PEOPLE-CENTERED CREDIT SYSTEMS IN DEVELOPING COUNTRIES: THE NEED FOR REGIONAL NETWORKS Urban Poverty in Developing Countries Economies of scale in urban areas, achieved by concentration of goods, services and labour, has generated a GDP far in excess of their share of total population. This has created better wages and employment opportunities for both skilled and unskilled workers. The price paid for such advantages has, however, been rampant poverty and a widening gap between the rich and poor, with its consequent ills that have also affected the physical and social environmental quality of urban areas. Revamped government policies, provision of basic infrastructure and services, and strengthened local governments have not helped in improving the situation due to the sheer size of the problem (UNDP, 1991: 1-3). Problems of Credit in Developing Countries In attempting to obtain credit from banks, low-income households are constrained in their "credit worthiness" by factors such as low and/or irregular wages, jobs in the informal sector, seasonal employment, very low holdings of marketable assets etc. that have kept them out of the formal credit delivery network. This has led to dependence on informal credit markets to satisfy their credit needs (Srinivas, 1995). For example, for housing loans, it is imperative for a potential bank loan borrower to have tenure holding on the land on which the house is to be built, among other requirements. This summararily excludes all squatter households. In the survey, more than 95% of the finance used to build a house came from personal savings and borrowing from the informal market. There have been special programs targeting low-income households, but these have been few and far in between. When Banks turn the Other Way Stringent requirements of banks for loan appraisal have essentially kept people with low income and assets away from being serviced. They function under a set of regulations that are both self-imposed as well as required by the Central Bank of the country. These include capital, reserve and liquidity requirements, ceilings on lending and deposit rates, mandatory credit targets, and audit and reporting requirements (Ghate, 1988: 64-65). Such high requirements keep the poor out of formal credit sources. In the case of housing loans, for example, over reliance on credit history, preference of high cost properties, lifestyle assumptions, building style assumption, poor treatment of self- employed, high down payments etc. are some of the problems of the "mindset" of formal financial institutions (CDB-L, 1995). In general, the problems of access to formal credit are due to - inadequate financial means of the institutions complex nature of procedures inadequacy and sparse coverage of the banking network inadequacy of standards set for finance to low-income households. Due to these and other problems, 50 to 90 percent of the population of developing countries remain outside the services of formal credit institutions (UN-ESCAP, 1991: 4). Need for a Change in Outlook Thus, in the face of apparent failure of formal credit institutions to address the needs of low-income households, the key concern lies in using alternative approaches to mobilize credit. One important factor that has to be taken into consideration is that there is an existing system of informal credit delivery already operating in the settlements. Such systems need to be recognized, and concerted action taken that not only enhances such activities, but also provides necessary resources, training and support. Thus people's efforts in mobilizing credit should be seen as a logical complement to banking services. They fill a gap in the banks' delivery system and do not, as is popularly argued, duplicate or compete with banks. Go to the next section Return to the Table of contents Return to the Virtual Library on Microcredit