Microcredit Poverty Alleviation

The effect of microcredit on poverty alleviation: a case of Kyrgyzstan

Microcredits are small-scale loans that usually do not require collateral and directed to low-income individuals. The first idea about microcredit was created in the middle of the 1800s with the help of Lysander Spooner, who emphasized the advantage of small loans as the way of getting out of poverty by poor entrepreneurs and farmers. Later, Muhammad Yunus, who established Grameen bank in Bangladesh, captured his idea. It was the first bank that lent money to poor people and played a vital role in formation of present microfinance institutions. Nowadays, these institutions exist almost in every country of the world as they had accepted to be a development tool. Kyrgyzstan

The overall literature review shows three main categories of positions: the proponents, who argue for a positive effect of microcredit on poor, opponents, who argue for a negative effect and some researchers who took both sides. Thus, Mahabub Hossain in his study emphasizes how Grameen bank in Bangladesh has achieved to increase well- being of its customers. He found that Grameen bank has improved the livings standards of more than 90 percent of a people who took part in the survey (Hossain, 1998). Other studies of Pitt and Khandker have estimated positive impact of microcredit on borrower’s consumption in Bangladesh, in particular female borrowers. For every additional 100 taka borrowed, the annual household consumption expenditure has increased by 18 taka for women and 11 taka for men ( Pitt and

However, it did not achieve a considerable economic growth since independence in comparison with those countries. It remains as one of the poor around the globe with the more than 40 percent of population living below the poverty line. Many ways were introduced to get out of poverty and microcredit became one of them. Although the microcredit was designed to contribute to poverty reduction, its overall effect is under the question. This study examined the effect of microloans on well-being in case of Kyrgyzstan and revealed a negative correlation between microcredit and income. As income is considered to be a direct indicator of poverty, this suggests that microcredit is not achieving its goal of poverty alleviation. Therefore, the prediction is that some problems in the microfinance system exist in Kyrgyzstan. One problem of unsuccessful implementation can be a quite high interest rate. The high cost of loan service put burden on debtor’s ability to repay. Another problem can be a lack of business opportunities, because it is very hard for small businesses to survive in the market. However, the other fact that microcredit affects positively on social well-being of population demonstrates that it can be an efficient solvency of a problem of poverty if the policies and customer services in the microfinance system will be