Microfinance Serving the Youth: Microfinance as
an Integrated Instrument of the Salesian Work
Position Paper
-
March, 2009
Jean Paul Muller SDB (Bonn, Germany)
Table of Contents
1.
2.
What are Microcredits? What is Microfinance? .................................................................................... 2
1.1.
Financial System Levels ................................................................................................................. 2
1.2.
Objectives of Microfinance ............................................................................................................ 3
1.3.
The Poor Do Not Need Pittance ..................................................................................................... 3
1.4.
Two different approaches: NGOs and Professional Microfinance Institutes ................................. 3
Credere means to Trust – Microcredit as an Instrument According to Catholic Social Teaching .......... 5
At a Glance: How Does Microfinance Support…........................................................................................ 7
3.
Microfinance and the Teaching of Don Bosco ....................................................................................... 8
3.1.
The Preventative System ............................................................................................................... 8
3.2.
Education to Good Christians and Responsible Citizens................................................................ 8
Microfinance fosters… ............................................................................................................................... 9
3.3.
4.
5.
Assistance of the educator – the Role of the Facilitator .............................................................. 10
Microfinance as an Integrated Part of Salesian Work.......................................................................... 11
4.1.
Potentials for SDB in the Microfinance Sector (in the Narrower Sense) ..................................... 11
4.2.
Potentials for SDB in the Microfinance Sector (Nonfinancial services) ....................................... 12
Criticism, Lessons Learned, and Challenges ........................................................................................ 13
5.1.
Business start-ups and microloans .............................................................................................. 13
5.2.
Microfinance Is an Important but not Sufficient Instrument ...................................................... 14
5.3.
Religious Congregations Should Not Function as a Lender ......................................................... 14
5.4.
The High Percentage of Female Participants ............................................................................... 14
5.5.
Group vs. Individual Loans – The Aspect of Solidarity ................................................................. 14
5.6.
Microfinance and the Remote Rural Poor ................................................................................... 15
CGAP: The Key Principles of Microfinance................................................................................................... 16
Benchmarking: MISEREOR's current priority areas for promotion.............................................................. 17
Sources ........................................................................................................................................................ 18
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The media is full of news about the present financial and economic crisis. Never before has a crisis made it
that clear into which direction our world is heading, if money is only deployed to maximize its augmentation
and its function as a service to mankind is forgotten. On the other hand, a significant proportion of the
population, approximately 500 Millions low-income households, does not have access to any financial
services, such as savings accounts, loans or insurances. These people mainly live in the developing world.
They have no chance to build any assets or smooth consumption in economically difficult times. On the
contrary, if poor people in developing countries want to deposit their savings, they are usually charged a fee
by the bank. If they need a loan, they are oftentimes forced to see a moneylender, who charges predatory
interest rates. Since the 1980s international, national and local developing agencies seem to have found an
effective answer to this challenge – microcredits, or more inclusive microfinance. This trend culminates in
the 2006’ Nobel Peace Prize for Muhammed Yunus and his Grameen Bank.
After a short introduction into the field of microfinance, this paper will argue how microfinance
a)
b)
c)
d)
Is a legitimate instrument according to the Catholic social teaching
Reflects the thought and preventative system of Don Bosco
Can constitute a part of Salesian educational work
And it will call attention on the risks and challenges involved and the lessons learned
1. What are Microcredits? What is Microfinance?
Poor people, like everybody else, need a variety of financial services to manage risks, build assets, smooth
consumption, and to run their businesses. They need these services since they too, are economically active,
because they possess their labor and oftentimes entrepreneurial ideas. Nowadays, microfinance constitutes
a collective term for various basic financial services. It allows poor people access to financial services such
as savings, loans, microinsurances, housing space financing and money transfer services. Today, an
important component are remittances, the transfers from family members abroad to their home country. 1 A
lot of these microfinance institutions offer multiple loan products providing working capital for small
businesses, loans for children’s education and secure deposit services. A characteristic that all of these
institutions share is that they offer their services – in smaller denomination and adjusted financial
technology – to clients who are poorer than traditional bank clients and who cannot present any pledgeable
securities.
Macro Level
Meso Level
Micro Level
Clients
1
2
1.1.
Financial System Levels
1.1.1. Micro Level
A variety of financial and nonfinancial institutions, including
savings and credit cooperatives; NGOs; state-owned and private
banks; postal banks; member-owned community organizations;
nonbank intermediaries, such as finance or insurance companies;
and other service providers (moneylenders, agricultural traders,
etc.). The micro level is the backbone of the financial system.2
See http://www.cgap.org/p/site/c/home/
See GCAP 2006 p. ix.
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1.1.2. Meso Level
Locally available market infrastructure and services, including rating agencies, auditors, networks and
associations, transfer and payments systems, credit bureaus, and information technology and technical
service providers.3
1.1.3. Macro Level
A conducive, stable macroeconomic and policy environment provided by the appropriate government
entities.4
1.2.
Objectives of Microfinance
These financial services fortify the economic potential and influence of the participants, enabling them to
overcome poverty of their own accord. It is the empowerment of the poor and disadvantaged to develop
their productivity and consuming power, so that they are able to improve their living conditions
autonomously and sustainably.
1.3.
The Poor Do Not Need Pittance
What they do need is access to liquid assets. This enables significant economies of scale and offers the
possibility to work profitably. Frequently, the poor sections of the population are forced to work
inefficiently. Microloans are able to produce striking improvements, so that the surplus generated through
the microloan is usually a multiple of the charged interest. This fact leaves microfinance economically viable
and allows a sustainable development of all market participants.5
Different approaches pursue the goal of closing the gap between the formal banking system and the
marginalized sector of society. Among the most successful are down-grading (a formal bank qualifies in the
microfinance sector), up-grading (a NGO or similar organization becomes a microfinance institution) and
bank linkage (a NGO assists in and provides the contact between saving groups and banks). All have one
common goal – to assist the poor in the process from being “unbankable” and becoming “bankable”.
1.4.
Two different approaches: NGOs and Professional Microfinance
Institutes
Large donor agencies hold the view that only microfinance institutions, that are financially viable and
subject to the market-based principle, are able to sustainably fight poverty and secure a stable
development. This means that the interest rate needs to cover all expenses plus a profit margin. They argue
that this policy will best insure the permanence and expansion of the services they provide. Sustainable (i.e.
profitable) microfinance providers can continue to serve their clients without needing ongoing infusions of
subsidies, and can fund exponential growth of services for new clients by tapping commercial sources such
as deposits from the public.6
3
See GCAP 2006 p. ix.
See GCAP 2006 p. ix.
5
See Sommer 2009 p. 12.
6
See CGAP 2006 S. 10.
4
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1.4.1. Why Do (Commercial) Microfinance Institutions charge high interest rates?
Over the past 20 years, microfinance institutions in the developing world have increasingly focused on
financial sustainability by charging interest rates that are high enough to cover all occurring costs.
Administrative costs are unavoidably higher for microloans than for normal bank lending. 100,000 loans of
$100 obviously cause higher costs such as staff salaries etc. than a single loan for the total amount. As a
result, interest rates have to be substantially higher. Additionally, microfinance not only requires
quantitatively more attention of the bank employee. A qualitative examination of the client is also
necessary, i.e. to visit the client and to talk about difficulites. Loans do not need to be necessarily cheap.
The poor and marginalized prefer flexible, immediate and unbureaucratic access to capital and processing of
a loan. Furthermore, moneylenders still charge a substantially higher interest rate.
Subsidizing microfinance programs to lower the costs for the participant distorts and undermines
the development of a feasible financial system for the poor, as it does not give local financial service
suppliers the chance to participate in the market. Additionally, subsidized low interest rates have proved to
be counterproductive regarding the repayment discipline. Money, that is handed out “easily” and does not
correspond to the current market value, will be understood as a present, but not as a mutual contract. The
important aspect of reciprocity and relationship on eye level has been omitted, and therewith the
fundamental prerequisite for a sustainable impact of the loan.7 It is thus essential to offer basic financial
services to the conditions of the local financial market.8 Although “financial services themselves should not
be subsidized, it is perfectly admissible to subsidize the building up of structures that can provide
sustainable services in this field. In this regard, it is essential from the outset to agree on and then uphold a
clear exit scenario.”9
Nevertheless, attention needs to be paid to the determination of a fair interest rate. Cost recovery is
needed, and also surpluses – but an inappropriate equity return of the microfinance institute would have to
be covered by the client eventually.
1.4.2. The Approach of NGOs
Certainly, the above approach is only justified towards “economically active” poor. If a bank or program is to
work cost-effectively and profitably, loans below a certain threshold are clearly impossible. In comparison
with a motor mechanic, a woman selling home-made food at the curbside is clearly disadvantaged in
acquiring a loan and banking services. Hence, these microfinance institutions do not reach the really poor.
The second school of thought, however, holds the view that this marginalized section of society does not
depend on pittance, neither. They as well are willing and able to provide for their future, though they need
different microfinance models, based on solidarity not on market economy. Above all, they are not able to
overcome poverty on their own. In groups or associations they are able to better develop their potentials
and encourage each other. If a saving and loan service is to really work, it has to be embedded in a
comprehensive, i.e. holistic, program. Such a program provides education, ecological and sanitary
awareness, it fosters the self-reliance and self-conception of the persons concerned and the development of
the community. This represents another form of sustainability, although these programs might financially
not be sustainable.10
7
See Sommer 2009 p. 12f.
See http://www.misereor.org/issues-themes/microfinance/approaches-and-projects.html
9
http://www.misereor.org/issues-themes/microfinance/approaches-and-projects.html
10
See VENRO 2007 p. 53.
8
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1.4.3. The Linkage-Method: Bringing Self-Help Groups and Banks together
This method is able to combine the “commercial” and the “holistic” approach, since it deploys the
advantages and strengths of both. That means that the NGO or organization only provides the contact
between self-help groups and the banking institute. These self-help groups meet on a regular basis and
agree on depositing a part of their income. After a certain time, the members are allowed to lend from
these group savings. In doing so, all members keep an eye on the deployment of the loan, on the type of the
investment and on the punctual repayment. This blend of solidarity and peer pressure induces repayment
rates of above 98%.
The self-help groups process their transactions at the bank on their own. But the organization
guides to this kind of independence. Step by step, the participants learn the requirements for bank services,
such as the depositing of small savings on one’s own bank account, signing the deposit receipt,
bookkeeping, and the punctual repayment of the loan and interest.11 The NGO thus “brings” the client to
the bank. Additionally, they learn basic economic knowledge, planning and realization of entrepreneurial
activities, and the evaluation of chances and risk, i.e. a market analysis. Such an organization provides staff,
who assists self-help groups during the start-up phase, who train certain participants to take leading
positions. This staff creates the prerequisite for the reasonable deployment of financial services by the
participants.
Such a combination of professional microfinance and self-help groups is a promising blend. In
addition to saving, serves the option of a loan as a motivating criterion. This model is able to achieve high
repayment rates, since the participants know best how to deploy the capital in the region. Helping people to
help themselves creates the basis for an independent and sustainable development. Self-help groups
facilitate this process, not by impose a view on the participants, but by enabling them to be independent –
via training, instruction, group meetings and discussion. When deployed right, participants are able to learn
from each other, they find reassurance and learn to deal with criticism. They practice democratic decisionmaking and experience, that their vote counts and that they can make a difference. In this context, saving
groups and the linkage-approach lead to social education, which again fosters social development. This
development of self-esteem renders the assisting organization unnecessary at some point in time – as the
participants become mature and responsible citizens.12
Thus, Bank linkage uses this strength of the organization and combines it with the professional
financial service of the bank. All forms of institutions provide an important aspect of development, but not
all of them can be measured against financial sustainability, but still be relevant. Solidarity has to be part of
the microfinance sector.
2. Credere means to Trust – Microcredit as an Instrument According
to Catholic Social Teaching
The original meaning of the term „credit“: credere in Latin means to trust. A credit or loan is based on the
trust, that it will be repaid. Certainly, the microfinance sector fully reveals the close connection of the
financial instrument credit, on the one hand, and concepts of faith and trust on the other hand. It is a
connection that puts the human being center stage. The person with all his or her potentials and individual
personality is the capital hedging element in this relationship between investor and capital seeker.
11
12
See VENRO 2007 p. 27.
See VENRO 2007 p. 22.
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Subsidiarity functions here as the key to success.13 The following chapter explains how the instrument
microfinance can be deployed according to Catholic social teaching.
Advancing a person’s full potential – in this context microfinance does not only seem like an applied
example of the Catholic social teaching, when applied in the right way, it also emphasizes its anthropological
concern. Personhood, subsidiarity and solidarity are key concepts for the understanding of what
microfinance is able to stand for. In this concept, the individual is the epicenter of all economic activity.14
Catholic social teaching understands justice as equal opportunities (iustitia commutativa), distributive
justice (iustitia distributiva), and legal certainty (iustitia legalis).15 Economic justice thus comprehends
equitable chances and access to resources, an evenhanded allocation of the aggregate income and a just
legal order. Poor and disadvantaged sections of the population are often reduced to being consumers and
cheap labor, instead of being regarded as active designer of the economic sector. In this context,
microfinance supports the active and equal participation of the poor, especially in a neoliberal market
economy, which favors strong market participants and thus exacerbates income disparities.
Furthermore, microfinance is able to create employment, either by self-employment or by allowing
augmenting one’s business and creating additional jobs. Precisely developing countries suffer from high
unemployment rates or hidden unemployment, especially among the young population. According to
Catholic social teaching employment forms part of everybody’s personhood. A person without labor is
unable to actively participate in social life, nor is he/ she able to earn their livelihood. The economic
exclusion of a considerable part of the population can be considered as a structural injustice, that is
incompatible with the Christian concept of man. This injustice is being exacerbated by the fact, that in the
developing world more than 50% of the population is under 20 years. These young people still have to find
their place in the society and the economy. Their integration must be considered a key issue of a just and
equitable development and must be regarded a sine qua non for the protection of the internal peace of any
society.16
To be considered a legitimate instrument for development, microfinance must comply with the
need to work within a framework
“[…] where economic rationality is not detached from the requirements of ethical
rationality, in which the basic focus and purpose of any economic activity is the human
person and the promotion of its well-being, along with the development of each and every
man in their entirety”17.
Thus, the individual and the overcoming of global poverty must be the driving force for microfinance
institutions. Microfinance thus requires an appropriate concept of the (financial) market, so that profits do
not become an end in itself, but an instrument, that allows people to fully develop their entrepreneurial
creativity and personal responsibility. Although profits are generally considered indicators for the sound
condition of a business. A company can only create employment, provide income and pay for social
benefits, if it realizes profits in the medium and long term. This ensures economic capacity and allows
investments, innovation and the ability to set up reserves for times of crisis. However, a too ideological view
of (financial) markets which “is considered to be absolute, like a totalitarian deus defining every economic
relationship“18 leads to an exacerbation of inequalities, leaving the poor more marginalized.
Microfinance is able to incorporate these social standards by assisting the poor and marginalized to
fully develop their economic creativity and responsibility. But it is able to achieve even more – it offers
13
See Sommer 2009 S. 6.
See Sommer 2009 p. 3.
15
See Misereor 2008 p. 12.
16
See Misereor 2008 p. 12.
17
Card. Martino 2006.
18
Card. Martino 2006.
14
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access to ethically “clean money” for all parties involved. It offers clean money for the credit users, in the
sense that no predatory interest rates are charged. But it also offers an opportunity for investors in the
developed world. Considering the fact, that the microfinance sector largely developed independent from
the global financial markets and that political and cyclical struggles have only minor influence on this sector,
its attractiveness for any investment portfolio becomes obvious. Additionally, investment into microfinance
does not only hold financial, but also social yields. It can be considered an ethical investment.
At a Glance: How Does Microfinance Support…
…Justice?
Microfinance allows access for all people to financial services, not only to those that seem credit-worthy in
the eyes of a bank. Furthermore, it offers people the opportunity to display their economic potential and to
fight against the structural injustice and poverty.
…Solidarity?
As the economist Jeffrey Sachs put it in his book “The End of Poverty”, microfinance helps all the people,
who are not able to reach the first rung of the ladder, which they then could climb on their own.19
…Subsidiarity?
The poor and marginalized do not need pittance. When they have access to financial services, they are able
to help themselves. They themselves can thus determine in what way they want to be economically active.
Additionally, a successful form of microfinance is saving in self-help groups.
…Welfare?
Microfinance creates employment. Additionally, various studies document that access to microfinance
institutions results in an improved school attendance of the credit users’ children. Additionally, higher
incomes lead to improved nutrition and subsequently to lower sensitivity to diseases.20
…Personhood?
Microfinance primarily serves the social-economic development of its clients. The individual chooses in
which way he or she wants to be economically active and is able to use his/ her own potentials.
It is the “stakeholder value” that counts – not the “shareholder value” and a sole orientation towards yields.
This produces the success of microfinance, which allows sustainable development due to market-based
instruments. The social market economy functions as the basis for profit seeking. This approach is based on
the assumption that all parties involved might benefit from the commercial relationship and create a winwin situation.21
19
See VENRO 2007 p. 60f.
See BMZ 2008 p. 16.
21
See Sommer 2009 p. 6f.
20
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3. Microfinance and the Teaching of Don Bosco
Considering all the processes involved in microfinance, it is more than a simple financial instrument that
helps the poor and marginalized to overcome their present situation. Microfinance is also an educational
act. And education does not come automatically, but implies dedication, patience and a certain share of
risk.22 To live in poverty deprives people of their dignity. Withdrawing the possibility to make a living, leaves
especially young people passive and with a feeling of uselessness. It is the educator’s task to outweigh this
conviction and to create a process of recovery to regain values, one’s dignity and a healthy self-perception.
3.1.
The Preventative System
The Salesians of Don Bosco have an answer to these challenges for marginalized juveniles all over the world.
The Salesian contribution to educational science and answer to ongoing challenges is Don Bosco’s
preventative system. Based on the Christian idea of man, great importance is attached to the quality of the
relationship between educator and juvenile.23 In his Rome letter, Don Bosco asks the educator to love what
the adolescents enjoy and to respond to their affection.24 Microfinance gives the educator, or better
facilitator, the chance to, respond to the juvenile’s strengths and affections and gives them the room to live
their professional and economic potential in society. In that way, microfinance offers a possibility to open up
new chances for the young and marginalized in order to take up their lives into their own hands und to
develop a strong personality. In this context, microfinance also offers a chance to make young people visible
in a society that mainly advocates the economically strongest. Additionally, it is an instrument to protect the
young people from dependencies, as it shows ways to be responsible for one’s own life. In this context,
microfinance can be regarded as an instrument for Don Bosco’s ‘social dimension of prevention’25 – it
combines social welfare and charity with the securing of a social-economic livelihood and the inclusion into
the economy. Due to this approach, the disadvantaged youngsters are able to liberate themselves from
their fateful environment and to escape marginalization.
3.2.
Education to Good Christians and Responsible Citizens
The aim of prevention according to Don Bosco is the social integration and holistic development of the
individual – this can be paraphrased by the Salesian aim of education: T become a Good Christian and a
responsible citizen. The adolescents as a whole and the improvement of his/ her living condition take center
stage. The impact on the development of one’s personality and self-esteem is resounding. Obviously,
marginalized juveniles consider a loan as a sign of confidence at eye level. They are trusted with a loan and
their individual achievements are being honored and appreciated.26 Again: “credere” means to trust. This
reflects quintessentially the preventative education. In this concept, the young individuals are not the
“object” of education. On the contrary, Don Bosco emphasizes the active participation of the juveniles.27
22
See Bottaso 2004b p. 22.
See Schmid 2001 p. 9.
24
See Norddeutsche Provinz 2002 p. 18.
25
See Schmid 2001 p. 4.
26
See Sommer 2009 p. 6f.
27
See Norddeutsche Provinz 2002 p. 21.
23
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Microfinance fosters…
… self-confidence and self-esteem: Loans proof to the juveniles that they are able to meet obligations
through their punctual installment. It demonstrates them what they are capable of out of their own power.
The possibilities and options, which are created by a loan, allows the marginalized youngsters to grow and
develop as a person, see themselves as a human that matters, who has his/ her knowledge and strengths. It
teaches a person to feel responsible for something and to be proud of oneself.
…discipline and organization: Saving and microloans in self-help groups asks the participants to
dedicate certain hours a week to reunite with the group, although one might have other things to do. Being
a member of a group requires compromises and organizing abilities. Additionally, saving groups require the
payment of installments every week. This enhances the financial discipline of the participant.
…responsibility: Self-help groups hold weekly evaluation meetings and check the repayment habits of
each credit user. Regular repayment allow for future loans. This teaches responsibility towards one’s
obligations.
… appreciation of labor: No matter what occupation the participant chooses, this labor dignifies,
because it is one’s own power and hands that help to advance.28
… team spirit: If one group member is not able to pay his/ her installments, the rest of the group covers
this quota. The group supports and challenges – it is the only guarantee and pressure.
… citizenship: Bit by bit the juveniles are able to develop as citizens, who know their rights and express
their opinion. The educator assists during this process – his task is the civic, moral and intellectual education
of the participant.29
Microfinance accomplishes even more, it does not only enhance the strengths and features of the character,
it also cultivates the entrepreneurial qualifications of the adolescents, such as
Open-mindedness
Ability to communicate
Problem solving ability30
Assertiveness
Handling of scare resources
Reasoning ability
Vitality
Ability to handle conflict
Knowledge about business
During the process of holistic encouragement, the young people are accompanied on their way to humane
and Christian fundamental values. The educator’s role is not only emphasized by Salesian education, but
takes center stage in the microfinance sector.
28
See Bottaso 2004b p. 63f.
See Norddeutsche Provinz 2002 p. 12.
30
See Kuratorium der dt. Wirtschaft 2006.
29
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3.3.
Assistance of the educator – the Role of the Facilitator
“Love creates Trust.”31 Don Bosco’s words from the Rome letter seem to gain renewed importance in the
microfinance sector. The preventative education requires a cooperative and participatory attitude on the
part of the educator. This education is shaped by mutual trust and honest interest in the young person. Don
Bosco deployed the term “assistance”.32 Accordingly, the role of the educator needs to take center stage in
the microfinance sector. Taking Yunus’ Grameen Bank as an example, it can not only be considered a
microfinance institution, but also an educational process.33 It teaches the poor and marginalized how to be
“bankable”, i.e. the credit users learn basic financial ideas, such as the functioning of interest rates, the
processes involved to acquire a loan at a bank, the proceeding of difficulties with repayment etc. The
facilitator, such as staff or the contact person for a self-help group, stands at the center of the procurement
of loans.
Microfinance/ Microcredit
Credit User
Facilitator
Bank
Being in such a center position, the first who needs to be educated are the facilitators, the educators
themselves. The system of Grameen, for instance, is based on the principle that the clients do not have to
go to the bank, but that it is the bank that comes to the client – a totally new approach for a “traditional”
bank employee. The project “USHAY”, founded by Father Botasso SDB in Quito, works in the same way. The
relationship between facilitator and participant needs to be face to face.34 This approach provides more
than a traditional bank, it offers ethical companionship. This concept reflects the Salesian preventative
system, where the educator stands “by your side”. Accordingly, “USHAY” constitutes an educational project
that operates through microfinance. Loans function here as a learning instrument.35 The role of the
facilitator should no be understood as a “cooperator” but as a “catalyst”. They are part of a strong civil
society, which implements what the government is not able to.36 Microfinance is a proposition with a truly
humane face, more than monetary. Through its implementation, a process of retrieval of values is being
generated among the participants. This process is embedded into an mutual educational dynamic between
participant and facilitator.37
31
See Norddeutsche Provinz 2002 p. 17.
See Schmid 2001 p. 9.
33
See Botasso 2004b p.11.
34
See Botasso 2004b p. 29.
35
See Botasso 2004b p. 34.
36
See VENRO 2007 p. 145.
37
See Botasso 2004b p. 61.
32
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4. Microfinance as an Integrated Part of Salesian Work
The previous sections have argued how Microfinance can be integrated into the Salesian concept of
education. Based on these theoretical findings, the following section points how this can be applied in
existing Salesian structures, or more precisely how microfinance has already been deployed in Salesian
projects.
The Salesians should exploit their structural advantages. They are known worldwide for being longstanding and experienced with a holistic vocational training approach. In addition, the Salesians have a deep
insight into local culture and social circumstances. This structural strength and the credibility of Don Bosco
institutions should be exploited in any microfinance program implemented.38 It is fundamentally important
to distinguish between business start-up projects and microfinance. Accordingly, the institutional distinction
between vocational training center and microfinance institution cannot be overemphasized. On the other
hand, they might feature a possible interface, when a microfinance institution offers microlending for
founders of new businesses. Within the Salesian vocational training, (microfinance-aided) business start-ups
are able to play a distinctive role in the holistic approach to give young people a chance of sustainable
income generation. By the use of this instrument, the entrepreneurial potential and the economic initiative
of the juvenile can be enhanced. Self-employment and occupation for marginalized juveniles can be
substantially advanced through the combination of microfinance and business start-ups. Accordingly, these
programs counteracts unemployment, creates perspectives for juveniles and enables young men and
women to find their place in society and economy.39
4.1.
Potentials for SDB in the Microfinance Sector (in the Narrower
Sense)
A Holistic Approach for the Poor: While many poor people (potentially) benefit from a micro grant,
the extremely poor are hardly able to use loans or repay them. Or microfinance does not reach them at all.
To use credit effectively, clients must be able to generate an income that is higher than the interest rates for
the loan. Providing loans to people, who are not able to use it efficiently, could push already-vulnerable into
debt. Thus, the participation of a person needs to based on his or her creditworthiness. If this condition is
not satified, then projects should focus on consolidating the creditworthiness by enhancing the repayment
capacity of the participant. Teaching the people how to save and handle money might be the only
reasonable modus operandi.40 Additionally, they need nonfinancial services or safety net services, such as
skills training, nutrition and health assistance, and education. Traditionally, these programs did not prepare
the participants to access basic financial services or to start a microbusiness. One approach is the linkage
between microfinance and safety net services to graduate the poor from recipients of social services to
clients of commercial microfinance institutions. These projects offer their services for a certain time, during
which the participants are enabled to develop entrepreneurial skills and taught how to save small amounts
of money. After this period, participants are able to graduate into a conventional microfinance program. To
avoid undermining the repayment discipline for loans (and thus the sustainability of the microfinance
institutions), a clear distinction between the grant of the safety net service and a microloan is
indispensable.41 Microloans as an instrument is not suitable for all people, some are not capable of helping
38
See Fischer 2007 p. 16.
See Misereor 2008 p. 4.
40
See http://www.cgap.org/p/site/c/home/.
41
See CGAP 2006 p. 32.
39
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themselves. Microfinance is based on subsidiarity, but that does not leave solidarity redundant.42
Providing Contacts: Like other Entrepreneurship Development Programs (EDPs), the Salesian strategy
intents to deal with the lack of integration of vocational training graduates into the formal labor market.
Approaches to facilitate business start-ups are often integrated into concepts for Business Development
Services (BDS). These programs do not provide direct financial support, instead they give information about
credit structures and processes and link business with microfinance institutions and regular banks. Thus,
Salesian vocational training centers should not function as a microfinance institution, nor should they build
up loan funds. SDB should rather cooperate with local microfinance service providers to broker suitable loan
possibilities for the participant (linkage-approach), for instance by offering a “credit information desk”.
Assistance: The emphasis should be on educational and social assistance and training. Young
entrepreneurs need assistance at the beginning of their business to make them “bankable”. That help might
include to show how loans and saving work, the importance of punctual repayment and how to plan future
investments. Additionally, they also need assistance in communication strategies, price calculation and
market analysis. Managerial technical assistance and funding should be administrated by different
institutions.
Guarantee fund: A Salesian educational institution could deposit a fund at a bank in order to absorb the
risks of loans for business start-ups, which functions as a guarantee for the bank or microfinance institutions
and facilitates the access to capital for young entrepreneurs.
Microlending as an educational instrument: At the DB Reach Out (Guwahati, India), micro loans are
deployed as an assisting element of the classes to make the participants “bankable”. The emphasis is on jobplacement, i.e. assisting the participants in finding an employment. Only about 10% of the participants are
able and willing for a business start-up.
Cooperation with microfinance instutions: Conditional cash transfers are a popular way to structure
grants. Loans might only be given to entrepreneurs who promise to create training positions or employment
for graduates from SDB institutions. Or beneficiaries receive a loan in exchange for important behavior such
as school enrollment.43
Awards: Instead of loans, the best participant, e.g. with the most promising business plan, wins a prize,
such as a certain amount of capital for the young entrepreneur.
4.2.
Potentials for SDB in the Microfinance Sector (Nonfinancial services)
Donation of tool kits: Graduates are allowed to keep the tool kits they have been using during their
vocational training.
Provision of infrastructure: Young entrepreneurs do not need to use a loan, as they are able to use the
rooms and machines at the vocational training center or in special workshops integrated into the center.
42
43
See Sommer 2009 p. 14.
See CGAP 2006 p. 32.
12 | S e i t e
Showrooms: Sales promotion for collective marketing could be provided.
Networking: Systematic search for potential partners and contacts to local businesses. Additionally, it
proved useful to establish an active alumni network, as it results in viable contacts to local businesses.
5. Criticism, Lessons Learned, and Challenges
5.1.
Business start-ups and microloans
Special attention should be paid to the fact that funding of business start-ups does not work like regular
microlending. Micro loans aim at a repayment rate of nearly 100% – a rate, which cannot be accomplished
by young entrepreneurs. Due to specific challenges, repayment of business start-up grants is far more
difficult. Young entrepreneurs often lack experience, maturity, communication skills, and support of the
family. Experiences in Sunyani, Ghana, have proved that young entrepreneurs often disregard financial
planning in the long and medium run, do not differentiate between profit and turnover, and between
business and private expenses.44 Accordingly, a credit fund for business start-ups cannot be conducted
financially sustainable.
Another aspect to be considered is that business start-ups oftentimes do not need microlending,
but financial support for small scale industries. Microloans usually imply a shorter duration and smaller
amounts for informal micro enterprises (one person activities). Small scale industries require a higher credit
volume.45
Furthermore, not all business start-ups are economically desirable. A higher number of businesses
does not necessarily have to be regarded positively. From an economical point of view, new enterprises are
only able to generate growth and employment, when the yield positive external effects. New businesses
might feature external effects when they are innovative and growth oriented. Innovative in this context
does not necessarily stand for high-tech, but includes all goods and services that create a new market, for
instance regionally, locally or for new target groups. Growth oriented in this context means, that businesses
are not only one-person enterprises, but that they are able to create employment. Facilitation of business
start-ups in international development mainly concentrates on poor and extremely poor. That offen entails
a concentration on less innovative and growth oriented businesses. When entrepreneurs enter an already
saturated market with a “traditional” business idea, it might crowd out other market participants, or it
lowers the income of all market suppliers.46 Business start-ups create externalities when they enhance the
technological progress. In this context, the term technological progress has to be understood broadly, such
as the modernization of production and supply processes, and the development of new goods and services.
Thus, innovation includes a regional reference: What might be an established business idea in the capital
could be an innovation in remote areas.47
44
See Fischer 2007 p. 8.
See Fischer 2007 p. 12.
46
See Eckardt 2003 p. I.
47
Eckardt 2003 p. VI.
45
13 | S e i t e
5.2.
Microfinance Is an Important but not Sufficient Instrument
Although microfinance is regarded as one of the most promising instruments in development politics, it
hardly developed any economical leverage effect. “Bangladesh and Bolivia are two countries widely
recognized for having the most successful micro credit programs in the world. They also remain two of the
poorest countries in the world.”48 The full potential of microfinance can only be developed when it is
combined with additional complementary development instruments, such as education. Microfinance is not
the panacea in the fight against poverty. The experiences made, showed that isolated lending programs
cannot be the answer. While the provision of financial services is fundamental, it is by no means sufficient
to enhance self-help and self-responsibility. Constant assistance via education and training close to the
market needs to be integrated into any microfinance program. Additionally, attention needs to be paid to
the social, religious, and cultural realities of the local population and economy.
5.3.
Religious Congregations Should Not Function as a Lender
This could deteriorate the repayment morale of participants. If an intermediate organization is founded,
which grant microloans, an efficient management is imperative. Incentive systems for the organization staff
to achieve a high repayment rate are recommendable. Nepotism needs to be strictly avoided. Additionally,
decisions should be taken on transparent and comprehensible base for all organization members.
5.4.
The High Percentage of Female Participants
Experience has shown that women adapt better and faster to the process of self-help. They achieve higher
repayment rates, as they reveal a thorough handling of the loan and repayment, and they are more likely to
invest into the education of their children. A loan given into the hands of a woman to administrate the
household is more likely to achieve social yields than it is in the hands of a man.49 Approximately 80% of the
microfinance clients are women. However, the literal exclusion of men is extremely problematic. Especially
young men end up in antisocial activities as a result of a lack of economical prospects and simultaneously
high expectations of the social environment. Suitable instruments thus need to be developed for the
successful inclusion of young men.
5.5.
Group vs. Individual Loans – The Aspect of Solidarity
Since self-help groups and saving cooperatives are a popular instrument in the microfinance sector, a
fundamental question needs to be asked – whether the general aim is achieve individual access to financial
services and group-based approach are only feasible temporarily, or whether group loans constitute an end
in itself. If the goal is individual access to basic financial services and saving groups are only a means to an
end, the value of solidarity can also only be regarded as temporary.
In addition, solidarity within groups might be an idealized value that only works in theory. In reality, it is
oftentimes only the leaders of saving groups that gain access to loans. The value solidarity might soon turn
into the negative aspect of peer pressure.
48
49
Cockburn 2006.
See Botasso 2004a p. 41.
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5.6.
Microfinance and the Remote Rural Poor
Reaching the poor in rural regions presents different challenges than those in urban areas. The demand is
uneven and dispersed. Weak institutional capacity of service providers and a poor infrastructure add to high
transition and information costs for the client. Moreover, rural areas usually depend on agriculture. This
leads to a high seasonality of productive activities and an uneven income, accompanied by low market
prices during the harvest time. Inherent risks of farming present further challenges, such as drought, heavy
rainfalls, pests, etc. in the sector of agriculture. Livestock breeding has to deal with potential animal
diseases, high costs for medical treatment and vaccinations, high forage costs, and a low purchasing power
concerning high-value products of the rural population.50 Any financial service has to consider these special
circumstances. An additional aggravating factor is that remote areas are for the most part unattractive for
the traditional financial sectors, as the costs for a local branch cannot be covered due to low population
density. If banks still get involved in rural areas, poor clients usually do not gain access to loans because of a
lack of conventional collateral.51
50
51
CGAP 2006 p. 28.
BMZ 2008 p. 10.
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CGAP: The Key Principles of Microfinance
Commitment to applying good practice in microfinance comes from the highest levels of donor countries
and agencies. In June 2004, the Group of Eight (G8) endorsed the “Key Principles of Microfinance” at a
meeting of heads of state in Sea Island, Georgia, USA. Developed (and endorsed) by CGAP’s 28 public and
private member donors, the Key Principles are translated into concrete operational guidance for staff of
donors and investors in these Good Practice Guidelines.
1. Poor people need a variety of financial services, not just loans. In addition to credit, they want
savings, insurance, and money transfer services.
2. Microfinance is a powerful tool to fight poverty. Poor households use financial services to raise
income, build their assets, and cushion themselves against external shocks.
3. Microfinance means building financial systems that serve the poor. Microfinance will reach its full
potential only if it is integrated into a country’s mainstream financial system.
4. Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people.
Unless microfinance providers charge enough to cover their costs, they will always be limited by the
scarce and uncertain supply of subsidies from donors and governments.
5. Microfinance is about building permanent local financial institutions that can attract domestic
deposits, recycle them into loans, and provide other financial services.
6. Microcredit is not always the answer. Other kinds of support may work better for people who are
so destitute that they are without income or means of repayment.
7. Interest rate ceilings hurt poor people by making it harder for them to get credit. Making many
small loans costs more than making a few large ones. Interest rate ceilings prevent microfinance
institutions from covering their costs, and thereby choke off the supply of credit for poor people.
8. The job of government is to enable financial services, not to provide them directly. Governments
can almost never do a good job of lending, but they can set a supporting policy environment.
9. Donor funds should complement private capital, not compete with it. Donors should use
appropriate grant, loan, and equity instruments on a temporary basis to build the institutional
capacity of financial providers, develop support infrastructure, and support experimental services
and products.
10. The key bottleneck is the shortage of strong institutions and managers. Donors should focus their
support on building capacity.
11. Microfinance works best when it measures—and discloses—its performance. Reporting not only
helps stakeholders judge costs and benefits, but it also improves performance. MFIs need to
produce accurate and comparable reporting on financial performance (e.g., loan repayment and
cost recovery) as well as social performance (e.g., number and poverty level of clients being
served).52 (CGAP Donor guidelines)
52
CGAP 2006 p. B.
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Benchmarking: MISEREOR's current priority areas for promotion
 Establishment of new and strengthening of existing savings and credit groups among the poor with
the aim of making them permanently "bankable"
 Linkage of these groups with formal (micro)finance institutions
 Development and introduction of new, innovative and needs-oriented financial services, such as in
the fields of insurance and money transfer
 Financial and commercial training and advisory services for selected target groups, e.g. individuals
operating microenterprises or starting up businesses, to enable them to access financial services
and use them successfully
 Mobilisation of local financial resources (e.g. via banks) for microfinance programmes
 Cross-regional exchange of experience and networking of microfinance institutions, primarily
among small-scale finance institutions
 Lobbying and advocacy work to improve the political and socioeconomic environment
 Provision of microcredit funds only under very specific conditions.53
53
http://www.misereor.org/issues-themes/microfinance/approaches-and-projects.html
17 | S e i t e
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