U.N. Report Slams Loan Plans for Poor

The success of widely touted “microcredit” loan programs that encourage entrepreneurship in poor countries, particularly among women, has been oversold as a means of eliminating poverty, a U.N. report released Tuesday concludes.

The loans, often of a few hundred dollars or less, have been promoted in recent years as a low-cost avenue for encouraging development of business skills and improving the living conditions of poverty-stricken women. The idea’s boosters have included First Lady Hillary Rodham Clinton, who was honorary co-chair of a conference about the issue last year.

There are an estimated 3,000 “microfinance” institutions in developing countries, most receiving financial backing from the United Nations, the World Bank, foreign governments and private aid organizations. Although the programs began in Bangladesh and other poor nations, they have spread to industrialized societies, including the United States, where such institutions have been set up in poor neighborhoods in Los Angeles and Orange counties.

While acknowledging the successes of this type of financing, particularly in Asia and Latin America, the U.N. report notes that “there are limits to the use of credit as an instrument for poverty eradication. . . . It is not clear if the extent to which microcredit has spread, or can potentially spread, can make a major dent in global poverty.”

The report asserts that “the poorest of the poor”--whom most microcredit programs target--are usually “not in a position to undertake an economic activity, partly because they lack business skills and even the motivation for business.”

Advocates agreed that the programs are no panacea but suggested that the report is too harsh given the infant status of most of the institutions.

The study was prepared by the U.N. Department for Economic and Social Affairs at the request of the 185-member General Assembly, which is dominated by governments from the developing world. Many of those governments are dismayed by the decline in traditional foreign aid from the United States, Japan and Western Europe, and suspicious of the rise in private investment and nontraditional programs such as microcredit.

Most of the microcredit institutions require subsidies from international aid agencies to survive. The U.N. study noted that most of the enthusiasm for microcredit has been generated by the success of a handful of programs, led by the Grameen Bank of Bangladesh, which has lent $2.1 billion to more than 2 million people, 94% of them women.

That success has not yet been replicated widely, and the high interest rates and loan costs associated with microcredit institutions suggest that recipients may have difficulty with repayment, the report says. Claims of high rates of repayment have not been consistently substantiated, it adds.

It stresses that microcredit cannot be expected to succeed unless a program is coupled with financial support for education, health care and other social services and with economic reforms such as land redistribution.

Sam Daley-Harris, microcredit expert with Results International, a Washington-based anti-poverty organization, suggested that the report reflects unease with unconventional forms of assistance to the poor, especially those divorced from countries’ governments. He scoffed at the assertion that the poor “lack the motivation for business.”

“Give me a break,” he said. “There is no one on the planet . . . who works as hard as the poorest people on the planet to eke out a living under the worst conditions.”