If you are involved in an educational system either as an educator or the parent of a high school student, then you might be familiar with the important role of AP courses in the life of high school students across the United States. AP courses also play important roles for high school students in other countries because AP courses are offered at all International schools opened by the United States. For instance, according to the 7th AP Report to the Nation, “universities in more than 60 countries recognize AP Exam scores in the admission process and/or award credit and placement for qualifying scores” (College Board, 2011, p. b). In other words, students enrolled in AP courses in any of those countries can earn college credit the same way they would do in the United States. So this is not a local phenomenon at all. Naturally, any parent or educator might wonder what the history of AP courses is, and what their benefits and roles are for high school students.

I have worked as an AP Coordinator and Guidance Counselor for a public school for more than three years. Unsurprisingly, many middle and high school parents have asked me numerous questions regarding the AP program. The following interview, which took place between one of the parents who had a daughter at the school and myself, should help the reader develop a good understanding of AP programs and their benefits for both parents and students.

Q: What is the Advanced Placement program?

A: The AP Program was created by the US College Board in 1955 with the motto “Connecting Students to College Success.” The AP program aims to prepare students for an academically demanding college experience. “Advanced Placement is a curricular option for academically superior tenth, eleventh, and twelfth-grade students. Naturally, courses offered in the program are more demanding in terms of time and intellectual skills than corresponding courses in the regular high school curriculum” (Postsecondary Educational Planning Commission, 1988, p. 4). Initially, AP courses began as a program for elite private school students to take college-level course while still in high school. This way, outstanding students could begin college with already earned credits needed for freshman year, which potentially would help them graduate college earlier.

Q: What is the role of the College Board regarding AP courses?

A: AP courses are developed and maintained by a non-profit organization, the US College Board, founded in 1900. This organization provides training for AP teachers, provides curriculum resources for both teachers and students of AP courses, and supports universities as they define their policies regarding AP grades, and develops and coordinates the administration of annual AP examinations. According to the US College Board, the AP program offers more than 30 different courses as of 2010. In 2009, nearly 1.7 million students worldwide took 2.9 million AP exams.

Q: Are AP takers increasing or decreasing?

A: According to the recent data released in the 7th AP Report to the Nation, the number of seniors taking at least one AP course and scoring 3 or more on AP exams has increased significantly (College Board, 2011, see Table I). The increases are due to growing awareness of the program, obvious benefits of taking AP courses, and the significant role of AP courses in the college admission process (Reichard & Keirn, 1999). Moreover, the No Child Left Behind Act (2001) offers states substantial federal funding, $24 million annually, to expand AP programs in underserved populations (Manzo, 2005).

Q: Are AP classes smaller than regular classes?

A: Since only academically outstanding students are accepted into AP classes, they are to be smaller, usually less than 15, as opposed to regular classrooms with 25 to 35 students. For instance, smaller schools like charter schools, might provide better opportunities for AP students in terms of class size because their student population is usually smaller than local public schools. Therefore, as is the case in my school, it is not a surprise to see AP classes with as low as 2 or 3 students per course. On the other hand, smaller schools may not offer as many AP courses as other public schools due to its student size.

Q: What about teacher quality? Do better teachers teach AP classes?

A: Yes, it is likely that AP teachers have either better training than other regular course teachers or more years of teaching experience, with higher degrees in subject areas. Moreover, AP teachers receive annual trainings in the subject they teach which is organized by the College Board. For example, I attended one of those trainings when I was assigned to teach AP Calculus in 2009. In trainings, you learn how to teach the course and they provide you with lots of resources to teach your course in depth. Conclusively, I believe that AP teachers may be better prepared in their content area as opposed to non-AP teachers.

Q: Can my daughter graduate early from college if she takes AP courses?

A: Yes, taking AP courses in high school will enable your daughter to realize her goal of graduating early from college because students can pursue college level studies while still in high school. That means AP students can transfer their high school credits to college and can replace them with their required college classes thus eliminating some freshman courses and graduating early. As a result, AP courses have become very popular among parents. They want their children to take as many AP courses as they can take. But taking an AP course is not enough to earn a corresponding college credit.

Q: What else should my daughter do in order for her to earn college credit?

A: For that purpose, students are required to take the AP exams administered annually in May prepared by the Educational Testing Service located in Princeton, New Jersey. This is where AP teachers, parents, and students’ decide if students should take the AP exams of the courses they are taking. They usually look at students first semester performances in those classes. If students do not perform well in those classes, they are either recommended to continue taking the AP courses but not to take the exams or drop the course before first semester ends and start taking regular classes of the same course. AP exams consist of a multiple-choice section and a free response section. College professors and AP teachers score the open-ended questions once a year in June. The results of the multiple-choice and free response sections are combined to determine a composite score and then converted to a 5-point scale: 5 being extremely well qualified; 4, well qualified; 3, qualified; 2, possibly qualified; and 1, no recommendation.

Q: Do all colleges give credits for AP courses?

A: As common practice, more than thirty five hundred colleges give college credit to test scores 3 and above. Although this is still a common practice in almost all colleges, some universities and colleges have recently started to limit credits by requiring either a 4 or 5 exam score. For example, the University of Pennsylvania is very strict in awarding the AP Calculus credit and MIT is requiring its students to re-take a college introductory chemistry course at their institution regardless of their AP Chemistry scores while they are all still accepting other AP courses (Manzo, 2005).

Q: Do having AP courses on my daughter’s transcript increase her chance in college admission?

A: The use of AP courses in the admission process began after the 1980s. At first, only highly selective colleges and universities considered AP courses to make fine distinctions among the increasing number of applicants (Reichard & Keirn, 1999). Today, AP and honors courses receive special consideration by almost all selective colleges and universities in the admissions decision. The way AP scores are used may vary from one institution to another. For example, the University of California recalculates an applicant’s high-school grade-point average (HSGPA) by giving additional “bonus points” for approved AP courses while others do not recalculate but accept the school’s weighted HSGPA. Regardless of how colleges evaluate students’ AP courses, yes, having AP courses on a transcript puts a student in a more advantageous position as compared to non-AP students in admission decisions. Once, I remember a parent who was evaluating all the high schools in her district in terms of their AP offerings to enroll her son. When she was asked why she was doing so, she said it was because colleges look at the number of APs on an applicant’s transcript to make an admission decision. As a high school counselor, I know that this is a common practice among upper middle-class parents to ensure their children get a college admission. Thus, this puts great pressure on schools to expand their AP offerings.

Q: Then, can I say that I will pay less tuition and save time?

A: Yes, indeed, taking AP courses in high school will save the student and parent, both time and money. As of today, skipping an introductory course in college could translate to an average of $3,000 per course. For example, one of my students took 9 AP courses while she was in high school. It is equivalent to almost a year of time and $27,000 money. Why would a reasonable parent and/or student miss this great opportunity?

Q: But I am afraid that my daughter may not graduate from a college because many high school students are not ready for college challenges both in terms of academics and in life?

A: Yes, you are right to have such concerns because Lewis (2010) reports that just 56 percent of those who enroll in a four-year college earn a bachelor’s degree. The number one reason why the rate is low is because students are mostly unprepared for the college experience. On the other hand, research has revealed that students who pass AP exams are more likely to graduate college on time (College Board, 2011). For example, in a study sponsored by the College Board, it was found that taking AP courses in high school and passing the exams appear to help students perform better in college classes and graduate on time. They analyzed four incoming classes at the University of Texas from 1998 to 2001 by looking at their ten individual AP subjects. These researchers reported that, “AP Credit students consistently outperformed non-AP students of similar academic ability in all college outcome measures” (Keng & Dodd, 2008, p. 1). Thus, taking AP courses and passing its exams usually put students one step ahead of their non-AP counterparts.

Moreover, according to Dillon’s (1986) study, completion of AP courses convey to colleges that students who have taken AP classes have developed scientific inquiry, reasoning, problem solving, and analysis methods. In other words, they are more ready for college challenges. As a result, it is not surprising to see that academically prepared high school students are not only more successful in academic work in college, but they are often more self-confident, have increased aspirations and “fit-in” more easily into college. This is true because AP students are exposed to the academic rigor, expectations, and autonomy, which are usually linked with the content and rationale of college curriculum. For instance, Syracuse University found that students with AP credits showed as high as a 96% first-year retention rate while the national average was 79% (Miller, 1994). Therefore, taking and completing AP courses help students have a smoother transition from high school to college in terms of both curriculum and lifestyle.

Q: My last concern is about my daughter’s senior year. I know from my oldest son who didn’t study much and skipped his classes a lot. Therefore, he barely passed his classes and graduated. Thus, he did not get an admission to a 4-year college. Can my daughter really take AP exams during her senior year?

A: All high school counselors know that “senioritis” is a disease and that it is contagious and there’s no vaccination or cure for it. Delicath (1998) found trends in AP courses as they deal with high school seniors. Delicath stated that AP classes help solve the problem of “senioritis,” defined as senior-year boredom among capable high school students who complete most of their graduation requirements by the end of their junior year. The good news is that the seniors who enroll in AP courses often remain more focused and attached to learning than their non-AP counterparts. Thus, seniors overcome their stresses and last year boredom.

In conclusion, in light of all its benefits, I would strongly suggest all high school administrators and counselors to be more knowledgeable about AP and try to create a very strong AP program at their schools so they can send more students to four-year colleges. Also, having a strong AP program at schools prevents students from dropping out due to financial reasons, first generation fear, and so on. Therefore, it should be the goal and duty of all high school teachers and counselors to inform and prepare their capable students to benefits from this great opportunity.

Alpaslan Sahin, PhD from Texas A&M University, College Station TX, is a school administrator. His research area is Mathematics Education.

References

• College Board. (2011). The 7th annual AP report to the nation (100084202 10b-2333).
• Delicath, T. A. (1998). The influence of advanced college credit on college students’ integration and goal attainment: A longitudinal study. Dissertation. (UMI No. 9911930).
• Dillon, D. H. (1986). The advanced placement factor. Journal of College Admissions, 113, 14-17.
• Keng, L., & Dodd, B. (2009). A comparison of college performances of AP and non-AP student groups in 10 subject areas (College Board Research Report No. 2008-7). New York: The College Board.
• Lewis, K. R. (2010). High college dropout rate threatens U.S. growth. The Fiscal Times. Retrieved March 19, 2011, from
• http://www.thefiscaltimes.com/Articles/2010/10/28/High-College-Dropout-Rate-Threatens-US-Growth.aspx
• Manzo, K. K. (2005). Mass appeal. Teacher Magazine, 16(5), 11-12.
• Miller, L. (1994). Effects of racial and socioeconomic factors on advanced placement programs. Dissertation. (UMI No. 9606827)
• Mores, R (2009). Methodology: America’s best high schools. Retrieved February 27, 2011, from http://education.usnews.rankingsandreviews.com/education/high-schools/articles/2009/12/09/methodology-americas-best-high-schools
• Newsweek (2008). FAQ: best high schools. Retrieved February 8, 2011, from
• http://www.newsweek.com/2008/05/17/faq-best-high-schools.html
• Postsecondary Education Planning Commission (1988). Funding of acceleration mechanisms. Report 1. Tallahassee, FL: Author. (ERIC Document Reproduction Service No. ED 293 452).
• Reichard, G. W., & Keirn, T. (1999). The advanced placement exam in history: Growth, controversies, and new perspectives. The History Teacher (Long Beach, Calif.),
• 32(2), 169-73.

According to a study by researchers of the Human Footprint Project [1], humans have influenced 83% of the earth’s surface. The study is based on four factors: population, travel routes, land use, and lights. One of the findings of the study shows that an average American is responsible for more carbon emissions in one year, than a person in Tanzania in a lifetime. This significant difference is certainly related to the average lifespan, income, culture, and climate. However, do any of us have the rights to disturb the environment more than others? Are we consuming something that doesn’t belong to us, and leaving an unsustainable environment for future generations? To answer these questions, it is imperative that we understand and acknowledge exactly what we have inherited, what we are responsible for, and what we will leave to future generations.

Our influence on the earth and environment in a general sense is not limited to the consumption of goods. One of the most influential yet less-visible traces is the footprint we leave in the digital environment. There are active or passive traces left in a digital environment by personal activity. An active trace is left when personal information is released by a person himself, whereas a passive trace (digital shadow) is left when personal data is collected during personal activity. These traces, also known as digital footprints, can spread very quickly and may reach to millions in a very short time. One can leave digital traces by simply visiting a website, sending a blog post, or posting a photo or message to a friend’s website.

Our digital traces affect the environment in many ways. Every trace takes our time to generate it and for others to read it. It consumes storage and network resources on the server that increase the costs, power usage, and eventually our carbon footprint, or the total greenhouse gas emissions. We need to seek a balance in our use of digital media in order to utilize the benefits efficiently and to minimize our consumption of time and other resources.

Have you ever wondered “how often a person leaves digital traces behind every day?” or “how much of our privacy are we sharing with others?” A recent study reveals some figures about the size of the digital universe as 281 billion gigabytes (GB) for 2008 and 1.8 billion terabytes for 2011 [2]. The digital trace generated by the average person on a daily basis was about 45 GB in 2008. This includes private information such as emails, photos, VOIP calls, and instant messages.

How about passive digital traces we leave behind by credit card purchases, bank accounts, phone records, web searches, general backup data, medical and hospital records, surveillance cameras, and so on? There are more passive traces collected than our active digital traces, which provide more personal information.

As of 2006, there were over 1 billion Visa credit cards worldwide and counting [3]. Credit cards give a lot of private information about a person: stores we prefer, movies we watch, places we travel, books we read, prescriptions we take, rent and utility fees we pay; mainly our lifestyle is hidden in our credit card statements. It might contain a lot of details we want to keep private. We can easily learn a lot about our social life just by analyzing one of our credit card statements.

Web searches provide more insightful information about a person. 113 billion web searches were conducted in July 2009, a 41 percent increase compared to 2008 [4]. Besides all the information we leave with our credit card, web searches may show things we have not actually done. They contain information about our future plans, such as travel, job search, health related issues, meetings, and education. Websites can provide smarter search results and personalized advertisements according to our search habits. Search engines even know how fast we type or process information, our typos, languages we speak, how smart we search, and even our physical location from the IP address.

Today many cars have GPS (Global Positioning System) capabilities and smart phones have GPS sensors. GPS devices can show our exact location anywhere in the world, provide turn-by-turn instructions from one location to another, provide a list of nearby stores, and warn us about traffic problems. A recent market research [5] estimates that the mobile location technology market that crosses the US will be $75 billion by 2013 with growing usage of GPS capabilities in automobiles and consumer electronics. Beside all the benefits, GPS devices leave an important digital trace behind, our exact location, which can be stored for later use or tracked by third parties.

Even if a person doesn’t have a GPS sensor with him, there are cameras all around the city that can help capture one’s location. We can see cameras inside and outside of the banks, stores, traffic lights, and even closed-circuit TV (CCTV) surveillance cameras in some cities. The total number of CCTV cameras in England is 4.2 million, or one for every 14 people according to an estimate. According to Scotland Yard, one crime per 1,000 CCTV cameras is solved in a year [6].

The number of smart phones increased 13.9 percent worldwide, compared to 2007, and reached 139 million in 2008 [7]. Many smart phones have real-time video streaming capabilities and are widely used. Users upload hundreds of thousands of videos per day to YouTube about themselves or people around them. Considering that there are thousands of video sharing websites like YouTube, sharing videos on these websites lies at the center of important privacy concerns. There are websites to share videos, photos, music, location, blog posts, and personal updates. With the rise of the micro-blogging trend, we can see real-time updates about a person on websites like Twitter. This allows us to track every minute of a person’s life.

Social networking is a new way of communication. Many websites provide tools to build online communities of people, who want to share and learn interests and activities of others. We can build our friend list and share photos, videos, and updates about our life. According to Nielsen Online’s report on Internet usage in June 2009 [8], users spent an average of 4 hours and 39 minutes during June on one of the most famous social networking sites, Facebook, which has 87 million visitors. Normally these websites provide privacy settings to limit who can access our friend list, photos, or other information. Since most of the people don’t refuse friend requests, it is very easy to be added as a friend and get access to all the private information of people we do not even know. Once we get accepted by a person as a friend, it gets easier to be accepted as friend by his/her friends, since we have mutual friends. These connections increase our friend list exponentially.

I had known about this process for some time, so I wanted to confirm it myself by setting up an account with fake information and identity on Facebook in 2008. I selected a college and input random personal information to my profile. I visited some group pages on Facebook and joined them. Then Facebook started to offer possible friend lists that have common interests with me. I started to make random friend requests to many users on these lists. In one day, I had around a hundred friends in my list that I don’t know personally. As a friend on their list, I have access to all information they share with others. Most of the users are using default settings and are not aware of privacy issues. Even if we are careful about all these settings and our privacy, our information is accessible by website managers. Digital traces left by users are valuable commercial assets for companies, and most of them share or sell this information to third party companies which provide online advertisements, products, and services.

There is a positive side of these digital traces. Websites provide better recommendation of products and services, targeted advertisements, smarter search results, and personal news. Entertainment businesses can provide appropriate suggestions by using location services. However, erasing our digital traces is difficult or even impossible in some cases. To protect our privacy and identity, it is essential that we are aware of places our personal information is stored. It is the responsibility of websites to protect user’s data. However, it will be a good start to be aware as users of our traces on the digital universe and to share personal information carefully.

With various effects on our natural and social environment, digital traces are one of the most influential and yet less known by-products of consumption. It is an important responsibility for us to decide how we affect our environment, how we spend our time, and what we are going to leave to future generations. With all the unique values given to humans, we need to learn to make meaningful contributions and carry more responsibility for our actions, especially in the digital world where boundaries are unlimited.

Acknowledgment: This article is produced either in part or a whole at MERGEOUS [9], an online article and project development service for authors and publishers dedicated to the advancement of technologies in the merging realm of science and religion.

Halil I. Demir is an internet entrepreneur and freelance writer.

References

1. Wildlife Conservation Society [http://www.wcs.org/humanfootprint]
2. EMC Report, “The Diverse and Exploding Digital Universe,” 2008.
3. Visa USA Internal Statistics, Q4 2006.
4. ComScore Press Release, August 31, 2009.
5. RNCOS Market Research Report, “World GPS Market Forecast to 2013,” April 2009.
6. Telegraph, 24 Aug 2009.
7. Gartner Press Release, Worldwide Smartphone Sales, Mart 2009.
8. Nielsen Online’s Report, June 2009.
9. Mergeous [http://www.mergeous.com]

What is microfinance?

As defined by the Consultative Group to Assist the Poor (CGAP), microfinance is “the supply of loans, savings, and other basic financial services to the poor.”¹ Muhammad Yunus provides a much more detailed definition of microfinance to ensure its distinction from other kinds of credit. He gives the goal of microfinance credit as “creating self-employment for income-generating activities and housing for the poor, as opposed to consumption.”² Microfinance, as a concept, was first introduced in the late 1970s by Yunus in Bangladesh through Grameen Bank. To ensure the utilization of the idle capacity of skills among the poor, microfinance credits typically offer tiny loans to individuals ranging from $40–$50 to a couple of thousand dollars. The borrowers are asked to repay the loans within a brief period in order to secure future loans. According to Gary Gardner, worldwide the average microcredit size is $1,026.³ The credits usually come with a fairly high interest rate. At the lower end, we see annual interest rates of 20–30%; at the higher end, the rate can go as high as 60–70% per annum in certain cases.

The need for microfinance

Microfinance addresses, it appears, a moral necessity more than anything else. By empowering the poor through credit extension, this innovative idea of microfinance tackles a serious drawback of the contemporary economic system, that is, the exclusion of the poor from the financial system. The working of modern economies prevents people without assets from securing loans in commercial banks. The rationale is simple; the poor person does not have savings, assets for collateral, or a credit profile. For the lender, the risks associated with the loaned-out credit are disproportionately high in relation to the profit in the ongoing interest rates; the expense of conducting the high-risk financing of businesses run by poor people exceeds the potential returns. Yet, for underutilized or idle economic capacity to be realized, an economic agent needs to assume the risk associated with extending credit to people on low incomes.

Traditionally, poor people have developed informal mechanisms to address their credit needs, such as securing loans from their family networks. Yet, these mechanisms cannot always provide the amount and flexibility needed in dire economic conditions such as an emergency. According to some accounts, there are around 7,000 “microlenders,” or microfinance institutions (MFIs), worldwide reaching out to more than 100 million borrowers.⁴ How did these institutions emerge? The answer is high interest rates. As mentioned above, there are many financial actors lending at rates well above current interest rates because of the higher default risk. Based on this new financing system, new business models developed throughout the world demonstrating that poor people did not necessarily mean risk-prone investment. An interesting aspect of microfinance is the predominance of women as borrowers rather than men. Almost 90% of actual borrowers are women, a fact attributed to the better “repayment performance” of women. This is a deliberate policy on the part of microcredit programs. This reliable repayment performance coupled with women’s tendency to invest the additional income to the benefit of the family⁵ ensures the achievement of several positive outcomes which will be discussed in the following section.

The success of microfinance to date

Microfinancing theory has two broad goals. One of them is the realization of long-term economic development in less developed countries. Investigating and measuring the accomplishment of this goal is beyond the scope of this article; instead, I will focus on the second goal and the level of its achievement in order to evaluate the concept. The second goal, which is improvement in the daily lives of poor people, is also more directly related to the lives of individuals and may give us a better idea about the benefits of microfinancing. If the institution of microfinancing targets poor people and their economic prospects, then we should be able to see tangible evidence of improvement in that area. Proponents of the idea postulate that microfinancing benefits the immediate borrowers economically, but also has wider implications for the household as a whole. The eradication of poverty is one of the celebrated successes of microfinancing at the individual level. According to Littlefield et al., the project has recorded significant improvement in the earnings of microfinancing borrowers as opposed to non-borrowers. For example, in Bolivia two thirds of borrowers experienced an increase in their income. Similarly, in Indonesia the increase in income was about 13% for borrowers and a mere 3% for non-borrowers.6 Various studies demonstrate that among borrowers of microfinance loans about 50% have actually risen above the poverty threshold, an important statistic by any measure.⁷

Another success of the microfinancing program has been the improvement in children’s education. According to the research, education is one of the areas where we can observe the spillover effects of the increased income; extra income is likely to be spent on the education of children. In Bangladesh, the educational achievement of children aged from 11–14 years (whose families took microfinance loans) has doubled to surpass the control group (the children of non-borrowers) by almost 80%. A different study finds that in 1996 the schooling rate among the daughters of borrowers was almost 100% as opposed 60% among the children of non-borrowers; similarly among boys, 81% of the children of microfinancing borrowers went to school as compared to 54% of the rest.⁸ In health care, Littlefield et al. also report noteworthy improvement in immunization, breast-feeding practices, and rehydration therapy for children with diarrhea in countries like Ghana, Bolivia, and Bangladesh.⁹ According to recent literature on economic development, better educational and health care opportunities as part of human development initiatives underlie the new, long-term economic development process. In this regard, it is important to recognize the great potential that microfinance can offer for the future of developing countries.¹⁰

Drawbacks of microfinance

Nonetheless, microfinancing raises important questions with respect to its application and the heavy burden it places on the borrowers. Microfinancing particularly faces two urgent issues undermining its popularity worldwide. The first of these issues concerns microfinance institutions (MFIs). In recent years, MFIs have begun to experience financial difficulties, in particular, high delinquency rates. In contrast to the high repayment rates of the early period of microfinancing, MFIs are having increasing difficulty in sustaining their financial solvency. The early 2000s saw Grameen Bank experiencing serious repayment problems; 19% of its overall loans are one year overdue and about 10% are delinquent as defined by the bank itself. In a similar vein, Nimal Fernando, a consultant for CGAP (Consultative Group to Assist the Poor), reports liquidity and delinquency problems Asian MFIs faced in the 1990s and 2000s.¹¹ Because of high interest rates, borrowers fail to pay off the principal of the loan, and the accumulating interest. Taking the necessary steps to ensure financial sustainability of MFIs, however, comes with a trade-off; the borrowers will have to confront tighter measures on their loans in the form of higher interest rates, shorter due dates for repayment, or limited uses for the loan.¹²

The second problem facing microfinancing surfaced in the form of increased commercialization. MFIs have increasingly gained a commercial nature with investment banks obtaining a larger share of the microcredit sector. The justification for commercialization of microfinance is that increased capital allows financing to reach a larger pool of poor borrowers, enabling them to engage in a wider spectrum of economic activities. No doubt the increased pool of available funds has contributed to the increase in the number of borrowers in the last decade or so. However, this new interest in microfinancing poses problems in addition to its advantages. The surge in commercialization is in large part due to the potential for high returns in the sector. Higher returns for MFIs come at the expense of the poor borrowers across the world in the form of higher interest rates. This outcome is intimately related to the delinquency rates of MFIs. Higher interest rates imply lower repayment performance and longer repayment terms.¹³ The commercialization of microfinance is exemplified by the recent case of Compartamos, a microfinance institution in Mexico. In the words of Jonathan Lewis, “Compartamos is without question an impressive…bottom line success story, a veritable poster child for commercializing microfinance.”¹⁴ But this focus on the lender’s “bottom line” has not proved to be a guarantee of success or satisfaction for the borrower, as we shall see.

Both of these problems, the lack of financial sustainability of MFIs and the commercialization of microfinancing, point to a serious issue at the very foundation of microfinancing: interest-based credits. As we know too well from the current financial and economic crisis, an uncontrolled interest-based economic system is likely to harm the poor rather than the rich who actually own the financial assets. The major burden of “saving” the economic system falls on the shoulders of lower economic groups. Interest-based microfinancing, seen in this light, has a negative effect on the microfinancing system in two ways. Firstly, borrowers try to catch up with interest payments while at the same time putting in an effort to make the best use of the limited amount of credit. As Businessweek put it, the loans from MFIs rival traditional “pawnshops and loan sharks.”¹⁵ In the case of Compartamos, for example, the effective interest rate paid by the borrowers goes as high as 100% annually. Unable to run their business as expected, borrowers defer payment of their loans, which results in higher interest payments. Particularly in a crisis environment, low business volumes are more likely to cause delays in repayments and increases in interest rates, a vicious cycle harmful for the poor. Under such circumstances, the possibility of added economic value is minimized.

Secondly, the interest-based mechanics of microfinancing, and by association its commercialization, have become an effective mechanism for integrating the poor into the global financial system. “Unbankable” until the 1970s, the poor have now been made de facto captives of the financial system. Although the original idea was to help the poor in ways unexplored so far and to make microfinancing “a tool of nonprofit economic development,”¹⁶ neither of these goals has been realized in the long term because of the heavy interest burden of microfinance formulation. In a slight reformulation, the question of the high interest rates is not whether they prevent microloans from working, but rather how they affect the working of the system. What happens is that the loans obtained by borrowers are directed to more urgent uses to “smooth consumption” in the short term, instead of being invested in potentially profitable business activities, which is stated as the chief goal of the microfinancing system. High interest rates change the pattern of loan consumption by borrowers; high interest rates preclude the chances of profitable entrepreneurial activity. Even if the loan is employed for business purposes, at the time of repayment the profits cannot match the interest¹⁷ and this eventually leads to the use of loans for consumption needs.

Conclusion

The contemporary capitalist global economic system has benefits and harms in proportion to the individual’s wealth, usually favoring the rich over the poor. Microfinance began with the hope of offering a helping hand to those outside and on the margins of the global economic system. The goal is an exalted one, suggesting respect and increased economic opportunity for the poor. Yet, the practice of microfinance seems to set it far from its moral foundations. Increased commercialization accompanied by exorbitant interest rates only reinforces the working of the global economic system to benefit the wealthier and harm the poor. Unless the fundamentals of microfinancing are transformed to not-for-profit bases, in the long term we may see this potentially valuable institution simply withering away to another form of aggressive capitalism. I would like to conclude with a quotation from Bediüzzaman Said Nursi pointing to two fundamental problems of our contemporary society:

… [T]he following two attitudes or approaches are the causes of all revolutions and social upheavals, as well as the root of all moral failings: … “I do not care if others die of hunger so long as my stomach is full,” and “You must bear the costs of my ease-you must work so that I may eat.”¹⁸

Microfinancing in its current formulation stands strangely where these two problems meet. On the one hand, it is an effort at minimizing the suffering of others by the extension of finance opportunities. On the other hand, those others carry the burden of this help, making the wealthy wealthier. In this regard, Bediüzzaman’s statement is intimately related to the way microfinancing, a potentially valuable initiative in itself, has become an instrument of the rich used against the poor through its dependence on commercialization and interest.

A. Kadir Yildirim is a PhD candidate in political science at the Ohio State University. He can be reached at yildirim.10@osu.edu.

Notes

1. Consultative Group to Assist the Poor (CGAP) website, http://www.cgap.org, accessed 12/26/2008.
2. Muhammad Yunus, 2007, “What is Microcredit?”
3. Gary Gardner, 2008, “Microfinance Surging,” Worldwatch Institute.
4. Daniel Pearl and Michael M. Phillips, November 27, 2001, “Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a Repayment Snag,” Wall Street Journal; Gary Gardner, 2008, “Microfinance Surging,” Worldwatch Institute.
5. Elizabeth Littlefield, Jonathan Morduch, and Syed Hashemi, 2003, “Is Microfinance an Effective strategy to reach the Millennium Development Goals?” Consultative Group to Assist the Poor (CGAP), p. 7
6. Ibid, p. 3.
7. See “Role of Microcredit in Poverty Alleviation,” 2005, First Quarterly Report of State Bank of Pakistan, 2004–2005 for data on India; see Global Development Research Center’s “Data Snapshots on Microfinance,” http://www.gdrc.org/icm/index.html, accessed 02/07/2009 for data on Bangladesh.
8. A.M.R. Chowdhury and A. Bhuiya, 2001, “Do Poverty Alleviation Programmes Reduce Inequity in Health: Lessons from Bangladesh,” in Poverty Inequity and Health, ed. D. Leon and G. Walt (Oxford: Oxford UP).
9. Ibid, p. 6.
10. See World Development Report 2006 by World Bank; and, A.Kadir Yildirim, 2008, “Economic Development via Human Development,” The Fountain, Issue 62 (March–April).
11. Pearl and Phillips, “Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a Repayment Snag”; Nimal A. Fernando, 2008, “Managing Microfinance Risks: Some Observations and Suggestions,” Asian Development Bank.
12. Viktor Berglind and Arizo Karimi, 2007, “Repayment Performance in Microfinance: A Theoretical Analysis,” University Essay from Uppsala University.
13. Ibid, p. 11;
14. Lewis’ study on the case of Compartamos is instructive on the benefits of commercialization for MFIs. Jonathan C. Lewis, 2007, “What Would Leland Stanford Do?” Microcredit Enterprises.
15. Businessweek, December 13, 2007, “The Ugly Side of Microfinancing.”
16. Ibid.
17. See James Surowiecki, “What Microloans Miss,” The New Yorker, 17 March 2008 for a discussion on the impact of high interest rates in microfinancing industry.
18. Bediüzzaman Said Nursi, The Words, New Jersey: Tughra Books, 2005, The Twenty-fifth Word, p. 427.