It is both encouraging and appreciable that Professor Yunus has finally noticed the lack of clarity in the use of the microcredit and microfinance ideas in the current development discourse. His idea of microcredit seems quite different from the microfinance idea that is being advocated and advertised from the both bilateral and multilateral donor agencies and distinguished western academic scholars. This conceptual confusion is hurting the cause of microcredit that Professor Yunus had in mind when he experimented the idea in the 1970's and established the Grameen Bank in the early 1980's.

Microcredit

The microcredit idea evolved as part of a paradigm shift in the Third World (TW) development thinking, which led to dramatic changes in the development policies pursued by donor agencies. Western interests in the TW development were inspired after WWII, when most of these countries gained political independence. To help improve socioeconomic conditions of these decolonised countries, national and international agencies were created to transfer western monies and materials. This policy is popularly known as the 'top-down' approach to international development, because international aids and loans were given to the TW governments, who were primarily responsible for their utilisation.

International aid programmes failed, many believe, to achieve their objectives -- a fact that was recognised as early as the end of 1950's. Most of these failures were attributed to the perception that the people -- supposed to be benefited from the development projects -- were not included in the process of designing, formulating and implementing these projects. With this understanding, development activists and practitioners advocated for ending the prevailing 'top-down' approach and adopting 'participation and participatory methods of interaction as an essential dimension of development'. The idea received World Bank's recognition in 1973. In the Annual Meeting of Board of Governors in Nairobi, the then Bank President Robert MacNamara told his audience that no programme would help small farmers if it was deigned by those who had no knowledge of their problems and operated by those who had little interests in their future. Thus, the terms, participation and participatory development, became the key ideas of a new development paradigm called, 'bottom-up' approach, which currently dominate the policies of bilateral and multilateral donor agencies.

Since the central idea of the 'bottom-up' approach is to reduce government's influence in utilising development aids, and the private sector is not an ideal candidate to substitute them, the new policy regime emphasised the involvement of civil organisations popularly known as Non-Governmental Organisations (NGOs). These organisations have three major characteristics: (i) largely independent of government; (ii) not operated for profit; and (iii) exist to serve humanitarian, social or cultural interests.

In terms of function, they usually (i) provide goods and services, not ordinarily supplied by the State or the private sector, (ii) help the government achieve its development objectives by providing public information, education, communications campaigns etc., and (iii) organise citizens to voice their aspirations, concerns and alternatives for consideration by policy makers.

The Grameen-type organisations, whose fundamental objective is to serve rural poor with small loans and related services, meet these conditions. These credit programmes usually have the following features: First, the loan size is small, averaging about US $100. Second, the primary customers of these loans are rural poor, women in particular, who have little access to conventional banking facilities. Third, the purpose of these loans is to create income generating activities in rural non-formal sectors through selfemployment. Fourth, these loans are collateralfree. Finally, the micro lenders have integrated the loaning and savings mobilisation functions. Unlike the conventional banks, regular savings are a precondition for getting loans from the micro financial enterprises.

Apparently, the microcredit organisations have three distinctive characteristics: First, they are part of the NGO-approach to TW poverty-alleviation, meaning that profit-motive is inconsistent with the nature of this type of organisations. For this reason, they primarily depend on external financing. Second, they are different from the charity organisations. While the charity organisations help the poor with small loans under the assumption that their poverty is due to 'personal failings', the microcredit NGOs believe that poverty is created through social processes by depriving the poor from their rightful access to social resources. One of these social resources is credit, which the microcredit leaders treat as a kind of human right. Finally, the microcredit leaders believe that they can inspire social and economic revolutions in the TW through organising the poor under the banner of the Grameen type microcredit organisations.

Microfinance

The tremendous success of the microcredit programmes in outreaching the poor women in rural areas, and recovering outstanding loans (95 per cent), soon attracted world attention, particularly that of international donor community. In this regard, the most significant event is the Microcredit Summit of 1997, which gathered 2,900 delegates from 137 countries representing 1,500 organisations from all over the globe in Washington, D.C. This popularity, in turn, inspired academic interests in the topic, leading to the coinage of the concept, microfinance, in the late 1990's. Thus, the term, microfinance appears to be a transformation of the popular poverty-alleviating idea, microcredit. This is perhaps one reason why the two terms are often considered synonymous in the development literature.

Princeton University professor, Jonathan Morduck's survey article, "The Microfinance Promise," published in the Journal of Economic Literature, makes no difference between microcredit and microfinance ventures. The same practice is followed in the Microfinance Handbook published by the World Bank. This book defines microfinance as a development approach that provides financial and/or social intermediation. The financial intermediation includes the provision of savings, credit and insurance services, while social intermediation involves organising citizens' groups to voice their aspirations and concerns for consideration by policy makers, development of self-confidence etc. The microfinance institutions include all kinds of lenders, who supply small loans to poor people -- NGOs, government and commercial banks, nonbank financial institutions, informal lenders like moneylenders, pawnbrokers etc.

Conceptual confusions

The confusion in the conception seems obvious. For, one of the most important characteristics of micro-lending is collateral free loans supplied by the NGOs to the poor who have little access to formal financial institutions. Some of the above micro-lenders clearly violate these conditions.

This confusion is continued in the renowned recent book -- Microfinance and Poverty Alleviation: Case Studies from Asia and Pacific -- edited by Joe Remenyi and Quinones Jr. In their introductory article titled, "Financing a Revolution: An Overview of the Microfinance Challenge in Asis-Pacific," Getubig, Gibbons and Remenyi say that the most notable microfinance providers come from Bangladesh, who include Grameen Bank, the BRAC and the ASA. These small-loan providers are, however, microcredit organisations, not microfinance ones. Then in his own article, titled "Is there a 'State of the Art' in Microfiaince?" Remenyi gives a very different idea of microfinance. He takes the traditional definition of banking -- financial intermediation that involves bringing together 'the independent acts of savers and borrowers to facilitate one another's goals'. Microfinance is no different from this traditional banking concept except that, unlike formal banks whose activities mainly involve rich clients in urban areas, the market for microfinance consists primarily of poor people in rural areas of TW countries who need credit for pursuing small enterprises in the informal sector. The microfinance entrepreneurs are business people with usual profit motives, who are supposed to be self-financed eventually. "Subsidised credit and subsidised banking with the poor are inimical to 'best practice' in microfinance." This idea is supported in recent publications.

Conclusion

The fundamental differences between microcredit and microfinance ideas are (a) profit motives and (b) the means of operation. By definition, the microcredit programmes are NGOs', for which they cannot run their operations with the objective of making profits. This, in turn, suggests that they must depend upon external financing. The microfinance, on the other hand, is a profit-making private venture, which must aim at operating its activities without external help, because profit-making and public objective do not go hand in hand.

For both intellectual clarity and sound policy formulation, the current practice of using the microcredit and microfinance terms synonymously demands critical evaluation. It is obvious that they are very different kinds of organisation that attract very different kinds of people. Therefore, for the sake of sound policy-making of international development, these terms ought to be used in their proper context.

Dr. Elahi is former Associate Professor, Department of Agricultural Finance, Bangladesh Agricultural University, Mymensingh. He currently lives in Ontario, Canada. Dr. Rahman is Professor (retired), Department of Agricultural Finance, Bangladesh Agricultural University, Mymensingh and a former Member, Planning Commission, Government of Bangladesh. He currently lives in New Jersey, USA.