Empowered to default? Evidence from BRAC's micro-credit programmes

01.12.1995
This article investigates whether the acquisition of greater skills, resources, confidence and social position through repeated micro-credit borrowing might reduce the effectiveness of mechanisms which promote repayment. The idea is motivated by new data from BRAC's (Bangladesh Rural Advancement Committee) Rural Development Programme, in which repayment appears to decline with repeated borrowing. In lending without physical collateral, group-based finance (GBF) uses alternative 'collateral', such as obligation to peers, which is socially based. GBF relies partly on high administrative inputs (for group formation, and for weekly visits by fieldworkers), and substantially on the borrowers' lack of alternative sources of credit and social powerlessness. If so, repayments will be undermined if repeated borrowing empowers by enriching and individualizing borrowers (through 'individual empowerment'), or improving access to alternative credit (through 'social transformation'). This is particularly important where groups have been formed simply to supply cheaper credit. The BRAC experience suggests that a micro-credit intervention, based strongly on incentives for individual self-enrichment alone, eventually undermines the social forces inducing repayment by changing the incentives and costs associated with honouring the financial contract.