they do have is vital. Building a pool of savings that can be drawn on in
emergencies, or that can help to finance the education of children or the purchase of a productive asset, is vital to poor households, and providing them with safe and accessible means of doing this is therefore an important service. Poor households are particularly vulnerable to the setbacks that come from ill-health, loss of employment and other emergencies. Providing insurance that can mitigate the impact of such setbacks is another vital financial service. While insurance is a very different business from taking deposits and making loans, a number of microfinance organisations are looking at including insurance services in their range of products. The beginnings of microfinance The idea of microfinance was developed as a survival strategy for the poor. Ela Bhatt established the Self-Employed Women's Association (SEWA) in India in 1974, while in 1976 Mohammed Yunus founded the Grameen Bank project in Bangladesh. Ela Bhatt's first loan was $1.50 to a woman who sold herbs, while Mohammed Yunus' initial outlay was a total of $27 to forty-two poor people. How microfinance works Poor people often live from day to day, and have few reserves for major expenses such as illness, weddings, house repairs or education. They are often unable to save for these expenses, or have been unable to open a bank account that would enable them to build their savings, and therefore need to borrow, frequently at exorbitant rates, to meet these unexpected costs, further worsening their economic situation. Microcredit provides poor people with access to small loans at more manageable interest rates, and can lead to self-sufficiency and poverty alleviation. There are many models of microcredit. A common model is for small groups to form a collective and with a start up grant to provide an initial pool of money, which is augmented with regular savings and interest members pay on their small loans. One or two members take loans to develop small businesses, and, when they have repaid their loan, others are able to draw on the collective fund. They may be supported with business and other training to help make these micro-enterprises successful. The outside support and group pressure leads to a low default on repayments. Where poor people are able to build their savings, they can often use these savings to meet their needs for lump sums of money, either to meet emergencies or to finance a productive investment. This is less risky than relying on credit, because it doesn't involve going into debt. Saving and borrowing are really different ways of turning small amounts of money into lump sums. Saving involves building a lump sum by first accumulating smaller amounts; borrower is taking the lump sum first and then 'saving' afterwards in the form of loan repayments. How does microfinance address poverty?
With less interest to repay, more profitable businesses and autonomy, poor people have been able to reduce debt burdens and break the cycle of poverty. Studies of the impact of microfinance in more than 24 countries have found dramatic improvements in household income levels. These improvements take place mainly through growth in the borrower's business. Access to microfinance allows the borrower to reduce costs with lower interest rates and bulk purchasing of raw materials. Income increases as the number of goods or services offered is expanded and reduced product costs increase sales. Is it all good news? Although microfinance can demonstrate huge levels of success, there are risks and other disadvantages to the scheme. Maintaining a sustainable small loans program is costly, and the high interest rates take their toll on borrowers, although less than that of local money-lenders who may charge even higher interest rates or indenture children. Microfinance fosters self-employment, but the odds are stacked against the self-employed in the global marketplace. Business training and support can be important so that loans can be effectively used. However, many poor entrepreneurs in fact know very well what to do, but lack the capital needed to set up or expand their businesses. While women have taken a high percentage of the loans and invested in their households, improving the health and education of their children, this has had a cost. Running a business has added to their workload and changed their role in the family, sometimes putting a strain on their marriage. Moreover, in some cases husbands have used the loans, but expected the women to repay it. It is important to include gender training as part of the microfinance program to address these problems. Microfinance programs may enable poor people to improve their situation, but they do not eliminate the need for other basic social and infrastructure services. Microfinance can help poor households to reduce their vulnerability to economic shocks, but they do not eliminate such shocks. It helps the poor to take advantage of economic opportunities, but it does not create such opportunities. Microfinance can only ever be one part of a broader process of social and economic development. Source: Global Education Project: http://www.globaleducation.edna.edu.au/globaled/go/cache/offonce/pid /1533;jsessionid=0BDB10DB1465E68326A0997A1D98864F
Appendix 2 Frequently Asked Questions What is the difference between microfinance and microcredit? Microcredit is a small amount of money loaned to a client by a bank or other institution. Microfinance refers to loans, savings, insurance, transfer services, microcredit loans and other financial products targeted at low-income clients. Microcredit has been changing the lives of people and revitalizing communities worldwide since the beginning of time. Who are the clients of microfinance? The clients of microfinance are generally poor and low-income people. They may be female heads of households, pensioners, artisans or small farmers. The client group for a given financial organization depends on that organization’s mission and goals. How do financial services help poor and low-income people? Anyone who has access to savings, credit, insurance and other financial services is more resilient and better able to deal with everyday demands. Microfinance helps poor and low-income clients deal with their basic needs. For example, with access to microinsurance , poor people can cope with sudden expenses associated with serious illness or loss of assets. Merely having access to formal savings accounts has also proved to be an incentive to save. Clients who join and stay in microfinance programmes have better economic conditions than non-clients. What is a microfinance institution? A microfinance institution (MFI) is an organization that provides financial services targeted to the poor. While every MFI is different, all share the common characteristic of providing financial services to a clientele poorer and more vulnerable than traditional bank clients. What is an inclusive financial sector? An inclusive financial sector allows poor and low-income people to access credit, insurance, remittances and savings products. In many countries, the financial sectors do not provide these services to the lower income people. An inclusive financial sector will support the full participation of the lower income levels of the population. If microfinance is about serving the poor, why does the provision of financial services need to be profitable? Microfinance institutions need to be profitable in order to cover the costs of reaching out and meeting the demand of underserved segments of the population over a sustained period of time. Additionally, after a series of very small loans, a microentrepreneur often wants to expand her business; a microfinance institution must keep up with the demand for larger loan amounts so businesses can grow into small enterprises.