New Funding To Expand Volunteer Initiatives
August 26, 2010 by grameenfoundation
Sabrina Quaraishi is Client Relations Manager for Grameen Foundation’s Bankers Without
Borders® program.
We are very excited to launch the Bankers without Borders Alliance Program as a way to utilize
the increasing number of skilled volunteers who join our program to donate their time and skills
in the space of microfinance and technology for the poor and at the same time serve the various
needs of microfinance institutions and other organizations serving the world’s poor.
Harvard & Haas Business School students working on a BwB volunteer project.
To expand volunteerism in the microfinance and technology-for development sectors, Bankers
without Borders, an initiative of Grameen Foundation announced the availability of US$150,000
in seed capital to microfinance associations and other pro-poor organizations interested in
expanding Bankers without Borders volunteer services to Asia and the Americas.
Presented by J.P. Morgan, the Bankers without Borders Alliance Program aims to establish a
global network of local organizations who can help identify and scope volunteer projects that can
benefit from the pro bono services of the more than 4,500 skilled business professionals from
around the world willing to donate their time and expertise to help microfinance and technology
organizations improve their scale, sustainability, and impact. This first round of competition will
focus in Asia and the Americas. Future rounds of funding will focus on expanding the program
in Africa and the Middle East.
A formal request for proposals both in English and Spanish can be found at
http://www.bankerswithoutborders.com/mfis-networks. The deadline for submission is
September 30, 2010. Selected organizations will be announced in November 2010.
For those organizations interested in applying to join the Alliance program, Bankers without
Borders will hold two technical assistance conference calls:
For LAC Applicants (Presentation in Spanish)
Tuesday, August 31, 2010
11am-12am US EST
Call-in Details:
Conference Call in Number: 1-404-920-6650
Participant code: 21285456#
For Asia Applicants (Presentation in English)
Stay tuned for our next Asia technical call. Please check back with us at
http://www.bankerswithoutborders.com/mfis-networks for details on our next call.
Tags: volunteers
Posted in Uncategorized | Leave a Comment »
The Making of a Microfinance Music Video
August 18, 2010 by grameenfoundation
Fred Graves is an intern at Grameen Foundation, working with our Mifos® Team in Seattle,
WA. Fred’s passions include microfinance as well as music. To help Grameen Foundation win a
$200,000 grant, Fred wrote, performed & filmed what we believe is the best rap video about
microfinance. This post is also featured on the Huffington Post Impact website.
When I was approached by our marketing department to put together a song for the Members
Project, I was stoked. Hip hop has been a passion of mine for years, and Microfinance is rapidly
becoming my foremost interest. I was excited about the chance to combine the two in one
project. Upon receiving the assignment, I began my usual artistic routine of composing the
lyrics in my decrepit rhyme book on my bus ride to and from work.
The biggest challenge was that I had no instrumental with which to write the song. Enter
Michael Ehrhart (AKA Agent M), a friend of mine since high school who composes beats in his
free time. I contacted him and no more than two days following our conversation I had myself a
“banger” track to write to. Even more impressive was that he composed the beat around a
sample he took from a song performed by a Ghanaian singing group recorded by field workers
on Grameen Foundation’s MoTech project.
We recorded the song in a studio at Western Washington University where Mike is fulfilling his
undergraduate degree. We knocked out the recording with relative ease and even managed to
record the vocals for some other projects we are working on as well. With the song composed,
the next step was to film the music video. Enter Scott Everett, a coworker of mine at the
Grameen Technology Center. It may come as a surprise to the viewers of the video, but this was
actually Scott’s first ever endeavor at filming. Despite his years of experience with photography,
he had yet to branch out into the world of motion picture. However, not only was Scott able to
adapt quickly to the unfamiliar task, his creativity behind the lens added a whole new dimension
to the video.
Next we lay the vocals over the beat and edited the footage. We integrated profiles of several
Grameen Foundation borrowers to really bring home the message of who we are truly working
for. Mike was great to collaborate with, and as a result the video turned out even better than I had
anticipated. So with the draft of the video complete we put it up on YouTube for a trial release
within Grameen Foundation. I credit the feedback I received from my coworkers for truly taking
the video to the next level. They offered a plethora of candid feedback that I took to heart, and
as a result we cleared both the song and video of several blemishes that would have certainly
detracted from the video’s impact.
I would like to thank Mike, Scott and my friends at Grameen Technology Center for providing
me with the assistance critical to making this project a success. So check out one of the select
few microfinance music videos in circulation and enjoy!
Tags: intern, rap video, music, hip hop, video, rap
Posted in microfinance | 1 Comment »
Engaging the poor in business using…yogurt
August 17, 2010 by grameenfoundation
Grameen Foundation supporter and actress Yeardley Smith (voice of “Lisa Simpson” on the
popular TV show The Simpsons) and President and CEO Alex Counts traveled to Bangladesh in
late July 2010. They visited Grameen Bank and some of the other enterprises Professor Yunus
has launched to accelerate poverty reduction. This is Alex’s fifth and final blog post chronicling
their visit.
My trip to Bangladesh with Yeardley Smith and the rest of our delegation was a terrific learning
experience. It proved to be a window into a possible future for microfinance, since Grameen
Bank, its affiliated companies, and other groups in Bangladesh are far ahead of the rest of the
movement in many ways.
On the morning of our sixth day, we were joined by three French interns with Grameen-Danone.
The original social business focused on combating malnutrition and poverty, Grameen-Danone
produces fortified yogurt and engages the poor in the production and sales processes. First stop
was one of four collection points where Grameen-Danone contractors test and purchase milk
from local farmers, including quite a few Grameen borrowers. They set up in a convenient
location and guarantee a fixed price all year round—both of which, based on random interviews I
conducted, are appreciated by the local people even if they can occasionally get a higher price in
local markets miles away.
Yeardley and Alex at the Yogurt Factory
Then we went to a cooling station where the daily milk collections are stored for a few hours
before being sent to the Grameen-Danone plant. (Everything is transported using local rickshaw
pullers and “baby taxi”—three-wheelers—drivers on contract. The time from milk collection to
yogurt in a cup ready to be sold or shipped is just 36 hours!) Read the rest of this entry »
Tags: Yeardley and Alex Bangladesh Trip July 2010
Posted in Business, Social Business, Travelogue, Yeardley Smith | 2 Comments »
“Bangladeshis seem very busy!”
August 16, 2010 by grameenfoundation
Grameen Foundation supporter and actress Yeardley Smith (voice of “Lisa Simpson” on the
popular TV show The Simpsons) and President and CEO Alex Counts traveled to Bangladesh in
late July 2010. They visited Grameen Bank and some of the other enterprises Professor Yunus
has launched to accelerate poverty reduction. This is Alex’s fourth blog post chronicling their
visit.
Yeardley and I began our fifth day in Bangladesh with a two-hour meeting with Professor
Yunus. He was as warm, gracious and engaging as always. We discussed his debut as a
character on an upcoming episode of The Simpsons and Yeardley’s reactions to her field trips
(her main take-away: “Bangladeshis seem very busy!”).
Dr. Yunus showed us short videos about two new social businesses being launched, the Nursing
College and the network of Eye Hospitals (two hospitals and counting). We needed to shield our
eyes during what felt to us like graphic footage of a cataract surgery! Later, he explained how in
most countries (and for good reasons) there are three nurses for every doctor, but in Bangladesh,
it was the reverse. As a result, health care suffered. The Nursing College, launched in March
2010, will grow from graduating 100 nurses per year to 1,000. He also gave us a preview of one
of the eye hospitals and Grameen-Danone located in the northern district of Bogra.
After our meeting, Professor Yunus spoke to a group of visitors from Pakistan, South Korea and
Africa who were beginning a two-week study tour of Grameen, while we spent some time with
Nazneen Sultana, head of Grameen Communications. This division handles all the IT for
Grameen Bank and several other companies. Next, Yeardley did an interview with the Daily
Star, the country’s top English language daily. Finally, we joined Professor Yunus and the group
of international visitors for a quick lunch. The visitors all wanted their pictures taken with Dr.
Yunus and Yeardley!
Tags: Yeardley and Alex Bangladesh Trip July 2010
Posted in Social Business, Travelogue, Yeardley Smith | 1 Comment »
Learning and Progressing through Microfinance
August 12, 2010 by grameenfoundation
GF supporter and actress Yeardley Smith (voice of “Lisa Simpson” on the popular TV show The
Simpsons) and President and CEO Alex Counts traveled to Bangladesh in late July 2010. They
visited Grameen Bank and some of the other enterprises Professor Yunus has launched to
accelerate poverty reduction. This is Alex’s third blog post chronicling their visit.
Our third day in Bangladesh was a day of rest. On day four, the five of us headed to Gazipur,
north of Dhaka. Although Saturday is a bank holiday, it’s a working day for Grameen Shikkha,
the arm of the Grameen family of companies that promotes education.
We spent about an hour at a preschool program that Grameen Shikkha runs with PLAN
International and the local primary school. They recruit and train local teachers to provide
learning and enrichment for students ages 3-5 in the nearby villages, which prepare them for
success in first grade—similar to Head Start in the U.S. Despite the limited facilities, the
children—about 30 of them—were eager to learn. The teacher was energetic and focused on
drawing all the kids in to learn and play. The Grameen Shikkha staff were mostly retired
Grameen Bank employees (most appeared in their 40s) enjoying a second career.
We also interviewed eight of the 503 Grameen Foundation-supported recipients of Grameen
Shikkha scholarships. Each student knew that Grameen Foundation was the donor providing
their scholarships, and that Microsoft Corporation (in three cases) and a Seattle nonprofit (in the
remaining five) had staked us to create a perpetual endowment that was benefiting these students
during their high school years. They used their monthly stipends of $4-$8 (depending on the size
of the endowment) to pay education-related expenses. They’d practiced their English, and with a
few promptings in Bengali, they were each able to complete three-minute interviews with us. It
was sobering to hear that each student’s parents, if alive, had received little if any formal
schooling.
We then visited Grameen Bank clients’ homes in rural Bangladesh. One woman, Phul Khatoon,
was very pleased with how well stocked her small general store was (thanks in part to successive
Grameen loans).
Later, we sped back to Dhaka to get ready for dinner with Professor Yunus, his wife Afrozi, and
some of his senior staff. Around a rectangular table in a semi-private room of an Indian
restaurant, Andy enjoyed discussing social business with Professor Yunus, while Yeardley spent
the evening getting to know Afrozi, a physics professor. By the time we reached out hotel, we
were ready for a good night’s sleep!
Tags: Yeardley and Alex Bangladesh Trip July 2010
Posted in Travelogue, Yeardley Smith, microfinance | Leave a Comment »
Grameen Borrowers: Confidence Equals Success
August 9, 2010 by grameenfoundation
GF supporter and actress Yeardley Smith (voice of “Lisa Simpson” on the popular TV show The
Simpsons) and President and CEO Alex Counts traveled to Bangladesh in late July 2010. They
visited Grameen Bank and some of the other enterprises Professor Yunus has launched to
accelerate poverty reduction. This is Alex’s second blog post chronicling their visit.
At 8 am, we departed our Dhaka hotel in a van with a driver and a guide from Jannat’s
international training team, heading to the Gorai Mirzapur branch, about fifty miles northeast of
the capital. This, however, turned out to be something of a mistake as we hit rush hour traffic
again. Somehow we managed to arrive for a borrowers (or center) meeting at 10:05 am, only five
minutes late. We were joined by Andy Pleatman, a Hong Kong-based financial supporter of
Grameen Foundation, and his daughter Kim. Over the next forty minutes, we had a spirited
discussion with 60 Grameen members that pushed my translation skills to the limits and beyond.
Alex speaking and translating at Gorai Mirzapur branch office
One woman shared how she had taken a Tk. 1,000 (about $15) loan 22 years ago and now was
able to borrow and productively invest 30 times that amount in raising livestock and
shopkeeping. Another proudly spoke about the three cows she now owned free and clear after
taking a loan to buy them. Several mentioned that they’d built houses nearby to rent out to
laborers who migrated to the area for work in new factories nearby. When we asked the newest
borrowers (i.e., less than three years in Grameen) to stand up, their lack of self-confidence in
addressing us starkly contrasted with those who had been borrowing longer. Also striking was
how few children all of the women had—all the ones we asked had one or two.
Rokeya and her Daughter
After the meeting, our group went to visit a few borrowers’ homes. One borrower, Rokeya
Begum, had been widowed soon after her third child was born. With Grameen loans, she grew
several businesses (many based on raising livestock) and then built a house where seven laborers
now live and pay her rent. She’d sent her son to Singapore to work. He sent back earnings for a
while, but he was killed in a tragic accident soon after he’d returned to Bangladesh. We met his
widow as we left and expressed our condolences, hoping that she had the same fighting spirit as
Rokeya. Read the rest of this entry »
Tags: Yeardley and Alex Bangladesh Trip July 2010
Posted in Travelogue, Yeardley Smith, microfinance | 2 Comments »
Grameen Pioneers: They Knew Professor Yunus When…
August 5, 2010 by grameenfoundation
GF supporter and actress Yeardley Smith (voice of “Lisa Simpson” on the popular TV show The
Simpsons) and President and CEO Alex Counts traveled to Bangladesh in late July 2010. They
visited Grameen Bank and some of the other enterprises Professor Yunus has launched to
accelerate poverty reduction. This is Alex’s first blog post chronicling their visit.
Yeardley’s and my flight arrived at Dhaka’s International airport one hour late, after which we
had the pleasure of navigating Dhaka’s ever-worsening traffic to get to our hotel. During lunch, I
prepared her for the days to come, explaining that this trip would be different from the time we
spent in May 2009 witnessing microfinance in Haiti. We then started for the Grameen Complex
in Mirpur—traffic stretched a usually short trip to 45 minutes.
To get a sense of Grameen’s 30-year history, we met with three individuals who were with
Professor Yunus during the organization’s nascent years in the mid-1970s.
In her new role as General Manager, Jannat Quanine oversees all of Grameen Bank’s
international programs. She receives and provides exposure and training to a delegation of
foreigners—from senior government officials to curious students—who want to learn about
Grameen. As we sat with her, she received a call about two ministers from India who wanted to
visit the following week. (I suspected that in the days ahead, she’d have her hands full preparing
for that one visit.)
Jannat explained to Yeardley what it was like during the early years with Professor Yunus—
before the worldwide acclaim for his achievements in reducing poverty, which spawned a global
financial services industry for poor women. She also explained the itinerary for our six days in
Bangladesh—her team had worked out every detail.
After meeting with Jannat, we visited Nurjahan Begum, Grameen’s Deputy Managing Director
and Grameen Foundation Board member. She told us about Grameen Bank’s recent growth and
talked about its sister organization, Grameen Shikkha. (Shikkha means “education” in Bengali.)
Nurjahan is the organization’s nonsalaried CEO. She’s barely five feet tall, but pound for pound,
she’s the most potent force for poverty reduction and women’s empowerment I’ve ever met!
Read the rest of this entry »
Tags: Yeardley and Alex Bangladesh Trip July 2010
Posted in Travelogue, Yeardley Smith | 1 Comment »
Students Become Part of the Solution
July 22, 2010 by grameenfoundation
Emily Ferris is a Marketing and Communications Intern for Grameen Foundation based in our
Washington, DC office.
I remember reading about the success of Grameen Bank before my Global Issues, Local
Solutions class one day and thinking to myself, “What an incredible idea!” Microfinance is such
a straightforward model with such a powerful impact – who wouldn’t be impressed? So when I
set out on my internship search for summer 2010, Grameen Foundation was the first place I
looked.
I joined Grameen Foundation in mid-May as the Marketing and Communications intern. I work
closely with staff to communicate the foundation’s mission and progress moving people out of
poverty. Every day is different from the last. I can be researching target audiences for some of
our program pieces or editing blog posts one minute and corresponding with conference
organizers the next. The position has given me valuable insight into the day-to-day operations of
a nonprofit organization that will serve me well no matter where I end up in my professional life,
especially through projects like blog posts and publications where I was able to learn to better
craft my own writing.
More importantly, however, my experience at Grameen Foundation has given me the opportunity
to learn more about the microfinance industry and the important role that we play within it.
Working with the foundation’s innovative programs on a daily basis has taught me more than
any textbook ever could, and not just about regional approaches and industry trends. I’ve had the
opportunity to experience what a career in international development is really like and engage in
open conversations with people at the forefront of the development community about what I
need to do to break into the field. Let’s face it; a textbook can’t help you decide what to do with
your life, and it can’t be as fun as the dynamic staff and volunteers that make up this
organization – especially during the excitement of the Members Project campaign! [Check out
this video made by some of our other summer interns in DC.]
At Grameen Foundation, I’ve met inspiring people, had great experiences, and had a world-class
crash course in the microfinance industry. When my friends ask me what I did this summer, I can
say that I spent it in the fight against global poverty. I became part of the solution.
Will you be one of the next to volunteer your time in the fight against global poverty?
Grameen Foundation is currently accepting applications for our Fall 2010 Marketing &
Communications Internship. Be sure to apply here or send the posting to an interested student
in the Washington, DC area.
Tags: intern, internship
Posted in microfinance | Leave a Comment »
Emily and Madelyn’s Excellent Adventure
July 21, 2010 by Madelyn Hammond
Veteran marketing executive Madelyn Hammond, President of Madelyn Hammond & Associates,
and Emily Lynch, West Coast Coordinator for shoe designer Christian Louboutin, recently
accompanied GF staff on a site visit to Peru to witness the impact of microfinance. Once
acquaintances, and now lifelong friends, both are dedicated supporters of the Grameen
Foundation.
Six people who didn’t really know each other went to the Amazon to see Grameen Foundation
and their local partners in action. Four days later we were friends for life and would never look
at the world the same way again. This special expedition to Pucallpa, Peru was a combination of
divine intervention and supreme coincidence.
Madelyn (left) and Emily in Peru.
Almost a year ago, the world famous shoe designer, Christian Louboutin, was given a list of ten
charities for him to review and then select one to really get involved with. Without knowing a lot
about Grameen, the idea of microfinance appealed to him and that these loans were primarily
made to women made it even more perfect. Emily Lynch, who is the West Coast Coordinator
for Christian Louboutin, and responsible for overseeing their Charity associations in the U.S.,
was charged with spearheading the project. She knew to really get Christian involved would
require first-hand knowledge of how a “charitable gift becomes a loan” and actually meet the
“borrowers”.
I’m a marketing executive and was already somewhat familiar with Grameen through Yeardley
Smith, (the voice of Lisa Simpson), who was a former client. Yeardley’s two trips to Haiti really
inspired and made me want to experience a Grameen trip on my own.
We were expertly guided (and educated!) through various towns in Peru by several Grameen and
Prisma (their local microfinance partner) associates. Alberto Solano (Grameen’s Regional CEO),
Mary Irvine (Grameen’s Regional Director of Development), Diego Fernandez Concha
(Director, Prisma), and Lori Ospina (Grameen’s Program Assistant).
Here is our Story: Ten Things Emily and Mad Learned on our Trip to the Amazon
The Borrowers:
1.
…are resourceful. There is a misconception that poor means lazy. What poor is…is a lack
of opportunity. The women we met all have 4 or 5 jobs depending on weather, time of year,
crops or children.
2.
…are resilient. The women had an attitude of “whatever needs to be done will be done”.
We saw an incredible work ethic coupled with practicality and strong survival undertones.
3.
…just like other women. The mothers want the same things all mothers want—healthy,
educated, successful children. We saw women who were “Avon saleswomen” [the equivalent
of?]and took pride in their appearance although they were dirt poor. All the women had the same
hopes and dreams we all share.
Read the rest of this entry »
Tags: amazon, christian louboutin, impact, peru, shoes
Posted in Travelogue, microfinance | 1 Comment »
The Progress Out Of Poverty Index™, A Sum of All
Its Parts
July 13, 2010 by grameenfoundation
Preeti Wali is Communications Officer at the Grameen Foundation Social Performance
Management Center (SPMC). She is based in Washington, DC. Preeti and her colleagues
recently completed a trip to Senegal and Mali in support of Progress Out Of Poverty Index™
(PPI™) trainings. Check out our PPI blog for more posts, and you can keep up with our social
performance work @gfppi on Twitter where we have been live tweeting during our travels.
“Can you drive a wheel? Can you drive a door?” As pictures of pieces of a car were passed
around the room, these are the questions our trainers asked. Of course, the response was a
resounding “No.” Just so, the trainers explained, “The PPI is like a car, you can only drive it if
you have all the parts in place.”
The most common questions during training are usually around specific PPI indicators and how
they are chosen, why they are chosen, and if they can be changed. However, the PPI is not just a
compilation of random questions; each question is carefully chosen through a statistical logit
regression process, based upon the national survey and the correlating strength of the questions,
to determine poverty likelihood.
PPI trainers use exercises like the one about the car to show how those indicators are chosen,
Trainees learn that the PPI is the sum of its parts, not to be broken apart. This said, it is common
practice in the PPI development process and it is absolutely vital that we obtain input from
institutions working on the ground to determine if there are large concerns with any of the
indicators and, if so, to consider putting in a different indicator that is statistically relevant.
Continue reading this post, and check out the other notes from the field from Preeti and Sharlene:
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Teranga, Trainings, and Tea
The TOTOT, A Training of Trainers of Trainers
Image is Important
Visiting Caurie Microfinance
Action Planning and Reflections
Grameen Foundation needs your vote to win a $200,000 grant to continue fighting poverty using
tools like the PPI. Spread the word and check out our video series.
Tags: mali, ppi, progress out of poverty, senegal, training
Posted in Social Performance, microfinance | 2 Comments »
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#2:
Hebah Fisher
August 3, 2010 — 08:45 am
Bahrain's Family Bank: Pioneering Islamic Microfinance
Much has been written about the success of microfinance throughout the world, but did you
know that nearly 40 percent of microfinance clients in predominantly Muslim countries (such as
Syria, Jordan, Egypt, and Algeria) refuse microfinancing because it conflicts with their religious
beliefs? Under Islamic law, the conventional practice of charging interest for loans - or the very
means by which conventional microfinance institutions maintain operational sustainability - is
prohibited. So how can the estimated 1.5 billion Muslims worldwide access microfinance
products? Institutions like the Family Bank in Bahrain attempt to provide an answer by offering
microfinance services that are fully compliant with Islamic banking laws.
The Family Bank, inaugurated in the Kingdom of Bahrain in January 2010, is the first formal
Islamic microfinance bank in the world. While the tiny island kingdom is one of the wealthy
Gulf countries, some Bahrainis still live off of government welfare payments. Unemployment
strikes women, the youth, fresh graduates, and disabled persons, and the dependency rates are
relatively high for the region. While larger banks in the Kingdom offer financing, their smallest
product size begins at BD 7,000 (~USD 19,000), which is far too high for the financing
requirements of microenterpreneurs. Furthermore, these macrobanks demand collateral,
insurance, and a commercial registration in order to apply for funding - all of which the neediest
Bahrainis lack.
The Family Bank, therefore, entered the market in attempt to service the need for access to
Islamic microfinance. By partnering with Grameen Trust, the Family Bank has merged the
lauded Grameen banking model with Islamic finance to produce a final product that can work for
the local Bahraini context. All financing is based on trust, requires no collateral or commercial
registration for acceptance, is forgiven in the event of death or grave disability, and is offered at
fees that are 40 percent lower than competing institutions. As a pioneer Islamic microfinance
bank, the Family Bank is actively fulfilling its responsibility to set high standards and craft a
successful, replicable model across the Middle East and throughout the world.
The not-for-profit bank offers three financing programs: (1) group-based financing adopted from
the Grameen group-based lending model; (2) microenterprise financing for the expansion of an
existing microenterprise and; (3) NGO/MFI financing to support their socioeconomic
development projects. For each activity the Bank finances, it places special emphasis on income
generation, empowerment, and skills enhancement. Clients are also obligated to open a savings
account with a mandatory monthly savings deposit to encourage sound financial management
and good savings discipline.
In addition to its financial services, the Bank offers non-financial support in the form of
entrepreneurial and vocational training, business counseling, and professional networking. The
Family Bank's several local and international corporate and NGO partners lead the vocational
training workshops according to their individual specialty, and clients are encouraged to visit the
Bank at any time to sit with one of its staff members for advice and guidance.
To date, the Family Bank has disbursed loans to 200 clients and one NGO. By the end of 2010, it
seeks to meet the anticipated demand of 1,000 individuals, 350 microenterprises, and 5 NGOs in
Bahrain.
#3
4.
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Speeches & Articles
The following is a selection of bylined articles and speeches in by
ACCION staff.
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Microfinance InSights: An Industry Imperative: Enhancing Consumer
Protection in Microfinance: Profile - Sept/Oct 2009
The Next Banking Revolution - Microfinance is not just about
loans: Commentary - July 9, 2009
Another View: A Local Fix for a Global Mess: Op-Ed - January 27, 2009
Yes! I want to support
microfinance and
empower people to
work their way out of
poverty.
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- New York Times Dealbook
The Role of Remittances in Leveraging Sustainable Development in
Latin America and the Caribbean - Testimony on March 7, 2007, of
Dr. Elisabeth Rhyne, Senior Vice President, ACCION International
before the Subcommittee on Domestic and International Monetary
Policy, Trade and Technology of the Committee on Financial Services
Navigating the Evolution of Microfinance: Using Business &
Technology for Global Good - Speech given by ACCION International
President and CEO, María Otero, at 2006 NetImpact Conference in
Chicago, IL on October 27. María shares her thoughts on what
microfinance has accomplished to date, the clients that ACCION
reaches currently, and what ACCION believes it will need in the next
ten years to expand microfinance to all who need it.
Microfinance: Mobilizing Markets to Fight Poverty, The Latin
American Experience - Speech by former ACCION International CEO
Michael Chu at the International Development Bank Meeting in Brazil
on March 31, 2006.
Microfinanzas: Movilizando los mercados para combatir la pobreza,
La experiencia de America Latina - Discurso por presidente anterior
de ACCION International, Michael Chu, durante el reunion anual del
Banco Interamericano de Desarrollo en 31 marzo 2006 en Brasil.
Executive Summary: Microfinance Through the Next Decade:
Envisioning the Who, What, Where, When and How - Summary of the
study presented by María Otero, president & CEO of ACCION
International, and Beatriz Marulanda, at the Latin America/Caribbean
Region Microcredit Summit Meeting of Councils (LACRMS) in
Santiago, Chile, April 19-22, 2005.
Microfinance Through the Next Decade: Envisioning the Who,
What, Where, When and How - Study presented by María Otero,
president & CEO of ACCION International, and Beatriz Marulanda, at
the Latin America/Caribbean Region Microcredit Summit Meeting of
Councils (LACRMS) in Santiago, Chile, April 19-22, 2005.
The Power of Microfinance, the Experience of ACCION International Speech given by Maria Otero, ACCION International President and
CEO, in Basle, Switzerland on April 8, 2005.
Lessons and Trends of Microcredit in the United States - Speech given
by Bill Burrus, President and CEO of ACCION USA, at the CEAMI
conference "Microcredit in Developed Countries: Problems,
Challenges and Proposals" in Madrid, Spain on March 16-17, 2005.
The Future of Microfinance: Creating Financial Services to Serve the
Poor Majority - Keynote speech given by María Otero, President and
CEO of ACCION International, at the 8th Annual Conference of the
BYU Center for Economic Self-Reliance on March 11, 2005.
Twenty Years of Microfinance Work & Future Challenges - Speech
given by María Otero, president & CEO of ACCION International, at
the Inter-American Development Bank's 5th Annual Forum on
Microenterprise Development in Rio de Janeiro, September 10, 2002.
The Experience of Microfinance Institutions with Supervision and
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Regulation - Speech given by Elisabeth Rhyne, senior vice president
for Research, Development & Policy at ACCION International, at the
Inter-American Development Bank's 5th Annual Forum on
Microenterprise Development in Rio de Janeiro, September 10, 2002.
Microenterprise Development in the United States: Closing the
Demand Gap - Article written by William Burrus, president & CEO,
ACCION USA. A version of this article was published in the Spring
2002 issue of The Journal of Microfinance.
Cumbre de Microcrédito: La Experiencia Latinoamericana - Speech
given by María Otero, president & CEO of ACCION International, at
the Microcredit Summit in Puebla, Mexico, October 9, 2001. In
Spanish only.
Crisis in Bolivian Microfinance - Article written by Elisabeth Rhyne,
senior vice president for Research, Development & Policy at ACCION
International, published in the September 2001 issue of Monday
Developments.
How ACCION USA Creates Partnerships with Commercial Banks Article written by William Burrus, president & CEO, ACCION USA,
published in the summer 2001 issue of Community Developments, a
publication of the Office of the Comptroller of the Currency, U.S.
Treasury.
Creating Permanent Links Between Development and Finance Article written by María Otero, president & CEO of ACCION
International, published in the June 2001 issue of the World Bank
Group SME Department's SME Issues.
Microenterprise: How Can We Serve Hundreds of Thousands of LowIncome People Annually? - Speech given by Bill Burrus, president &
CEO of ACCION USA, at the 2001 annual conference of the
Association for Enterprise Opportunity.
Las Mejores Practicas de las Microfinanzas en el Mundo - Speech
given by María Otero, president & CEO of ACCION International, at
the 2001 Congress of the Peruvian Federation of Municipal Credit in
Lima, Peru. In Spanish only.
What's So Important About Sustainability? - Article written by staff
member Mandeliene Smith for the winter 1998 issue of ACCION
International's newsletter, Ventures.
Bringing Development Back into Microfinance - Speech given by
María Otero (executive vice president of ACCION International 199299, current president & CEO), at Goethe University in Frankfurt,
Germany in September 1999, and reprinted in the fall 1999 issue of
the Microfinance Journal.
Policies to Empower Women - Speech given by María Otero
(executive vice president of ACCION International, 1992-99, current
president & CEO), at the Microcredit Summit in June 1998.
Reflections on Accessing Capital Markets - Paper written and
presented by Michael Chu, president & CEO of ACCION International
(1994-99), at the 4th Annual Conference of the MicroFinance
Network in 1996.
5.
Imane conquers handicaps with microcredit
Published on : 15 August 2010 - 7:28pm | By RNW News Desk (Photo:Omar el-Keddi)
“Now, ten years later, I think we’re on the right track.” Imane Al-Majali has a daughter,
Jumana, with a handicap. Jumana suffers from growth problems and learning difficulties.
Even so, Imane wanted her to go to a normal school, with ordinary children. When that
didn’t prove possible in Amman, the capital of Jordan, Imane decided to set up her own
school.
By now, that school has almost 100 children. It uses teachers who specialise in the education of
handicapped children. They do this with speech therapy and with music, drawing and gym
lessons. At the same time, they take account of the children without handicaps, so that they also
receive the attention they deserve.
Proof of success
Over the years, acceptance has grown, and the mix of normal children and those with a handicap
is working well. So well that when the children move on to secondary education, they remain in
contact with each other. Former classmates come to the rescue of handicapped children if they’re
being teased or discriminated against. That, for Imane, is proof that her mission has been a
success.
Imane is proud of the parents of the other students, who say their children are developing in a
positive way: accepting more responsibility, being more sensitive and wanting to help those
weaker than them.
Bureaucracy
The school wasn’t set up without a struggle, though. There was a long bureaucratic process
beforehand. But, eventually, Imane received a permit to open a primary school. Then she began a
‘reverse merger’ programme, in which children with learning difficulties were brought together
in the same class with normally functioning children.
And then, after all the bureaucratic fuss, Imane was confronted with cultural problems: there was
little knowledge or awareness of special education in her society. Many families refused to place
their ‘normal’ children in the same class as one teaching children with learning difficulties.
“Parents here,” says Imane, “just aren’t used to such an idea. Ten years ago, people thought that
these kinds of handicaps or learning difficulties were infectious.”
That’s why Imane began inviting the children of well-educated parents, people with more
knowledge and awareness, to attend. In the beginning there were just a few such children in the
class and that was mainly because the parents were offered financial benefits.
Microcredit
Imane began her project with a loan of 8000 euros from the Fund for Development and
Exploitation. On top of that she had her pension of 4300 euros. But she says the success of her
project had less to do with money than with the dominant mentality in society about handicapped
children. There are a number of special schools for handicapped children, but no mixed school
like Imane’s. That healthy children could attend a class with handicapped children is still, for
many people, unacceptable.
Only primary school
Imane thinks it’s a shame her school is only for primary students. When they finish their last year
with her, her pupils go on to standard secondary education schooling. That’s why she’s now
looking for regular schools that offer time and attention to children with special needs. Although
she’s in no financial state to offer secondary education classes, Imane is trying to support her
former students in their new schools.
Special teams check up on the children, while Imane herself also tries to find vocational training
schools for her former students, to help offer them a better future in that way. Together with the
Higher Commission for Semi-Invalids, she’s creating employment for young people with a
handicap.
Proud
And after all the difficult years, Imane is extremely proud to say that her daughter Jumana – with
whom everything began – is now an assistant to the secretary of her special mixed school and
responsible for many administrative tasks.
6.
Tim Harford*
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The Undercover Economist
The Logic of Life
Dear Undercover Economist
Articles
Etc.
Perhaps microfinance isn’t such a big deal after all
An article written by Tim Harford on the 5th December,
2009.
Published on Undercover Economist.
Last December, I showed some unwitting prescience by worrying about a backlash against
microfinance, the practice of providing small loans – or perhaps savings products or insurance –
to poor people. I fretted that there was little compelling evidence that it worked.
A year later, the evidence is arriving and the backlash has begun. The Boston Globe published an
article in September, subtitled, “Billions of dollars and a Nobel Prize later, it looks like
‘microlending’ doesn’t actually do much to fight poverty.” Other media have weighed in on all
sides, with The Wall Street Journal concerned about a microcredit bubble. What is going on?
Three important randomised controlled trials were unveiled this year. In one, economists Dean
Karlan and Jonathan Zinman persuaded a lender in Manila to tweak a credit-scoring computer
program so that it randomly awarded or denied loans to marginal borrowers. The results were
disappointing, considering that an earlier Karlan-Zinman study of a consumer-finance lender in
South Africa had shown more substantial benefits from microcredit, despite annual interest rates
of 200 per cent. In Manila, male-owned businesses tended to become more profitable after a
loan, and female-owned businesses did not. This runs counter to a strong focus on women in the
microfinance culture. The loans produced no improvement in diet or income about 18 months
down the line.
A second trial, by Abhijit Banerjee and three other MIT economists, studied a more traditional
scheme in India, which lent to groups of women. Spandana, a leading microfinance operator,
agreed to randomise the way it entered the Hyderabad market. The company chose 104 suitable
areas of the city but at first only marketed loans in 52 of them. Again, the results were modest.
Households seemed to use the loans to buy more expensive goods and then cut back on everyday
spending to repay the loan, but income did not rise, nor were there improvements in health or
women’s empowerment. Business owners did manage to improve profits. The time horizon,
again, was less than two years.
A third trial, of a micro-savings scheme in rural Kenya, was more encouraging. Economists
Pascaline Dupas and Jonathan Robinson found that the savings accounts were popular among
women and helped them save, invest in businesses, spend more and cope with bad luck. All this
was despite the fact that the accounts paid no interest and charged hefty withdrawal fees.
Microfinance fans should not feel too defensive about these mildly positive results, especially
when microfinance itself has passed a market test by growing very rapidly, often without
subsidies. All such trials are context-specific and have other limits: the Manila study targeted
marginal borrowers, while in the Hyderabad study, Spandana was not the only microfinance
lender in town.
The reason for the backlash is obvious: microfinance was supposed not just to be a useful
financial product, but to emancipate women, create millions of entrepreneurs and get rid of
stubborn stains on your collar. Such claims were always going to be difficult to justify – even if
donors tend to lap them up in the search for the next development panacea.
David Roodman, a microfinance expert at the Center for Global Development, sums it up well:
“Suppose microfinance is not having much average impact on poverty, but is giving millions of
people a modicum of greater control over their lives … is that so bad?” Other serious studies are
in the pipeline. If microfinance is to thrive under the microscope, perhaps its practitioners should
establish more realistic expectations.
Also published at ft.com.
7.
On microfinance in Pakistan
May 15, 2010 15:35 EDT
Given the amount of negative news about Pakistan in the last few weeks, it is good to see a
report about something going reasonably well, with this article by the blog Changing up Pakistan
on the country’s first microfinance institution.
Modelled on the Grameen Bank set up in Bangladesh by Nobel Peace Prize winner Mohmmad
Yunus, the Kashf Foundation provides loans to Pakistani women to set up small projects which
both bring them an income and enhance their status.
“Women in our society do not get the due acknowledgement they deserve for their contribution
to the overall economy,” the blog quotes Kashf Foundation founder Roshaneh Zafar as saying.
“Time and time again, during my travels while I worked for the World Bank in Pakistan, women
from all walks of life – rural women, urban women, educated women, illiterate women, working
women, home makers – would tell me the same thing, that they wanted a better life for
themselves and their families, however, they lacked economic opportunity. This resonated
across the country, from when I sat with shy and veiled women in Kalat in Balochistan to when I
engaged with highly empowered and articulate women from the plains of the Punjab.
“ The second was related to my own commitment. I had grown up in a Pakistan where I had not
faced any discrimination on the basis of gender. I was and am strongly committed to the notion
that we can build a world free of gender discrimination – that comes with two strategies,
empowering women economically (providing them a financial voice) and investing in their
social status (through education and health).”
Microfinance has become something of a political football in recent years, in part a victim of its
own popularity. In India, SKS Microfinance last month became the latest in a handful of such
institutions to raise money on the stock market, drawing criticism that it was seeking to profit
from poverty. In this post here on the Huffington Post, Vivian Norris de Montaigu writes about
the pitfalls of microfinance going commercial, quoting Yunus as saying that “we started
microcredit to free people from the money-lenders, not to become the new money lenders.”
That said, it came relatively late to Pakistan, and in a country struggling to address the challenges
of religious conservatism and Islamist militancy, it’s worth reading about a project
bringing economic empowerment to women.
Among the success stories, Kashf Foundation founder Zafar tells of a woman who began six
years ago with a small spindle machine to spool thread, which she then packaged and sold to the
local market. Now she has 20 women working for her, while her husband, seeing the success
of her business, left his job as a small time clerk and began working for his wife instead.
8. Response To Microfinance Article
By Devinder Sharma
05 January, 2010
Devinder Sharma Blog
Mr Lokesh Singh, CEO of Sanchetna Microfinance, has very kindly responded to my article on
microfinance. His letter, published on http://www.indiamicrofinance.com/, was brought to my
attention by an avid reader. I am penning down my reply below, with the hope that the
microfinance industry will wake up and realise that the poor beneficiaries are not only mere
figures in their balance-sheets, but are human beings too.
Dear Mr Lokesh Singh,
Thank you very much for your letter dated Jan 1, 2010.
First of all, I am glad you appreciate my concern for the poor. Not only me, I am sure any
sensible Indian would be aghast to learn that the poorest of the poor are being charged such a
high rate of interest for the smallest of the small loans.
While the 24 to 26 per cent rate of interest (for an average loan of Rs 7000) may make perfect
business sense for the MFIs, but seen from the eye of the loanee it is nothing short of an
organised crime. I think we need to put ourselves in their place and then see how far the rate of
interest that the MFIs charge, is justified.
The other day I was on a TV show. I felt amused when the chairman of a financial company
disclosed on the show that his company was planning to enter the housing sector, and would
provide a loan of Rs 5 lakh on 8 per cent interest, and Rs 20 lakh for 8.5 per cent interest. Isn't it
shocking that for a higher amount you have to pay a very nominal rate of interest whereas for a
pittance you are charged exorbitantly.
There would always be stories of some women in some remote corner making a livelihood from
opening a paan shop from the small loan she got as microfinance. SEWA does that exceptionally
well. Basix has hood-winked the policy makers to believe their stories. Muhammed Yunus has
built an Empire selling his microfinance. There are others like them doing the same in more than
134 countries. The common thread being that they are all exploiting the poor, divesting the poor
of their hard earned money, living off the hungry stomachs.
I feel outraged at this systematic exploitation that goes unchecked. I think the time has come to
launch an international campaign to weed out these unscrupulous brand of organised money
lenders. I am overwhelmed by the response that has poured in ever since I began trailing the MFI
claims. I am sure slowly but steadily the voice against this unbrazen exploitation will gain
strength, and the poor will get the much needed respite.
I am looking for the day when the poorest of the poor gets a microfinance loan at not more than 4
per cent rate of interest. Whether it makes business sense or not to provide small loans at 4 per
cent interest rate is not important. What is important is whether the poor can get loans at a
nominal interest so as to carve out a sustainable livelihood for themselves.
There is no question of winning brownie points. I am more determined to win a brownie future
for the poor and marginalised. I am aware that there are many among the existing MFIs who feel
equally concerned about the poor. I am hoping that people like you would also join my campaign
to bring some sanity to the microfinance business. We need to look out of the box and come out
with viable alternatives. With help from people like you, I am sure we would be able to build a
better tomorrow for the poor.
Regards
Devinder Sharma
Mr Lokesh Singh's letter is placed below:
Response to Microfinance Article by Devinder Sharma
Published on http://www.microfinance.com/ Jan 1 2010
Dear Mr. Sharma,
Though as much I like the sympathy that you have for the poor of the country I could not
disagree more with you. The article that you have been writing show the shallow knowledge that
you have about the entire dynamics of poverty and how to get rid of it.
Though you have been more than vitriolic with your criticism for the entire system which has
evolved because of the market failure to reach the poor but to my surprise you do not offer any
alternative system to this. By just focusing on interest rate (which I think is important factor but
definitely not the most important) you are missing the woods for the jungle.
It is very easy to criticize but had you been little more objective with your observation then you
would have realized that the cost of funds to the MFIs itself comes to 13 – 14% plus if you add
the cost of conducting meeting with the borrowers every week in the villages and the entire
systems part to that the combined cost would be at least 22%.In such a scenario it will take either
some ultra-rich guy to dole out money from his/her pocket to get people out of poverty or some
body who has no sense about doing business. I do not know which one you would prefer but I
think none of this will be long lasting solutions to the problem at hand.
Please mind this that I in no way defending some dark horses which might be involved in
profiteering but you can not paint everyone with the same brush. Please learn how to distinguish
between what you perceive to be bad and what is bad.
In case if you want to discuss this objectively rather than going after winning brownie points you
can always discuss this with me.
9. Book Review: “Why microfinance doesn’t work”
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Monday, June 7, 2010, 1:32
Featured News
10 comments
11Share
By Malcolm Harper,
Microfinance Focus , June 07, 2010 : Microfinance, like all fashions, generates a lot of writing.
Some of it is not worth the paper or the screen space which it occupies, and much of it is
unashamedly promotional; Bateman’s new book is different, and much better. He has an axe to
grind, and he sometimes grinds it too hard, but he presents a very persuasive, readable and wellargued case. Microfinance has many millions of clients, and it employs many thousands of staff.
Few of them are likely to see this book, or to have time to read it, but there are also large
numbers of investors, researchers, consultants, advisors, donors and others who feed on the
frenzy it has generated; all of them should read the book.
Milford Bateman – “Why microfinance doesn’t work” Zed Books Limited, London, 2010
Few readers will agree with everything in it, and most will be irritated by some of it. All of us,
however, should think carefully about what Bateman writes. If we disagree, we should pause and
ask ourselves why; if we cannot justify our views, we should change them.
The book starts with a short but useful history of microfinance, tracing its evolution from a
subsidized approach to poverty alleviation to a highly profitable business. Bateman goes on to
state, and then purportedly to demolish, the main ‘myths’ which underpin it. His criticism of
current evaluation methods is particularly telling and should be noted by anyone who is involved
in assessing the impact of microfinance. He argues more generally that microfinance perpetuates
rather than removes poverty, and that its commercialization merely exacerbates this failure. The
case is supported by well-chosen contemporary and historical examples from the United
Kingdom, Cambodia, Poland, Peru, India and elsewhere; Bateman knows the Balkan nations of
South Eastern Europe very well, but his analysis goes far beyond their rather unusual situation.
The next chapter, which is perhaps the weakest part of the book, is about the ‘politics’ of
microfinance. It attempts to locate microfinance in the ‘neo-liberal conspiracy’. The poor scrape
a precarious living in informal microenterprises, profitably financed by the elite, and are thus
prevented them from uniting to improve their position. In this chapter, and in the book as a
whole, Bateman makes the same mistake as the more enthusiastic proponents of microfinance.
He over-exaggerates its importance.
Microfinance reaches a growing but still quite small proportion of its potential ‘market’, and it
involves only a tiny part of the world’s financial resources. Microfinance institutions merely
provide temporary second-rate financial services to those who cannot afford anything better.
These services can benefit them, and can injure them, just as ‘our’ banks can benefit or injure us.
Most of the world’s poor, however, either lack access to it or do not want it, and its clients still
rely on informal financial services and their own resources for much of what they need.
Microfinance is important, but is generally not a life-changing a phenomenon, for good or ill.
Those of us who are associated with microfinance should not delude ourselves that we are more
important than we are.
As I have already said, it is not difficult to find fault with many of Bateman’s assertions, or to
point to his omissions. He omits any mention of the remarkable and successful programmes
which institutions such as BRAC in Bangladesh and Bandhan in West Bangal have introduced to
assist the ultra-poor and destitute. He does not acknowledge the many new and rapidly growing
programmes which assist poor people to save, and borrow from their savings, without any links
to other institutions. He also reminds us that most microfinance is not actually used for
microenterprise, in spite of the rhetoric of it promoters, but then attacks microfinance mainly
because it is used to finance microenterprises; he cannot have it both ways.
The final chapter is the best part of the book. It is all too easy to criticize, but critics often fail to
suggest alternatives. Bateman adduces a number of good examples to show that a quite different
approach to financial service provision can achieve far better results. He shows how conditional
cash transfers can effectively address poverty, how the state can play a more productive role, and
how community and co-operative driven approaches can help to build sustainable economies, on
the basis of businesses which provide jobs rather than micro-enterprises which sustain only their
owners. Here again, he may exaggerate the role which financial services as such have played in
the relative success of economies such as Vietnam, China, Southern Italy, Kerala or Northern
Spain, but he does show quite clearly that there are alternatives, that microfinance is not the only
show in town.
***
About the author:
Malcolm Harper
Malcolm Harper was educated at Oxford, Harvard and Nairobi. He first worked in marketing in
England, and then taught at the University of Nairobi. He was Professor of Enterprise
Development at Cranfield School of Management, and since 1995 he has worked independently,
mainly in India. He has published on self-employment, enterprise development, micro-finance
and livelihoods, most recently ‘Inclusive value chains in India – Linking the poor to modern
markets’, ‘What’s wrong with microfinance?’ (Co-edited with T Dichter) and ‘Development,
divinity and dharma – the role of religion in development and micro-finance institutions’ (co-
authored with DSK Rao and A K Sahu). He was Chairman of Basix Finance in India for ten
years, and is Chairman of M-CRIL, the international microfinance and social rating company.
He was the founding editor of ‘Small Enterprise Development’ (now ‘Enterprise Development
and Microfinance’), and is a director and trustee of Homeless International, EDA (UK) Limited,
Musoni microfinance, APT Enterprise Development, PA Publications in the United Kingdom
and other related institutions. He has also worked on poverty issues in Bangladesh and Pakistan,
and in East and West Africa, Latin America and the Caribbean, the Middle East and Gulf area,
South and South East Asia and China, and in the United Kingdom.
10. India's pirates of microfinance
Micro-moneylenders who profit from borrowers in southern India are undermining the principles
of microfinance.
Microfinance schemes lend small sums of money to village women to allow them to start microbusinesses. Photograph: Karen Kasmauski/Getty
India is a land of entrepreneurs. From tech-savvy businessmen to street barbers, the country is
full of people who can identify opportunities and use them to their advantage. The unorganised
"micro-moneylenders" in the southern state of Andhra Pradesh are no exception.
To illustrate the point, let us take the example of a hypothetical village in Andhra. As with most
fertile villages in the region, MFIs (microfinance institutions) have a strong presence in the area.
For years now, they have been lending small sums of money to women in the village,
purportedly to help them jumpstart micro-businesses. The MFIs send staff to collect weekly loan
instalments, which they do in early morning centre meetings. In these meetings, 20-40 customers
gather and repay their instalments together, and if somebody cannot pay, the others cover for her.
Suppose that, in our hypothetical village, one such meeting just ended. Customers are pleased
that they have paid the money they owed this week – it means they are a step closer to receiving
a larger loan in the future. The loan officer is similarly pleased – 100% collection means that he
will get a pat on the back and a boost in his variable income. Far away in a world-class Indian
city, the MFI's founders are also pleased – high repayment rates mean that more investors will be
interested in them.
As of late, however, high repayment rates may speak of something else entirely. Specifically,
they may mean that micro-moneylenders are at work. These individuals, it seems, come in two
flavours. To date, both have only been seen anecdotally, but both have the ability to subvert the
microfinance industry. The first type looks and acts like a traditional moneylender. Minutes
before centre meetings, they offer money to cash-poor customers – typically 200-400 rupees (£3£6) – and ask them to repay within a week. They are quick, inconspicuous, and exorbitantly
expensive.
The second type is harder to find, since they look and act like MFI customers. In isolated
incidents, it seems enterprising customers have begun "lending" money to their fellow centre
members. Before the meeting begins, they subtly dole out cash to those in need, and in return,
charge commission for their generous services.
The presence of micro-moneylenders should hardly come as a surprise to microfinance
practitioners. Many customers in Andhra are running three to four loans simultaneously,
meaning they need to continuously be cash-rich to pay instalments. For customers that run
seasonal businesses, such as harvesting rice or weaving winter blankets, this may prove difficult.
Customers also know that the loan officer will not adjourn the centre meeting until every rupee
has been paid. This practice was begun to instil discipline in repayment habits, but over the
years, has become a nuisance to women whose livelihoods are time-dependent. Women who are
paid by the number of saris they produce, or by the time they spend picking cotton, want centre
meetings to end as quickly as possible – even if it means becoming further indebted in the
process.
Unfortunately, it is impossible to determine how widespread micro-moneylenders are. To date,
their existence has been only verified in whispers from branch staff in areas with high
microfinance activity. There are no statistics, academic reports, or roundtable discussions to
confirm how active these individuals are.
Regardless, the presence of micro-moneylenders should serve as a warning signal to the industry.
Traditional wisdom has, for years, been telling us that the higher the repayment rate, the more
effective the MFI. Staff incentive schemes and investment decisions have been made using this
linear benchmark. The emergence of micro-moneylenders reminds us that the story may not be
so simple, and that high repayment rates may mask other, less appealing, truths.
At its outset, microfinance was created for two primary reasons. First, it was developed to fight
local moneylenders who charged exorbitant rates. Second, it was designed to help
disenfranchised individuals climb rungs of the socioeconomic ladder. In the future, practitioners
should keep both of these guiding principles at the forefront. Those who do will be the ones to
truly benefit the women of our hypothetical village.
11.
Hope International :There is an app for that
By Chris Host
http://blog.hopeinternational.org/?p=65
It’s no longer good enough to kill two birds with one stone. We now require each stone to kill six
birds. Case in point: While I’m not cool enough to own an iPhone, I have friends who are, and I
am continually amazed at its diverse functionality. Mobile communication technology is an
absolute marvel in itself, but it’s no longer enough for our phones to make and receive calls from
anywhere in the world. Now we require them to provide email, directions, games, web browsing,
news, stock trading, and blogging. Daily, the list expands. Are you pregnant and need to track
your contractions? Now you can with the Birth Buddy app on your iPhone. You name it –
“there’s an app for that.”
Microfinance isn’t just about making loans anymore. Traditional microfinance in and of itself is
transformative, but the opportunities for innovation on the microfinance framework are
boundless. Clean water is a serious issue around the world; globally, one in six people lack
access. HOPE’s program in the Philippines pioneered an innovative, employment-based strategy
to address this serious issue. In partnership with PepsiCo, they built a top-notch water
purification system right in the branch office. Twenty of their clients took out loans to purchase
the water in bulk. These water vendors then load up their bicycles with jugs of water and sell the
water in some of the most-underserved communities in the city. Through this model, they
collectively sell over 300,000 gallons of clean water annually. Sure, it’s wonderful that our
clients in the Philippines can access financial services, but what about the dirty water they drink
every day? Microfinance has an app for that.
In the Dominican Republic, many of our clients are able to run a business, but they sadly have
family members who are suffering with or have died from AIDS or other sexually-transmitted
diseases. When I visited a community bank in the Dominican Republic last year, the loan officer
conducted a comprehensive, biblically-based STD training during one of the group’s bi-weekly
loan repayment meetings using educational materials developed by a healthcare organization. It’s
great our clients there have a safe place to save their money, but how do they educate their
children about sexual health? Yep, there’s an app for that.
Recognizing that their clients completely lacked access to Bibles and Christian literature, HOPE
Ukraine developed an innovative solution to address this disparity. They have thousands of
clients throughout Ukraine, and when they started distributing Bibles, the Jesus Film, and
Christian literature at client meetings, immediately they had created a viable distribution channel
for these much-needed resources. Having access to capital is important, but what directs our
clients’ financial decision-making and priorities? Do they have access to God’s word? You
guessed it. There’s an app for that.
12.
Microfinance Institution Reviews
One mission, myriad benefits from microfinance institutions
Published on:
Friday, March 21, 2008
Written by:
Brennan Dewey
Click a star to rate.
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Although it is widely recognized that microfinance alone will not end poverty, it is a vital step in
that direction. Microfinance institutions, also known as MFIs, offer financial services to
underserved, impoverished communities.
Previously, entrepreneurs seeking loans in these communities had to provide collateral to borrow
from unlicensed lenders at inequitably high interest rates. A number of factors, including high
administrative costs relative to small loans and small returns, had kept banks from setting up
shop in impoverished communities when surer profits were to be had elsewhere.
The lack of an efficient financial services industry has held back many would-be entrepreneurs
with viable business plans from realizing their own potential. Women, in particular, have been
excluded as loan candidates in developing communities. The lending practices of many emerging
microfinance institutions, such as the Grameen Bank of Bangladesh, have given people living in
extreme poverty the opportunity to realize their potential in the business community.
But the benefits of establishing microfinance institutions go beyond microcredit services alone.
Services offered by microfinance institutions include savings accounts, insurance, health care
and personal development. When Muhammad Yunus, founder of the Grameen Bank of
Bangladesh, saw the vast amount of latent human capital possessed by people living in
impoverished communities, he realized these people had the potential to help themselves if given
access to the benefits of efficient financial markets, particularly access to credit. What resulted
was a new approach to solving the problem of widespread systemic poverty. Despite the
formidable challenges involved in transforming impoverished communities, Yunus and others
have proved that it can work.
Microfinance institutions also provide insurance and health care services
By reaching out to those people living in extreme poverty, Yunus was able to determine their concerns
and interests. This understanding made it possible to arrange services in a way that made sense for each
community. In his book Banker for the Poor, Yunus referred to some of the benefactors of his innovative
banking practices. “When I visit center meetings, not only in Bangladesh but all over the world, in
countries as diverse as Malaysia, the Philippines, South Africa, and the United States, I realize how
resilient and creative human beings can be when given the chance.”
There are pros and cons for both for-profit and non-profit organizations. Some people are more
comfortable with a non-profit because they are turned off by the idea of making a profit by
helping impoverished people. In most cases, non-profits can provide for loans issued at lower
rates than for-profits can.
Fostering strong, efficient financial markets is important in enabling communities to sustain
economic growth. This is more likely to occur when profits are sought by microfinance
institutions.
Start-up costs are significant and microfinance institutions often need help from non-profit
organizations in getting off the ground, but the long-term success of any microfinance institution
lies in its ability to attain profitability. They do not eliminate the need for charitable contributions
any more than they promise to eradicate poverty. Instead, profitable microfinance institutions
supplement existing non-profit charities by accessing far more capital than charity alone can
gather.
Many of the organizations that support the establishment of microfinance institutions, such as
The Grameen Foundation and Accion, are non-profit, but it is through their support that many
microfinance institutions manage to achieve profitability. This profitability leads to greater
access to capital and greater access to loan candidates.
Non-profits provide microfinanciers with more access to capital and loan candidates
“[W]hile programs that reach out to the poorest clients perform less well as a group than those who
reach out to a somewhat better-off client segment, their performance is improving rapidly and at the
same pace as the programs serving a broad-based client group did some years ago. More and more
microfinance institution managers have come to understand that sustainability is a precursor to
reaching exponentially greater numbers of clients," according to MicrofinanceGateway.org.
Microfinance institutions first began to establish themselves with the help of big players and big
money. With the growing popularity of microfinance and socially responsible investing, there
came demand for a way to get involved as an individual investor.
By utilizing the networking power of the Internet, many organizations have made it possible for
an individual to contribute to the growth of microfinance institutions, and provided the option to
make loans to individual entrepreneurs from the comfort of a personal computer. On many
websites, payments can be made with a credit card using PayPal, by mail or by phone.
Combining the sustainability of microfinance with the existing popularity of contributing from
one individual to another seems to be a good match. Giving money away often has only a onetime benefit. Lending money at a fair price—the interest rate—can perpetuate benefits because
lenders may choose to reinvest interest earned as well as the principal. Web-based organizations
such as MicroPlace and Kiva have furthered access to loan monies for microfinance banks by
catering to individual contributors. In investigating some of the organizations offering these
services, here are three that are well established.
MicroPlace: A socially responsible brokerage specializing in microfinance investments,
MicroPlace offers convenience for the individual investor through offering securities and the
opportunity to earn returns—typically 1.5 to 3 percent—on their investments. MicroPlace is a
registered broker-dealer with the SEC. The website offers some good information about what
they do, convenient payment options and a wide range of regions throughout the world to choose
from. While MicroPlace is a for-profit organization, most of the loans are made at low interest
rates through non-profits such as Calvert and Oikocredit. This would appeal to the investor who
is more inclined towards charitable yet sustainable investments.
Accion: There is an extensive amount of information available describing the work they do not
just for individual investors but also for microfinance institutions. Accion, which boasts more
than 30 years of success in microfinance, aims to help establish microfinance institutions to the
point where they can be self-sufficient. Accion has a proven track record as a non-profit
organization with roots in South America offering opportunities throughout the world. Accion
has begun to market housing microfinance.
Microfinance improves business and infrastructure in target areas
Kiva: Another user-friendly platform that caters to the individual investor who may want a story to go
along with their contribution. Individuals can choose a business to loan to and track the progress of that
business over time. Kiva lists the microfinance institutions for each loan so individuals can choose to
place their investment through a microfinance institution in the risk category they are satisfied with.
Kiva has a wealth of information on their activities, including statistics for variables such as delinquency
rate, default rate and other relevant figures across five differently-rated categories. Investors even have
the option to purchase gift certificates and spread the word about microfinance.
FINCA International (Foundation for International Community Assistance): FINCA places
both donations and investments to facilitate “Village Banking” groups. This strategy utilizes the
strength of community by grouping people with similar interests in order to support each
individual. Village Banking groups are able to collectively insure loans borrowed by individuals
without needing to provide collateral. The website offers a number of ways to get involved. Taxdeductible donations can be made on a one-time basis or as a recurring gift. FINCA does not
offer a person-to-person lending program, but with a high loan repayment rate and proven
success in microfinance, benefactors can be sure that donations will help the working poor.
Sponsors may also choose to make bequests through the Planned Giving Program.
In developed nations, part of what makes economies strong is local ownership of small business
and thus the vested interest people have in their own communities. The growth of microfinance
institutions is making this a reality for impoverished communities throughout the world. To find
a microfinance organization or to learn more about microfinance, see a search engine that rates
them and offers information on the various microfinance institutions. Two of the larger such
search engines are MicrofinanceGateway.org and MixMarket.org.
13.
Obama Calls Out Microfinance
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President Obama has called out the microfinance industry. "A free market was never meant to be
a free license to take whatever you can get, however you can get it." (The Independent, April 23,
2010). Speaking this past week to Wall Street bankers, his remarks could as easily apply to the
profiteering merchants of microfinance.
Recently the New York Times published "Big Banks Draw Big Profits From Microloans to Poor."
(N.Y. Times, April 13, 2010).
Just two weeks earlier, I heard Nobel Prize Laureate Professor Muhammad Yunus, founder of
the modern microfinance movement, scold 1500 microfinance leaders from 81 countries at the
Global Microcredit Summit in Nairobi, Kenya, "Microfinance is not about making money from
the poor. Some have not gotten the memo."
Has microfinance, which proudly boasts financing millions of tiny business loans around the
world, lost its way? Are a few bad actors tarnishing the movement? Are there structural flaws
fatally at play?
The drumbeat of review, evaluation, critique and criticism is just getting started. Microfinance
leaders who think they can continue to hide behind the skirts of hard-working women in the
Third World are counseled to reconsider. The critics now smell a whiff of hypocrisy and the odor
of malfeasance.
As captured by the NY Times piece, microfinance stands accused of being exploitive and
predatory, charging exorbitant microloan interest rates to ignorant, desperate women and
amorally misusing marketplace mechanisms to promote economic opportunity without full
disclosure to either the poor or to financial donors and investors.
For a summary of the major allegations against microfinance and, for each, my own viewpoint
and perspective, see www.I On Poverty.com.
The truth about microfinance undoubtedly lies somewhere between predation and panacea.
Authoritative studies are infrequent. To attract donor and investor dollars, over-simplified hype
abounds. As with any field experiencing rapid growth, charlatans and carpet-baggers appear
along with responsible microfinance practitioners.
Microfinance is not a cure-all, an economic development elixir. Microfinance does not build
roads, schools or clinics; it has not stopped a war or cleared a mine field, nor does it preserve
pristine rivers, protect endangered species or restore cultural treasures.
The public brand of microfinance is impoverished micro-entrepreneurs, mostly women, valiantly
raising families while operating tiny businesses. For a nation whose self-image extols the selfmade man, the maverick Western sheriff and the college drop-out who becomes the richest man
in the world, the narrative is seductive. It converts the self-employed poor, victimized by the
formal economy, into an icon of economic opportunity.
Even with ostensibly high interest rates, microfinance has opened up financial services for the
poor and pushed loan sharks out of the slums and isolated hamlets where the poor live. At its
best, microfinance means opportunity and hope, providing an impoverished person with choices:
the choice to feed a child, pay a medical bill, buy a new metal pot, fix a leaky roof. Not bad for a
program that can become wholly or partially self-financing.
To the critic falls an awful burden. Who chooses to tell the next woman waiting in line for her
microloan that because microfinance is not yet perfected, or because we think she is overindebted, or because her chickens died or were stolen, or because she may be a financial front for
an abusive husband, "Sorry, the teller is closed."
14.
SKS Microfinance plans to raise $350m in IPO
By James Fontanella-Khan in Mumbai and Amy Kazmin in New Delhi
Published: July 20 2010 18:51 | Last updated: July 20 2010 18:51
SKS Microfinance, India’s largest lender to the poor, aims to raise about $350m this month by
selling a 21.6 per cent stake in an initial public offering expected to spark a wave of listings by
equity-strapped Indian microfinance companies.
SKS will be one of the biggest microfinance companies to go public since the controversial 2008
share offering of Mexico’s Compartamos tore the close-knit world of global microfinance
institutions apart with a soul-searching debate about the ethics of profiting from the poor.
EDITOR’S CHOICE
Lex: Monetising microfinance - Jul-20
Compartamos helps out Mexican women - May-19
Microfinancing spreads beyond India’s grassroots - Jul-20
Bankers without Borders to expand microfinance programme - Feb-04
Microfinance group targets Amazon region - Jan-25
Gates foundation to fund credit groups - Jan-14
Microfinance was born in the 1970s as an idealistic effort to provide small loans to the rural poor
to save them from the clutches of traditional moneylenders.
Muhammad Yunus, the Nobel Peace Prize-winning founder of Bangladesh’s Grameen Bank –
the world’s most famous microlender – has criticised the commercialisation of the industry,
saying profit-oriented microlenders are little different to the loan sharks they once set out to
replace.
However, Vikram Akula, the former McKinsey consultant who founded SKS, says Indian
microfinance companies must go public if they are to meet the huge unmet demand for more
affordable credit from the poor, a market he estimates to be worth about $50bn.
“The view of Professor Yunus is that microfinance should be a social business – no profit, no
loss,” he said.
“We feel the only way to get $50bn is to go to the commercial capital markets and the only way
to convince them to back you is not to be profitable, but very profitable.”
Mr Akula said SKS, which says it has 7m borrowers in 19 Indian States, also plans to boost its
revenues through alliances with large companies to distribute their products – such as mobile
phones and water purifiers – even as it provides rural consumers with the microloans needed to
buy the items.
The microlender has already been running pilot projects with Nokia, the world’s largest handset
maker, Unilever, the Anglo-Dutch consumer goods company, and Bajaj Allianz, the insurer, to
distribute their goods and services, although Mr Akula said such lending represented a tiny
fraction of its outstanding $960m loan portfolio.
“We have built a large distribution network in rural India,” said the SKS founder.
“We believe we can leverage this network to distribute financial products of other institutions to
our members at a cost lower than other institutions”.
Copyright The Financial Times Limited 2010. You may share using our article tools. Please
don't cut articles from FT.com and redistribute by email or post to the web.
15.
Microfinance can play key role in Haiti's
reconstruction
16. 25 Mar 2010 13:55:00 GMT
17. Written by: Anastasia Moloney
18.
19. A Haitian woman smokes a cigar as she stands next to debris in Port-au-Prince.
REUTERS/Eduardo Munoz
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13
BOGOTA (AlertNet) - Lending small amounts of money to Haitians can help kick-start the local economy
and play a vital role in rebuilding the hundreds of thousands of businesses and homes destroyed by the Jan.
12 earthquake, the Inter-American Bank of Development (IDB) says.
While international aid agencies focus mainly on providing shelter, healthcare and food, major lenders like
the IDB say microfinance institutions can enable quake survivors to recover their losses and get back on
track, especially in rural Haiti.
"People can cope with disasters by restarting their business," said Fernando Campero, senior financial
specialist at the IDB's multilateral investment fund.
"Haitians suffered significant losses because of the earthquake and microloans can help them get back
capital, kick-start local economic activities and provide an opportunity for small businesses to access
finance," he told AlertNet by telephone.
The IDB, Haiti's biggest source of financing, is providing millions of dollars in grants to local microfinance
institutions to support their services, increase the number of customers they serve and ensure liquidity.
"In Haiti, there's plenty of room for microfinance institutions to grow and specialise, especially in the
housing sector," said Campero.
Fonkoze, Haiti's largest microfinance institution, is offering some of its 55,000 women borrowers
extensions to pay back existing loans, providing new loans and in some cases writing off loans following
the quake.
"We will recapitalise 6,000 clients who lost businesses and or homes following the earthquake through a
recovery package including loan forgiveness and new loans," said Leigh Carter, head of Fonkoze USA, the
Haitian institution's American arm.
28. Fonkoze's customers, the majority poor women living in rural areas, are using the loans - of $180 on
average - to buy everything from cooking pots and pans, building materials, fertlisers, seeds and livestock
to rebuild their businesses.
29. Fonkoze is also gearing up to recruit new clients and scale up their microcredit services, offering loans of
US$25 and less.
30. The microfinancier hopes to expand its microcredit programme by securing $5 million of donor aid to
target Haiti's extreme poor - defined as those living below $1 a day - who make up around half of Haiti's
population of 9.8 million.
31. "We have 200 women on the bottom rung of our programme, including people with no assets and no
business, those who don't know where to start," said Carter. "We would love to take that up to 5,000
people."
32. REMITTANCES PROVIDE LIFELINE
33. Since the earthquake, increases in remittance flows - money sent to Haitians by friends and relatives living
abroad - mean microfinance institutions are playing an even more important role in providing cash to
struggling Haitians to buy basic goods as, by and large, they are the only organisations that process
remittance flows.
34. Even before the quake, around a third of Haitians relied on remittances to survive. In 2008, the millionstrong Haitian diaspora sent home nearly $1.9 billion, accounting for some 20 percent of Haiti's gross
domestic product.
35. "Remittances have always been important in Haiti, but after the quake they have been super important,"
said Carter.
36. During the first two months after the quake, remittances processed by Fonkoze almost doubled, totaling
nearly US$9 million last month.
37. With 42 branches in rural areas unaffected by the quake combined with a large network of customers,
Fonkoze and other local microfinance institutions are well positioned to reach people living in remote rural
areas where traditional banks do not operate.
38. As hundreds of thousands of people continue to migrate from the wrecked Port-au-Prince to the provinces
in search of a livelihood, the role of microfinance companies has become even more crucial.
39. Microfinance institutions also proved to be more resilient than traditional banks in the immediate days
following the quake than traditional banks.
40. While the central banking system took nine days to partially operate again, microfinance institutions, like
Fonkoze, were up and running within a few days and some branches did not close. In one town, Fonkoze
set up a mobile bank to serve its customers.
41. In a stealth operation shortly after the quake involving the Pentagon, the United Nations, and various U.S.
state agencies, $2 million of dollar banknotes were airlifted from the United States to Port-au-Prince by
military planes and helicopters and were distributed to 34 Fonkoze branches across Haiti.
42. MICROCREDIT NOT THE COMPLETE SOLUTION
43. Since the 1980s, microcredit schemes have grown into a global phenomenon, receiving the backing of
major aid agencies and donors including the IDB, the United States Agency for International Development
and the U.N.
44. But critics argue that a lack of regulation of the microfinance industry, a rise in rogue microlenders, and
high interest rates - sometimes up to 60 percent - put poor borrowers in a debt trap rather than lift them out
of poverty.
45. Microfinanciers acknowledge that microcredit alone is not the complete solution to Haiti's problems.
46. "Microcredit is one piece of a big puzzle. It's an answer to provide real hope to women who are very poor,
bring people up the ladder and it's one way to energise rural areas," said Carter.
47. "That's just one piece of the pie, though, that goes along with investment by the private sector and
investment in infrastructure," she added.
48. Still for the majority of Haitians who do not qualify for loans from traditional banks, microcredit before
and after the quake remains one of the few sources of cash and opportunity to start a small business.
49.
16.
Wednesday, August 18, 2010
Microfinance: Loan Sharks or Development Agents? The Ethiopian Case
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Walking along the street of any low-income settlement in anywhere in the world, one is thumped by the
apparent contrast of dwelling and habitat. On one side of the street is a decrepit, single story,
windowless house of tin sheets and open drains; across the street is a fine two-storied brick and
concrete house with glass windows, paneled doors, and painted walls. While there are many reasons for
such disparity, one variable that repeatedly surfaces as a common denominator is the accessibility to
different sources and types of credit.
Over the past three decades, microfinance has evolved, mutated, and segmented. Microfinance started
as a simple idea--to provide loans to poor entrepreneurs--but today it is a far-ranging and dynamic
sector, including institutions that provide savings and remittance services, sell insurance, and offer loans
for a wide range of purposes.
The idea of giving small loans to poor people became the darling of the development world, hailed as
the long elusive formula to boost even the most destitute into well again lives.
Actors like Natalie Portman and Michael Douglas lent their boldface names to the cause. Muhammad
Yunus the Bangali banker and economist who previously was a professor of economics in Chittagong
University while a famine raged in Bangladesh in 1974 where he developed the concept of microcredit.
These loans were given to entrepreneurs too poor to qualify for traditional bank loans. He initiated the
practice by lending small amounts to basket weavers in Bangladesh. Yunus is also the founder of
Grameen Bank. In 2006, Yunus and the bank were jointly awarded the Nobel Peace Prize, "for their
efforts to create economic and social development from below."
According to a report covering 100 Countries worldwide published by Microfinance Information
eXchange (MIX), on August 2007, updated September 2007, there were 77 million borrowers and 2,207
MFIs.
If we take the case in Ethiopia alone, the Association of Ethiopian Microfinance Institutions (AEMFEI)
which initially was established by four microfinance institutions (MFIs) namely Dedebit Credit and Saving
Institution S. Co. (DECSI), Amhara Credit and Saving Institution S. Co. (ACSI), Oromia Credit and Saving
Institution S. Co. (OCSSCO) and Omo Microfinance Institution (OMFI) has grown in to a 27 member MFIs
Association. This can be taken as a witness of how this sector is thriving.
In 2009 Forbes Magazine has listed the top 50 Microcredit Institutes worldwide. Accordingly Amhara
Credit and Saving Institute (ACSI) and Dedebit Credit and Savings Institution were listed 6th & 31st
respectively. However Desta, Asayehgn, (Ph.D), Distinguished Professor of Managerial Economics,
Dominican University of California labeled Forbes’s study that listed the Top 50 MFIs as ‘’anecdotal
rather than a study based on a rigorous empirical assessment of the repayment rates and it hardly
focuses on whether or not microcredit programs have improved the lives of the marginalized
participants or beneficiaries’’.
The idea even got its very own United Nations year in 2005.
Though this idea of lending money to the needy grew so popular, some of its biggest proponents are
now wringing their hands over the direction it has taken. Drawn by the prospect of hefty profits from
even the smallest of loans, a raft of banks and financial institutions now dominate the field, with some
charging interest rates of 100 percent or more.
With regard to ‘’loan sharks’’ drawn by the sturdy profits Mr. Yunus said at a gathering of financial
officials at the United Nations “We created microcredit to fight the loan sharks; we didn’t create
microcredit to encourage new loan sharks, Microcredit should be seen as an opportunity to help people
get out of poverty in a business way, but not as an opportunity to make money out of poor people.”
The brawl over safeguarding the field’s saintly aura centers on the question of how much interest and
profit is acceptable, and what constitutes exploitation. But still the noisy interest rate might lead one to
suspect that microcredit institutions are scamming the poor.
Underlying the issue is a ferocious debate over whether microloans in point of fact haul up people out of
poverty, as their promoters so often claim. The recent conclusion of some researchers is that not every
poor person is an entrepreneur waiting to be discovered, but that the loans do help cushion some of the
worst blows of poverty.
“The lesson is simply that it didn’t save the world,” Dean S. Karlan, a professor of economics at Yale
University, said about micro-lending. “It is not the single transformative tool that proponents have been
selling it as, but there are positive benefits.”
Though the success stories about MFIs are flooding from all corners of the planet, many are the
proponents of the Microfinance concept. Some believe that the question ‘’If microfinance is about
serving the poor, why does the provision of financial services need to be profitable?’’ is rebuttable.
Some practitioners try to justify why institutions need to be profitable in order to cover the costs of
reaching out and meeting the demand of underserved segments of the population over a sustained
period of time. In addition, after a series of very small loans, a micro-entrepreneur often wants to
expand his/her business; a microfinance institution must keep up with the demand for larger loan
amounts so businesses can grow into small enterprises.
Moreover, the interest rate is only a small part of their overall transaction cost of credit, and if
microfinance institutions offer credit on a more accessible basis, substantial costs in terms of time,
travel, paperwork, etc. can be reduced, thus benefiting the poor.
A long series of studies has shown that many programs that charge subsidized interest rates end up
using rationing mechanisms to distribute credit in response to excess demand. These mechanisms cause
the borrower to have to “jump through hoops”; increasing the time and money s/he must put out to get
the loan. In fact, these transactions costs are frequently higher than the interest costs, which take away
the advantage to the borrower of the interest rate subsidy.
However, while increased access to credit for the poor on a long term and sustainable basis can bring
significant benefits, MFIs must continue to work to improve efficiency levels, and to increase scale. This
will bring down the cost of providing loans, and the benefits transferred to the poor in terms improving
loan products, better access to loans, and lower borrowing costs.
The rationale and objective of advancing micro-loans to the ultra poor is to improve their liquidity
constraints, create employment opportunities, and induce sustainable incomes by engaging the poor in
the reinvention of everything from the bottom-up, with limited top-down directives.
But still, its earliest proponents do not want its reputation tarnished by new investors seeking profits (by
making the poor pay a lofty interest and/or transaction costs) on the backs of the poor; though they
recognize that the days of just earning enough to cover costs are over.
These proponents also argue the idea of the calculation of Microcredit interest rates set with the aim of
providing viable, long-term financial services on a large scale, while subsidized interest rates generally
benefit only a small number of borrowers for short period as a pretext.
This approach to breadth of outreach is based on a long-term view of microfinance services and the
belief that, in many cases, there is a limit to depth of outreach. This approach thus accepts a trade-off
between sustainability and reaching very poor people.
Other practitioners argue that microfinance should make reaching very poor people a priority because
credit is a human right in the fight against economic exclusion. This approach requires narrow targeting
of very poor people. Both breadth and depth of services are very important for the microfinance
industry. What has become apparent, however, is that very poor people are unlikely to be served by
microfinance programs unless these programs are intentionally designed to reach them.
There are three kinds of costs the MFIs have to cover when it makes microloans. The first two, the cost
of the money that it lends and the cost of loan defaults, are proportional to the amount lent. The third
type of cost, transaction costs, is not proportional to the amount lent.
After all the poor is in need of credit facilities. It could be for a new tool, a machine, or a shop in the
marketplace—to launch new enterprises, create jobs and help economies to flourish. Poor people have
proved time and again that they are able to repay these loans on time, though repayment doesn’t
necessarily co notate there are people escaping from the shackles of poverty.
There is an ongoing debate whether credit alone or credit plus is needed for poverty reduction. There
are views that credit alone on its own is inadequate to fight poverty. The need for other services is also
important in this respect. Such views, although, do not negate the role of credit; fail to appreciate the
role of credit on its own merit.
Though the institutes have grown tremendously and profitably is the poor benefiting from their
services? This is the question fuming debate by many practitioners.
Currently, no concrete tool for measuring the poverty level of MFI clients exists. Most of the
practitioners believe that credit plays a vital role as an instrument of intervention for a poor person to
discover his/her potential and to gait for a well again living. Muhammad Yunus advocates that Credit is a
human right. Once this right is established, he argued – ‘‘The entitlement to other rights for leading a
dignified life becomes easier’’. It empowers to break the vicious cycle of poverty by instantaneously
creating self-employment and generating income.
When in the ultimate analysis nothing can be said to be cure-all, by overemphasizing that micro-credit is
not a panacea is in a sense overreacting and underestimating the role of credit as an instrument to
combat poverty. Micro-credit is itself a very powerful tool. But if it is combined with others, it is
definitely more empowering.
According to the Association of Ethiopian Microfinance Institutions (AEMFI), until December 31st 2008
there were 2,220,901 active clients, with an outstanding loan of 4,606,885,776 ETB and a total saving of
1,575,635,740 Birr with in the 27 member MFIs of the association. The total asset of the 26 members of
the association has reached 5,462,578,130 Birr and total liability of 4,061,476,516 birr and total capital
of 1,401,101,614 birr.
Though this industry is flourishing and access to money is by far becoming near to the poor, the link with
Micro and Small Trade and Industry Promotion Agencies, and Local Technical and Vocational Training
Centers or even Farmers’ Training Centers (FTCs) and Community Skills Training Centers (CSTCs) is the
weak link in the chain.
It is not the amount of money lent by Microfinance institutes that matters most. What matters most is
the change in the lives of the poor and in fact the poorest of the poor. The tangible change that is the
rise in the number of people above poverty line can rise when the ability of the poor in assessing
profitable business opportunities and developing business even literacy and innumeracy is not the case
anymore, communication skills, life skills, business skills etc are mastered by the poor. This should have
to be and can be inculcated as an add-on component in an integrated manner by the CBOs mentioned
above.
Otherwise the role of MFIs is like doling out financial relief to the poor. This is like “the canaries in the
mines.” for Governments and other practitioners. Coal miners in England and the United States took
these small birds into the mines. The reason was because they would normally sing almost constantly
but when poisonous gases began to overwhelm them they would stop singing, thereby warning the
miners of danger.
Now that we have MFIs, realizing the ‘’Credit right of the poor’’, but is there any mechanism/s that
pledge the credit right has enabled – ‘’the entitlement to other rights for leading a dignified life’’?
Breaking the vicious cycle of poverty, instantaneously creating self-employment and generating income?
By Wondwossen W. Mebrat, Amhara Reaching Women Projects Supervisor for Development Expertise
Center (DEC-Ethiopia), A local Frontline Office for Edukans
18.
Shaping Microfinance in China
By Silvia Sartori on 31 October 2008
Bai Haiyan receives assistance through Funding the Poor Cooperative, which operates in China's
Henan and Hebei provinces in a partnership with the Grameen Foundation. Photo by: Grameen
Foundation
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In May 2008, the China Banking Regulatory Commission issued a historic statement for the
development of microfinance institutions in China. It allowed non-governmental organizations to
transform into microcredit institutions.
Microcredit organizations may now run microfinance operations. At least six microcredit pilots
have already been established in the Asian country.
"It is a really exciting time for the Chinese microfinance market," said Kate Druschel, east and
south Asia regional coordinator at the Grameen Foundation.
The Grameen Foundation has been active in China since 2000. It is legally independent from but
follows the principles of the Grameen Bank in Bangladesh. The work of the bank's founder,
Nobel Peace Prize winner Muhammad Yunus, inspired scholars of the Chinese Academy of
Social Sciences to bring microfinance to China. In the mid-1990s, the academy carried out
"action research projects" to duplicate the Grameen Bank's programs. The success of the
initiatives drew the attention of international organizations such as the United Nations
Development Program, UNICEF, the U.N. Population Fund and the Ford Foundation.
The Grameen Foundation does not have its own microfinance unit but instead works with a
network of local partners that offer microfinance services.
In China, the Grameen Foundation has three regional partners: the Chifeng Zhaowuda Women's
Sustainable Development Association in the Inner Mongolia province, the Association for Rural
Development of Poor Areas in Sichuan, and the Funding the Poor Cooperative in the provinces
of Hebei and Henan. It has supported their growth and expansion by providing loans, sharing
information, and strengthening the institutional environment.
The Grameen Foundation is also cooperating with major industry players such as the China
Association of Microfinance and the China Foundation for Poverty Alleviation to advance
microfinance in the country. In 2003, the Grameen Foundation hosted the first China Microcredit
Summit in Beijing, supported the establishment of the first national network for microfinance,
and published recommendations to strengthen the regulatory environment.
"Our goal in China is more at the industry level to ensure that the industry develops in such a
way that poverty-focused microfinance institutions can be successful and reach scale," Druschel
said.
"We don't have enough resources to go one-by-one to MFIs around the country and help them be
successful," said Druschel. "The poverty need is so great that we would just not have enough
resources to do that and so our approach really needs to be at the level of developing the industry
as a whole, developing infrastructure in the industry such that, for example, there are better
trainers able to help the industry build their own capacity at the manager level."
Management and governance are in fact the real problems in the industry, explained Druschel.
Local clients seek loans from the Association for Rural Development of Poor Areas in Sichuan.
Booz & Co. and the Grameen Foundation are helping China's largest microfinance institution to
streamline its business. Photo by: Grameen Foundation
"Ultimately, even though access to finance right now is a huge issue for the microfinance
institutions, I personally don't believe that that will be the issue for too long," she declared. "The
human capital issue will be the biggest issue."
To fill the gaps, the Grameen Foundation provides its local partners with the tools necessary to
improve their management skills. The foundation offers training, capacity building and
consultancy on how to draft a business plan, manage a growing organization, identify and access
new sources of finances, enhance financial reporting and carry out risk management, just to
name a few.
The Grameen Foundation's strategy for China focuses on three crucial areas relating to
institutional strengthening and knowledge sharing. These are investment readiness, efficiency
and social performance.
To boost investment readiness, the Grameen Foundation holds a series of workshops in
cooperation with the Chinese Association of Microfinance and PlaNet Finance, an international
NGO based in France. These activities are open to all microcredit institutions nationwide and not
solely to the partners of the Grameen Foundation.
To increase efficiency, the Grameen Foundation works closely with leaders of microfinance
institutions. The foundation introduces strategic management techniques and helps local
counterparts recognize inefficiencies in their organizations. It also provides advice on credit
administration, client identification, loan repayment, business mapping, and piloting new ways
of doing business.
The foundation is now helping Booz & Co. to streamline business processes for the Association
for Rural Development of Poor Areas in Sichuan, the largest microfinance institution in China.
In Inner Mongolia, the Grameen Foundation, according to Druschel, is assisting the Chifeng
Zhaowuda Women's Sustainable Development Association in its efforts to shift from a paperand-pencil method to an automatic portfolio management system, thus reducing time and
paperwork.
Social performance management refers to how an organization with a poverty-focused mission
ensures that its activities fulfill its mission. Druschel said this issue rarely gets the attention it
deserves. She stressed that Chinese microfinance institutions need to better understand their
clients while focusing on poverty reduction.
The Grameen Foundation introduced the Progress out of Poverty Index in 2008 to bolster social
performance by microcredit agencies. The 10-indicator index measures the poverty status of
existing and potential microfinance clients, and allows local loan officers to include additional
questions on whether their organizations' activities are creating the expected impact. The
foundation is training employees of Chinese microfinance institutions on integrating the Progress
out of Poverty Index into their operations.
"One of the things that is happening in China as microfinance is getting popularity is that it is
being looked upon more as a part of the financial system, which is a great thing, but the poverty
reduction aspect of it has been minimized," Druschel said.
The foundation pushes for the preservation of the so-called "double bottom line," referring to
both financial profitability and poverty eradication. Druschel believes that the use of the index
will help maintain this dual focus.
Today, the Grameen Foundation is localizing its support and has consultants based in Beijing
and Hong Kong. At the end of 2007, it helped its three microfinance partners to take part in the
Grameen Foundation Partner Forum in Bolivia. The Chinese organizations had never attended
such an event and were able to share best practices and learn innovative business techniques.
Fast facts
Name: Grameen Foundation
Founded: 1997
Type: Nonprofit organization
Mission: To to enable the poor, especially the poorest, to create a world without poverty.
Headquarters: Washington, D.C.
Annual budget: $21.9 million (2008)
President and CEO: Alex Counts
Number of employees: 91
Opportunities: www.grameenfoundation.org
19. Critiquing microfinance, Part I
April 20th, 2008 by Dave Leave a reply »
It is healthy and expected for any growing trend or endeavor to receive critique and microfinance
is no exception. I’ve decided to do a mini-round up of some recent critiques for those of you who
might not have seen them.
The New Yorker Article
The New Yorker recently published an article by James Surowiecki called What Microloans
Miss. In this article, Surowiecki argues that while microloans definitely have positive impact
they are not what poor countries need most in order to get richer. He observes that the majority
of people in developed countries are salaried workers, not entrepreneurs, hence we need more
new small/medium businesses which hire people (he calls the “missing middle”.) He also states
that microloans are often used for non-business activities including providing consumption credit
during lower income periods. He calls for more focus on equity investments vs. loans to small
businesses in addition to loans. In summary, he says “for some people the best route out of
poverty will be a bank loan. But for most it’s going to be something much simpler: a regular
paycheck.”
Microfinance network Pro Mujer CEO, Ben Moyer posted a response where he argues that “the
goal [of microloans] is not to make “poor countries richer”; it is to bring desperately poor people
out of poverty by helping them to become self-sufficient.” He goes on to note that “For now, the
impoverished semiliterate and illiterate women receiving microloans won’t benefit from
investments in the ‘missing middle.’ Microcredit will continue to offer the best return on
investment, because it eradicates poverty one person at a time.”
I think that this isn’t an either/or type of issue, but an AND … that is, we need to encourage the
continued growth of microfinance and new growing enterprises which create income for families
in poor countries.
Microfinance appears to be the best tool available to quickly grow the income of desparately
poor families to the point which they can get above the poverty line. That is, they can become
relatively stable in being able to provide for their basic needs. Microfinance requires relatively
small amounts of capital and infrastructure which means that it can reach and serve large
numbers of families very quickly. And you can start to see income improvements in terms of
weeks, not years. So, while I agree that we should not over-hype and over-promise on how
microfinance can reduce extreme poverty, I also think we should not underestimate the continued
positive impact it is having. More importantly, there are many countries and regions where
microfinance is almost non-existent, so we need to continue to encourage increased investment
to bring this baseline financial service to these families.
There is indeed a dirth of financing options available for new small business … even highpotential ones … in emerging economies. I wrote previously about this “funding gap“. Also,
there is a good article by Vinay Ganti which dives further into this topic. The reality though is
that this is a medium to long term contributor to emerging market income due to the nature of
starting and growing these businesses. It doesn’t mean we should not start investing now!
Also, to get perspective on the reality of timelines for dramatically changing systems, I
recommend Hernando Desoto’s groundbreaking book on the history, state and importance of
adequate property rights described in his book, The Mystery of Capital. Desoto reviews the
history and complexity of the development of property rights in the USA (and other countries)
not to discourage more acceleration in property rights in other countries, but on the contrary to
help articulate the lessons learned in order to accelerate property rights in emerging countries.
We want to deconstruct (in order to understand) the accelerated success of new business starts in
certain Asian countries over the past 50 years in order to better encourage similar growth in
countries which have not yet participated in poverty reduction growth.
Read Part II
20. PDF
21. How microfinance institutions can finance lasting social change
An estimated US$4 billion is invested annually in microfinance around the world. But while microfinance
institutions must have strong business models in order to survive, they face the challenge of making
profits while creating lasting social change. A new ILO study provides practitioners and donors with
guidance on how to deal with the issue of balancing business and poverty reduction by defining criteria
for supporting microfinance institutions.
Key resources

Measuring a microfinance institution's efficiency: Interview with Bernd Balkhenhol, editor of the
new book "Microfinance and public policy" -
Related information
Elsewhere in this site

Themes : Employment Promotion : Microfinance
Presentation

"Microfinance and public policy: Outreach, performance and efficiency" - Executive summary [pdf 49 KB]
Press release

ILO and Gates foundation join forces to develop range of insurance products in developing
countries
Publications
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ILO Books on Microfinance
Facts on Microfinance and Decent Work - [pdf 29 KB]
Type
Article
Date issued
21 November 2007
Unit responsible
Communication and Public Information
Subjects
microfinance, social finance
Other languages
Español • Français
An estimated US$4 billion is invested annually in microfinance around the world. But while
microfinance institutions must have strong business models in order to survive, they face the
challenge of making profits while creating lasting social change. A new study (Note 1) copublished by the ILO provides practitioners and policy makers with guidance on how to deal
with the issue of balancing business and poverty reduction by defining criteria for supporting
microfinance institutions. ILO Online spoke with Bernd Balkenhol, the editor of “Microfinance
and Public Policy”.
ILO Online: Public institutions, commercial banks, NGOs…microfinance institutions are
quite diverse and difficult to compare – what do they have in common?
Bernd Balkenhol: The first challenge was to make sense of the diversity of institutions with
different kinds of customers, processes, and organizational cultures. But one strand cuts through
all organizations: the importance of efficiency – the ability to use scarce resources to most
effectively reach thousands of customers, deliver quality services, and close the biggest gaps
between the supply and demand of basic financial products for the poor. In microfinance,
efficiency means using the least amount of inputs – particularly staff time and capital – to
produce the greatest number of loans, reach under-banked clients, and deliver a range of valued
services.
Our study found four different patterns of financial and social performance: the first group of
MFIs is markedly inefficient – both in terms of social and financial performance – compared to
what is being achieved by other institutions similar in location, legal form, delivery techniques,
subsidies received and staff structure. The second category serves many poor households, but is
weak on financial measures. The third category does well on profitability, but less well in terms
of social impact. And the fourth category performs well in both respects. In the extremes, there
are institutions that manage to reach very poor and remote households and still break even, while
others cater to a better-off clientele, enjoy a relative monopoly and fail to do well financially.
ILO Online: How can the efficiency of microfinance institutions be measured?
Bernd Balkenhol: Efficiency in microfinance can be measured by different ratios: the most
commonly used measure relates the operating expenses to the outstanding loan portfolio; others
relate total operating cost to the number of borrowers, or the number of clients to the number of
loan officers; less frequently used measures of efficiency are the share of loan officers to total
staff, loan officer salaries compared to the minimum wage or the average processing time per
loan.
In fact, institutions can operate with greatly varying degrees of efficiency. A 2005 survey of 365
leading institutions, for example, shows that on average lenders spent roughly 25 cents in
operating expenses for every dollar of outstanding loans, but the measure ranged from under five
cents for the most to over 40 cents for the less “efficient” lenders. Similarly, the average number
of borrowers per staff member of the microfinance institution (another productivity measure)
ranged from less than a hundred to more than 500 borrowers.
ILO Online: Is there a recipe for efficiency?
Bernd Balkenhol: There’s no magic recipe, one needs to bear in mind that context matters
critically for performance, it’s not just a question of good or bad management. However, a
starting point is to better understand the drivers of efficiency: average loan balances, salary costs
and staff productivity. Given the cost functions in finance it always pays to go for larger loans;
the downside is that one may lose the original clientele and move up-market into a less poor
segment of the market. The second driver of operating expenses is staff costs. These vary
enormously between countries as a result of the scarcity of qualified loan officers. Even the third
determinant of operating expenses is sometimes difficult to manage: in rural and peri-urban areas
it is a challenge for a loan officer to cater to 250-400 clients.
In part, managers of microfinance institutions must deal with the markets they are in, and have to
take the nature of regulation and the structure of costs and wages as given constraints. Managers
also have discretion; they can improve incentive contracts for loan officers, modify loan delivery
techniques (e.g. choose between individual versus group transactions), adjust collateral
requirements, choose combinations with non-financial services, and develop strategic
partnerships with local groups and associations.
ILO Online: Is efficiency a guarantee for self-sustainability?
Bernd Balkenhol: What we learnt in analyzing the data was that efficiency does not necessarily
translate into profitability, but moreover, that the successful outreach to the poor should not be
used as an excuse for inefficiency. Inefficiency limits the scale of outreach and the quality of
services, again leading to lost possibilities. Efficiency is a necessary but insufficient condition
for full financial sustainability, there is space for public policy. Focusing on efficiency helps
donors see that some institutions operate efficiently but fail to break even due to local market
conditions (particularly high wage costs and low population density) or due to a strategic
decision not to raise interest rates and other fees.
Patient public policy support can be justified, as long as institutions can demonstrate their costeffective contributions to poverty reduction. Donors, though, still need to make sure that their
support does not displace other service suppliers, private or public, or inhibit the microfinance
institution from further innovation. We argue for a fundamental reform of subsidies in
microfinance, built on longer-term, stable “performance-based contracts” between
governments/donors and microfinance institutions that are geared towards efficiency targets for
which managers can be held accountable.
Note 1 - Microfinance and Public Policy - Outreach, performance and efficiency, edited by
Bernd Bakenhol, International Labour Office, Geneva, 2007, ISBN 978-92-2-119347-0.
The study has been carried out by the ILO in partnership with the University of Geneva,
Cambridge University and the Geneva Institute of Development Studies. It was funded by
the EU, the Ford Foundation and the GIAN/RUIG (the Geneva International Academic
Network).
22. Protecting consumers of microfinance in Pakistan
August 3rd, 2010
Author: Ayesha Zara Naeem, Lahore University of Management Sciences
Low-income earners in Pakistan have been offered financing opportunities for the first time,
thanks to a recent surge in the activity of microfinance institutions (MFIs).
Microfinance theoretically involves the provision of loans or other financial services to lowerincome-bracket borrowers, with little or no collateral required. These borrowers are able to take
out small loans from MFIs to improve their businesses or living conditions. In Pakistan alone,
the potential market for microfinance is an astounding US$27 million, with active borrowers and
national gross loan portfolio size increasing in every financial quarter.
Despite the benefits that accompany the growth of MFIs, one aspect of microfinance lending that
must be addressed is consumer protection, or the right of the consumer to make autonomous,
well-informed decisions. In Pakistan, such protection is especially vital.
Not only does almost 56 per cent of the population have no access or experience with formal
finance, but the majority of the individuals targeted by these institutions have extremely low
literacy levels. The lower literacy factor, be it financial or otherwise, disadvantages most
consumers by obstructing their understanding of the complexities of loan transactions. This lack
of understanding can lead consumers to believe that access to finance is more essential than the
appropriateness of the product’s costs or risks. This is sharpened by the fact that, for many
lower-income people in Pakistan, microfinance is the only financing option available.
The MFI sector in Pakistan is highly differentiated and largely unregulated. Where some MFIs
have a strictly non-profit social motive such as poverty alleviation or female empowerment,
others may cater to slightly higher-income-bracket individuals and thus may become for-profit
organisations.
The unregulated environment effectively means that MFIs do not have to observe adequate
financial assessment before passing on a loan. In a poorly regulated developing nation, MFIs
often justify higher costs by virtue of the added expense of providing individuals with basic
levels of financial literacy, and the higher cost of enforcing compliance. This is often used as an
excuse for not opting for responsible financial practices. For close-knit communities, such as
those found in most rural areas of Pakistan, the ‘trust’ factor plays a major role in decisionmaking. A lack of alternatives causes lower-income-bracket individuals to rely faithfully on the
MFIs for their financial needs. This should serve these institutions well, as often these
individuals become long-term customers with the ability to make better financial decisions and
fewer missteps in terms of unmanageable debt or repayment issues. This trust factor is a product
of transparency in, and dependability on, the words and actions of the MFIs and cannot be
stressed enough.
To achieve greater consumer protection within the MFI industry in Pakistan, there must be
greater regulation. MFIs must develop transparent, unbiased, and nondiscriminatory ways of
dealing with consumers.
While this need could be addressed by greater governmental regulation and policies, the adoption
of self-regulatory methods by the MFI industry of Pakistan could better serve the institutions as
well as the customers. Self-regulation means enforcing and adhering to self-proclaimed codes of
ethics and practices and avoids the costs incurred due to governmental regulation—which
ultimately makes credit more costly and limits the accessibility of microfinance. Ultimately,
customers are more likely to use the financial services of a trustworthy institution, while the
government is less likely to have to enforce regulation on a sector which adheres to general
standards of customer protection.
23. Microfinance success tied to macroeconomy
Microfinance, the practice of making small loans to farmers or business owners too poor to
provide collateral, has grown successfully in recent years, particularly in Third World countries
with less of a manufacturing base, like Mongolia or Nigeria. (Credit: iStockphoto)
MICHIGAN STATE (US)—Success or failure of microfinance depends largely on the state of
a nation’s economy, according to a new study.
Microfinance is the practice of making small loans to farmers or business owners too poor to
provide collateral.
The research could help lenders establish more successful microfinance operations. Details are
published in the Journal of Development Economics.
“What this helps us do is better understand which microbanks are successful throughout the
developing world—and why,” says Christian Ahlin, associate professor of economics at
Michigan State University.
The microfinance movement has exploded during the past two decades, Ahlin notes, with more
than 100 million customers now borrowing small loans from more than 10,000 microfinance
institutions around the world.
The movement was thrust into the spotlight in 2006 when Grameen Bank, a Bangladesh
microbank, and its founder, Muhammad Yunus, were jointly awarded the Nobel Peace Prize.
Ahlin and colleagues from New York University and the University of Minnesota examined the
experiences of 373 microbanks worldwide. Because borrowers of microloans typically are thirdworld farmers or operators of tiny businesses in rural, isolated settings, it wasn’t clear how they
are linked to the larger economy, he says.
Ahlin was surprised to find that as the larger economy grew, the microbanks’ profit margins
grew as well, nearly one-for-one. For example, if the economic growth rate increased 5 percent,
a typical microbank’s profit margin went up by 5 percentage points.
“The finding of this study is not that context is everything, but that it does help explain
significant differences in performance of the microbanks,” Ahlin explains.
Microbanks generally grow more successfully in countries with less of a manufacturing base,
such as Nigeria and Mongolia, as opposed to more industrialized nations such as China and
Indonesia. Ahlin says this is likely because manufacturing jobs tend to crowd out the more
entrepreneurial-related jobs supported by microloans.
The researchers also say that better developed governing institutions can impact microfinance
business negatively by driving up costs, for example, suggesting that borrowers may benefit
from a hands-off regulatory approach.
Finally, microfinance institutions generally cover costs more easily in countries with a per-capita
income of about $6,000—countries “that are not too poor, but not too rich either,” Ahlin says.
In extremely poor countries, he says, there may be a lack of education to run a microenterprise
and little demand for goods beyond basic food and medicine.
But that doesn’t mean lenders should steer clear of the most impoverished nations, Ahlin points
out. On the contrary: The research findings could help support the case for more sustained donor
support of microfinance in those areas.
“Although covering costs internally may be harder,” Ahlin says, “the impact could be greater in
these poorer countries.”
More news from Michigan State University: http://news.msu.edu/
24. Saved as PDF
25. Macro Trends in Micro Finance
By Priya Ramakrishnan
Emerging Trends in the Microfinance Industry
Professor C.K. Prahalad said, 'the poor deserve world-class products and services". Speaking in
favour of microfinance and microloans aimed at low income customers; he said it would
alleviate some of the problems faced by the poorer sections of society, majority of who survive
on less than 2 dollars a day. Microfinance is the provision of financial services to low-income
clients, including consumers and the self-employed, who traditionally lack access to banking and
related services.
Mohammad Yunus, who received the Nobel Peace Prize in 2006 for creating the Grameen
Microcredit Bank in Bangladesh, first started the US $27 loan in a village of Bangladesh, the
loan that launched the microfinance movement. As Dr. Yunus has observed, Grameen Bank is
transmitting an entrepreneurial culture to millions of Bangladeshi women.
At the beginning microfinance happened through donor and philanthropic funding. However as
the activities scaled up, it was imperative to move to a commercial format. Bankers, Venture
capitalists, technology solution providers, governments and public at large have realized the
increased potential of microfinance.
A wide range of technologies are available to help microfinance providers improve efficiency,
track operations more accurately, increase transparency, and reach new customers, thus
facilitating financial inclusion. Technology has led to increased deposits, by placing easy-to-use
ATMs in well-trafficked areas. Technology has led to more rural customers. Standard Bank's
(South Africa) low minimum-balance, easy-to-use "ePlan" account can be opened at manned
ATMs in rural areas where it would be too expensive to open branches.
Banco Compartamos (Mexico's Microfinance Institution) put Mexico's microfinance industry on
the map, since its initial public offering (IPO) in 2007. About two thirds of India's more than 1
billion people live in rural areas, and almost 170 million of them are poor. Rural and microbanking is now an industry in India with each bank having a dedicated Rural, Agricultural, and
Micro-banking (RMAG) division. Banks in India have begun to enter the microfinance lending
market, and many are partnering with regional microfinance institutions. Forbes recently
published the Forbes 50 list of Top MFIs acknowledging the industry and its impact.
Mergers and Acquisitions in the Microfinance Industry: In the news: CGAP, DFID join hands to
boost mobile banking for the unbanked: GAP, Deutsche Bank, Grameen-Jameel, and IDB join
'Islamic Microfinance Challenge 2010'.Samasta a Non-Banking Finance Company, which
forayed into microfinance in 2008, says it is open to Geographical Mergers. It aims to become a
one-stop financial shop by offering 'solutions not products'.
Microfinance has now been seen by the United Nations as the means of achieving the
Millennium Developmental Goal -2015 of alleviating extreme poverty and hunger. The
producers of software, hardware and associated infrastructure can acknowledge this contribution
and prepare themselves thereby contributing to a larger social cause!
Article Source: http://EzineArticles.com/?expert=Priya_Ramakrishnan
26. If a microfinance NGO transforms into a bank, what’s in
it for the manager of the NGO?
by Richard Rosenberg: Wednesday, March 3, 2010
More and more microfinance operations are migrating out of not-for-profit associations (like
NGOs) and into for-profit companies (like banks). Similar transformations have occurred in
other industries that began with pro bono efforts but went on to mobilize commercial capital.
These transformations create important challenges. Some of the challenges inherent in migrating
to for-profit microfinance have been discussed widely—for instance, the question of maintaining
a social mission when for-profit investors enter the scene.
Calmeadow and Center for Financial Inclusion at ACCION have just published an important
new paper flagging another transformation challenge that occurs often but has received little
attention so far. Moving a microfinance operation into a new for-profit structure can make the
managers and directors of the old not-for-profit NGO worse off individually rather than better
off. For instance, NGO managers may feel frozen out of the profits that are expected to result
from their years of hard work. More pointedly, smart NGO managers are aware of the very real
risk that they may lose their jobs after transformation when owners of the new company decide
that a different set of skills are needed to run a bank. If angels have been running the NGO, there
will be no problem—angel managers will cheerfully ignore consequences for themselves and
resolutely pursue whatever is best for the microfinance operation and its clients. But quite a few
non-profit MFIs are run by humans rather than angels, and humans have a spotty record when it
comes to enthusiastic support for changes that hurt their private interests.
In “Aligning Interests: Addressing Management and Stakeholder Incentives During
Microfinance Institution Transformations,” Beth Rhyne and her co-authors present examples of
such transformation problems, along with various tools to compensate managers, directors, and
staff so that the success of the transformation will make them better off rather than worse off.
The paper analyzes the ethical and practical issues involved, and takes a strong first step in the
direction of articulating good practice guidelines for structuring incentives.
This paper does an impressive job of flagging and analyzing the problem. But the authors
recognize that a lot more work needs to be done before an industry consensus can emerge about
appropriate ways to manage incentive conflicts when MFIs commercialize. The working group
that supported this paper is mounting a series of regional workshops to explore the subject, and is
considering a database to inventory compensation and incentive arrangements in transformations
around the world. I hope that many members of the microfinance industry will engage in
moving this discussion forward.
27.
IN DEPTH: Egypt needs bigger plans for microfinance, say experts
By Pascale Nader
First Published: September 25, 2008
CAIRO: In 2006, Bangladeshi Dr Muhammed Yunus won the Nobel Peace Prize for his
achievements in microfinance with the Grameen Bank, changing the way the world views the
kind of action needed to eradicate poverty.
The poor don’t need good advice, moral support or charity, rather “a little capital to start
climbing the economic ladder” — also known as microfinance, a development tool to help the
poor contribute to economic growth.
As experts in both developing and developed markets learn more about their poorer economic
segments, the view towards microfinance is changing.
A change like this will alter the economic landscape in a developing country like Egypt as
competitiveness and diversity rely heavily on the strength of home-grown micro, small and
medium enterprises.
Most of Egypt’s poor are concentrated in the rural areas of five governorates in Upper Egypt and
in squatter and informal settlements of larger metropolitan areas, according to UNDP reports.
Some of the nation’s poorest are agricultural laborers, urban industrial employees and a large
number of government workers. In this context, experts say, microfinance is an ideal tool to
contribute to private sector-led growth by promoting micro-enterprises that increase income and
create jobs.
The question is, can Egypt’s financial sector adapt to the needs of micro-entrepreneurs?
Currently the size of microfinance services in Egypt cover only 3 percent of the total market
need, according to Sanabel, a regional network for microfinance institutions (MFIs) in the Arab
world. Compared to a country like Morocco, which reaches over 30 percent, Egypt’s
microfinance market is grossly under-penetrated.
Inability to acquire property rights is the main reason the poor have no access to capital or credit,
therefore, they find it hard to make it as entrepreneurs, said Frederic Mishkin, a former member
of the Board of Governors of the Federal Reserve System.
Microfinance programs provide financial services — such as credit, deposit and saving — to the
entrepreneurial poor. Effective microfinance programs offer small (between LE 500 to LE 1,000
initially), short-term repeat loans, alternative approaches to collateral, convenient location and
timing of services and above-market interest rates to cover the high transaction costs inherent in
microfinance.
Under the Egypt Microfinance Strategy — created by the Central Bank of Egypt — microfinance
donors, mainly USAID and the UNDP, established the Egyptian Microfinance Network in 2006
to unify MFIs.
Magdy Hussein, advisor to the Egyptian Microfinance Network (EMFN), said their vision is to
“provide microfinance on a sustainable institutional basis and not a donor project basis to the
market.”
“As we see globally the adoption of microfinance by the commercial banking sector, a similar
direction is expected in Egypt because our MFIs are showing good profitability,” he added.
Viable MFIs cover their own lending costs, avoid subsidies, promote outreach of services and
maintain a targeted social mission as well as financial returns to shareholders.
With a quarter of the population considered poor and another quarter living on the edge of
poverty, a country like Egypt cannot afford to have a poor perception of the lower-income
segment of the population.
Kristen Besch, interim executive director of Sanabel Egypt, said a balance is needed between
MFIs’ “double bottom-lines,” or how well they perform on their social mission and financial
returns. Industry benchmarks such as the Forbes Top 50 MFIs typically assess these indicators.
While the commercial banking sector brings the capacity — in terms of branch reach, capital and
financial services — to cater to microfinance needs, NGOs and other MFIs hold valuable
experience and a broad understanding of social mission.
On the structure of Egypt’s microfinance industry today, Ranya Abdel Baki said, “The legal
structure of most MFIs in Egypt continue to be predominantly NGOs (95 percent), and the
biggest player by far is USAID.
“On the other side are just three commercial banks with no social mission that are downscaling
their services to capture a small niche of lower-income borrowers. Microfinance banks are not
growing in comparison to their NGO counterparts.”
Specialists say commercial banks’ reluctance to take risks is the main reason for the slow growth
of microfinance in Egypt. When USAID started many of the MFIs in Egypt, they were given
large amounts of donations as collateral which they could borrow against. In addition, a general
aversion towards NGOs or microfinance means they are limited to how much money they can
source from the market, she added.
The solutions to these obstacles lie in observing developments in comparative markets. In
Morocco, for example, local bank Banque Populaire, created its own microfinance NGO, Abdel
Baki said. With this close relationship between banks and NGOs, their leverage rates increased
three-fold.
Amanah, the biggest MFI in Morocco, will issue a bond in the market very soon.
Another challenge to microfinance growth is training the right staff to grow a bank’s
microfinance program. Specialists point to commercial banks such as Banque du Caire’s, which
has established a microfinance department as a means to absorb abundant staff during
privatization restructuring.
The career of a microfinance loan officer, which often entails forging relationships with
customers by visiting their home or workplace, is very different from the typical desk job.
As commercial banks invest in corporate finance and suffer big defaults, more and more are
restructuring their portfolios and leaning towards retail segments. Still, “microfinance programs
in Egypt’s commercial banks constitute less than 0.1 percent of their total portfolios to date,”
Abdel Baki said.
For the time being, the financial services sector is still learning to adjust its perspectives towards
the entrepreneurial wealth of Egypt’s poor and treat them as an untapped financial resource in
the mission to integrate lower-income segments into the growing economy.
28. South Korea launches new microfinance bank
Published Date: June 16, 2010
By John Choi, Seoul
South Korea’s newly minted Smile Microcredit Bank
illustrates the growing demand for microfinance in the
world’s emerging economies.
“For thirty years, the microfinance industry has witnessed
explosive growth and now counts 80 million borrowers
around the globe,” World Bank sector manager, Tunc
Uyanik, told a June 15 international conference in Seoul on
the “Global Financial Crisis and Microfinance”.
“However, the need for microfinance is still huge,” Uyanik
continued, noting that almost 70 percent of adults in
emerging markets, or close to 3 billion people, still lack
access to basic formal financial services.
Eric Duflos from the World Bank making a
presentation during the international
conference on microfinance in Seoul
Moreover, the economic crisis is driving more people into poverty and increasing economic
polarization, Uyanik said.
Microfinance is not a panacea, however, and complementary social welfare programs are also
required, he added.
Kwon Hyouk-se, vice-chairperson of the Financial Services Commission (FSS) of Korea,
acknowledged that the global financial crisis has caused deeper economic polarization.
“Microfinance can become a social safety net for the financially alienated,” Kwon said, pointing
to the role played by the Smile Microcredit Bank in reducing economic polarization.
Founded in 2008 with money from dormant accounts and contributions from Korean banks and
companies, the Smile Bank had loaned 59.7 billion won or US$48.5 million to 15,789 people by
the end of 2009.
As the effects of the finance crisis bite, the microfinance industry will continue to grow, panelists
told the conference.
More international cooperation is also needed and regulation increasingly required to protect
borrowers.
The conference was organized by the World Bank , Financial Services Commission (FSS) of
Korea and the Korea Development Institute.
29. Microcredit
Summit in Bali Debates Profit
By ERIKA KINETZ / AP WRITER
Monday, July 28, 2008
BANGKOK — When Nobel Peace Prize winner Muhammad Yunus began making US $27
loans to women in Bangladesh three decades ago, he wasn't thinking of initial public
offerings and return on equity.
Now that the field of microfinance is become increasingly commercialized, though, such
terms weigh heavily on his mind.
"Poor people should not be considered an opportunity to make yourself rich," Yunus said by
phone from Bali, Indonesia, where he is attending a meeting on microcredit that opened
Monday.
This week at the Microcredit Summit Campaign conference, privatization advocates will be
pitted against those who believe you can save the world or make a buck—but not do both at
the same time. The gathering is drawing several heads and former heads of state, including
Indonesian President Susilo Bambang Yudhoyono, and microfinance representatives from
60 countries.
Members of the pro-market faction argue that civic-mindedness alone will never draw
enough capital to serve the billion people who want rudimentary banking services.
Profitability is the key to sustainability, they say.
Those against commercialization fear the microcredit movement is losing its soul,
prioritizing investors over the world's farmers, sheepherders and street vendors, many of
whom struggle by on less than a dollar a day.
Microfinance, for profit or not, is booming. According to Deutsche Bank, the volume of
microfinance loans hit US $25 billion in 2007, up from $4 billion in 2001, and another $250
billion is still needed. The bank expects that private investors will pour $20 billion into
microfinance institutions in 2015—ten times more than they did in 2006.
Many groups that started as nonprofits have become for-profit, and a plethora of
microfinance investment funds, targeted at institutions and individuals, have opened in the
last few years.
Citigroup, Credit Suisse, Deutsche Bank, and Morgan Stanley have all entered the
microfinance market, either providing direct funding, backing investment funds or
securitizing debt, and private equity investors have also started to pile in, according to the
World Bank's CGAP, a microfinance research group.
"You are seeing more and more financially driven investors going into this market," Eric
Savage, managing director of Unitus Capital, a new for-profit firm that will help
microfinance groups raise capital, said by phone from Bangalore, India.
Savage said the subprime crisis may give microfinance a further boost as investors seek
diversification, and that tightening credit has so far had a "quite muted" effect on loans to
microfinance institutions.
"The microfinance sector has been relatively isolated from the global credit crisis," he said.
At least two microfinance institutions are publicly traded: Mexico's Banco Compartamos,
SA, and Kenya's rapidly expanding Equity Bank Ltd.
The Compartamos initial public offering, in April 2007, was a watershed event. The bank
raised $474.7 million—and the hackles of the field's civic-minded pioneers, who say the
bank is making indecent profits by charging too much interest.
On Friday, Compartamos reported that net income for the first half was up 13.9 percent, to
500 million Mexican pesos ($49.5 million), over the same period last year. Return on equity
fell 11.3 percent, to 39.2 percent.
Compartamos founders Carlos Danel and Carlos Labarthe, argue that microfinance is, first
of all, finance. In an 11-page "Letter to Our Peers," published this year, they argued that high
interest rates are needed to cover the cost of administering small loans in difficult markets.
They defended above-average profits as necessary to attract investors to the still-nascent
field. Competition, they wrote, is already helping the poor: In the past 7 years,
Compartamos' interest rates have dropped from 115 percent to 79 percent, which they say is
in line with the competition.
The combination of high costs and small loan size in Mexico means interest rates are higher
than in many other countries, they said.
Globally, microfinance institutions charged an average of 28 percent a year in 2006,
according to CGAP.
Many, however, remain galled by what Yunus, who won the 2006 Nobel Peace Prize, calls
the "distortion" of the field he forged.
His pioneering bank, Grameen, is owned by the poor borrowers it serves, and sustains itself
with local deposits. The bank reported a narrow profit of 106.9 million Bangladeshi takas
($1.6 million) on revenues of 10.6 billion takas ($155 million) in 2007.
Grameen charges a simple interest rate, noncompounded, of about 20 percent a year.
Charity, Yunus said, "shouldn't tickle people's greed."
30. Hillary Clinton and Microfinance
by eriposte
Frenchdoc at Correntewire recently published a review on a recent book by 2006 Nobel Peace
Prize winner and founder of the Grameen Bank - Mohammad Yunus. Frenchdoc titled the post
thusly:
Book Review - Creating a World Without Poverty (Why HRC Should be President)
Frenchdoc says (emphasis mine, throughout this post):
When she was first lady of Arkansas, Hillary Clinton did not just organize tea parties (contrary
to what passes now for “common knowledge”). She had heard of a Bangladeshi economist
who had introduced a great idea to help people out of poverty in Bangladesh and she
thought his ideas might help the poor in Arkansas. The economist was Muhammad Yunus
and the idea was microcredit. She was instrumental in introducing Yunus to Bill Clinton
and they developed a program of microcredit in Arkansas. Yunus mentions her in every
one of his books (with photos).
This is why I want Hillary to be president. Because I want a president with intellectual
curiosity, looking around the world for the next good idea to solve problems. So, here it is,
the shamefully long review of Yunus’s latest book.
As I have gone beyond the media and blogosphere filter and discovered the real Hillary Clinton
over the last half a year or so, it is these kinds of things that keep increasing my admiration for
her. As you look at her record of public service, one thing stands out time and again - she has
been tireless in finding ways to help the downtrodden, especially women and children, and has
often been way ahead of the curve in driving for positive change (her fight for universal
healthcare when many of her opponents were barely even intrigued with the concept is another
good example). If there is one type of personality that I have been extremely impressed with in
life, it is the person who is routinely ahead of the curve, in a positive way, in driving needed
change. In this context, I always find it interesting when some people favorably cite Sen. John
Edwards' more recent focus on poverty (not to minimize his great work in any way) but fail to
realize that addressing poverty has been a key focus of Sen. Clinton's life for decades (you can
therefore only imagine my consternation - to put it mildly - when Sen. Edwards tried to portray
her as the candidate of status quo and himself as the candidate of change). From what I've seen
and read about her, Sen. Clinton really embodies the kind of personality who isn't content with
talk and is fairly impatient about exploring every viable idea and getting things done to drive
significant and positive change in people's lives. You can see this reflected again and again even
in her foreign travels. For example, back in 2005, Anthony Eksterowicz and Glenn Hastedt
published a paper "The Foreign Policy Activism of First Lady Hillary Rodham Clinton" at the
annual meeting of the Southwestern Political Science Association. It is a very long paper, but
here is a segment that relates a bit to Frenchdoc's comments:
Her diplomacy also highlighted the blurring of the boundary between domestic and foreign
policy. The issues Hilary Rodham Clinton chose to stress were those which have long been a
staple of American domestic politics: health, children, education, and the position of
women in society. She saw them as key to America and the world’s future as well. “In the
new global economy, individual countries and region would find it difficult to make economic or
social progress if a disproportionate percentage of their female population remained poor,
uneducated, unhealthy and disenfranchised. The first lady also recognized that differences in the
two spheres of action, domestic and foreign, continued to exist. At one point in her memoirs she
noted “my message abroad carried few of the political overtones of my proposals for specific
policies at home.
[...]
We can also see the first lady breaking free of the American experience in her diplomacy in
at least two respects. First, her definition of women’s rights clearly extended beyond the
political and legal. Second, the solutions to the problems she identified were not seen as
“foreign policy” solutions in a narrow sense but solutions that held relevance for the United
States as well. Long ago, while Bill Clinton was governor of Arkansas she had seen
Microcredit projects such as those she toured in Bangladesh as having relevance for
helping poor rural communities in that state. A trip to Nicaragua brought attention to
“Mothers United,” a microcredit organization that was supported by USAID. It also
brought forward a parallel with the Community Development Financial Institutions Fund
that she had advocated creating in 1994 to provide financial assistance to distressed areas
that were not being serviced by the established banking system. A visit to an AIDS
Information Center in Uganda brought forward the revelation that this organization
supported by USAID had pioneered tests at the clinic that were already being put to use in
the United States. A final example comes from a trip to China where she saw parallels
between the Center for the Women’s Legal Studies and Legal Studies of Beijing University
with a small legal aid office she had run at the University of Arkansas.
In an interesting interview late last year, President Clinton made a brief mention of Sen. Clinton's
efforts in Arkansas:
Charlie Rose: Muhammad Yunus has brought a lot of attention to microfinance and got a
Nobel Prize. Tell me, when you look at it, how effective is it? And how much is it
spreading?
Bill Clinton: First, it is almost universally effective where it's done based on the same model
that he and other big givers in Bangladesh have used. That is, where you realize you may
be dealing with people who never have a balance sheet, but they have a good reputation in
the community, you know they have a skill, and there is clearly a market for what they
want to do. In the early '80s, the South Shore Bank in Chicago, now called Shore Bank
started loaning -- make microcredit loans by American standards to black carpenters and
Croatian electricians to work together to retrieve the South Side. Hillary found out about
this and talked to me, and she went out and raised some money to create a rural
microcredit bank in Arkansas, do the same thing with the same results. It's still in place.
Then when I became president, we gave two million microcredit loans a year overseas, and
gave the first microcredit programs funding in America. It always works. Now, can it make
a difference? It depends on whether they're concentrated enough. I think in Bangladesh,
the Grameen Bank and others have been giving money now for 30 years so that the volume
of loans is so great now, I think it's making a measurable contribution to the economy.
Charlie Rose: Has moved beyond just loans to women.
Bill Clinton: Yeah. But even though -- women are still the primary recipients, when there are so
many of them have been made, that the various examples of economic growth have a synergy,
they're working together. My only evidence of this, is that in the last couple of years, Bangladesh
has had one political crisis after another, the kind of thing that tanks the stock market, you know.
Charlie Rose: -- run for prime minister and then backed off.
Bill Clinton: Yeah. But, in spite of all this trouble, their economies still continue to grow about
six or seven percent a year, unheard of. I think it's because it's growing through the grass roots,
through the interlocking networks of microcredit entrepreneurs. So I saw when I was president
that we changed the reality of life for a lot of villages in Africa and Latin American and Asia.
But we would have to give 20 or 30 million microcredit loans, not two million to change a
country.
As Leah points out in a comment to Frenchdoc's post:
And you are absolutely right that both Clintons were among the first to notice the import of
what [Yunus] was doing.
Not to drag you into the truly demoralizing schisms being opened up between the two competing
campaigns in the Democratic primary, but an irony I think you’ll appreciate: When Bill Clinton
was running in 1992, “Rolling Stone” did a joint interview with him, sending down William
Greider, generally known as a liberal progressive, and presently a true Clinton hater, (see
this post if you’re interested), along with a companion regular contributor at the magazine, P.J.
O’Roarke, who is known as a witty right-winger.
The entire interview was bathed in condescension, but my favorite moment came when
Clinton talked excitedly about new ways of thinking about poverty and in particular the
import of micro-credit; in the interview Clinton mentions [Yunus] and Bangladesh, to the
merriment of both O’Roarke and Greider; wow, imagine anything coming out of
Bangladesh, one of the poorest countries in the world that could be of use to Americans.
Yes, that was pretty much the tenor of the entire article.
I happened to know a lot about [Yunus] and what he had shown about the impact of extensions
of micro amounts of credit to poor folks, so I knew that the true fools were both Greider and
O’Roarke, but I’m sure I was among a tiny minority of the readers of the interview.
I’ll tell you what most of Washington players hate about the Clintons, including a lot of
progressives like Greider, and God help us, Barbara Ehrenreich; they’re both as smart, or
perhaps even smarter than our elite liberals, and yet they are smarmy politicians who actually
win elections, and then actually did something about poverty in this country, for the first time
since the Johnson administration, and don’t let anyone tell you that Richard Nixon cared about
poverty, or that he ever put forward a serious plan for family subsidies, an oft repeated talking
point to make out Nixon as more liberal than the Clintons.
Interestingly, Mohammad Yunus himself politely mentions the insufferable, know-nothing elite
snobs of the media and so-called "liberal" establishment (in this case, Rolling Stone) that Leah
talks about, in his previous book "Banker to the Poor: Micro-Lending and the Battle Against
World Poverty". In chapter ten of his book, in page 181, he writes:
The Good Faith Fund slowly grew to reach hundreds of low-income people in Arkansas. When
Clinton ran for President, he often used it as an example of a successful, innovative means to
fight poverty....
During a 1992 interview with the editors of Rolling Stone magazine, Clinton spoke
particularly fondly about Grameen. In a separate article, two of the editors ridiculed him
for being too ready to promote micro-credit in the United States. I was disappointed but an
American friend explained that Rolling Stone's reaction was hardly surprising. He argued that
Grameen was a "Third World technology transfer" and that the American elite might not
be ready for it.
The American elite - especially the fake "liberal" elite that includes people like Frank Rich,
Maureen Dowd, David Broder, Chris Matthews, and too many more to count, especially on the
internet these days - have long had a deep seated contempt for people like Bill and Hillary
Clinton and Al Gore (more on that in a future post). That contempt continues even today - both
among a body of alleged "liberals" and the corporate media they have become organs of. Melissa
McEwan at Shakesville (emphasis hers):
And the race to the bottom continues…as the LA Times weighs in with its solid conclusions
about Hillary Clinton's time as First Lady, based on 11,000 pages made public less than 36 hours
ago. Diminishing the veracity of her touted experience, the writers note:
As for overseas travel, the papers show that Clinton did spend some time conferring with foreign leaders
on strategic issues. But the records suggest she spent a lot more time fulfilling the traditional role of the
first lady: meeting the leaders' wives and focusing on women's and children's issues.
And no one who's serious about being the American president would do something so frivolous
as to focus on women's and children's issues! That's not real politics. Why, she might as well
have been playing with dollies!
The contempt for "women's and children's issues" could not be more palpable.
33. The impact of capital structure on the performance of microfinance
institutions.
Journal of Risk Finance
Business Impact
Webcast: Learn about the Future of Applications Performance Management
www.ca.com
Abstract
Purpose--The purpose of this paper is to examine the impact of capital structure on the performance of
microfinance institutions.
Design/methodology/approach- Panel data covering the ten-year period 1995-2004 were analyzed within
the framework of fixed- and random-effects techniques.
Findings--Most of the microfinance institutions employ high leverage and finance their operations with
long-term as against short-term debt. Also, highly leveraged microfinance institutions perform better by
reaching out to more clientele, enjoy scale economies, and therefore are better able to deal with moral
hazard and adverse selection, enhancing their ability to deal with risk.
Originality/value--This is the first study of its kind in the sector, especially within sub-Saharan Africa.
Keywords Microeconomics, Financial institutions, Capital structure, Ghana
Paper type Research paper
Introduction
The existence of separation between ownership and control of firms and the resultant agency cost
presents an embodiment of critical issues in modern corporate governance in both financial and nonfinancial corporate entities. In such circumstances, managers may pursue an objective function which is
at variance with the firm or owners' objectives. Hence agency cost arising out of the dichotomy between
ownership and control is measured as the resultant lost value due to managers pursuing their set goals
against those of the firm. To deal with this situation and in the process mitigate against agency cost,
several mechanisms have been proposed. One such theory is the use of the firm's capital structure. The
capital structure of a firm is basically a mix of debt and equity which a firm deems as appropriate to
enhance its operations. Thus, theory point out that high leverage or low equity/asset ratio reduces agency
cost of outside equity and thus increases firm value by compelling managers to act more in the interest of
shareholders, (Berger and Bonaccorsi di Patti, 2006). Therefore capital structure is deemed to have an
impact on a firm performance against the position held by Modogliani and Miller in their seminal work of
1958. Modigliani and Miller (1958) argue on the basis of the following assumptions; existence of perfect
capital market; homogenous expectations; absence of taxes; and no transaction cost, that, capital
structure is irrelevant to the value of a firm. This position has been supported by others such as Hamada
(1969), and Stiglitz (1974). It must however be pointed out that this conclusion does not hold in the real
world where these restrictive assumptions are not applicable. Consequently, studies by Jensen and
Meckling (1976); Myers (1977); Williams (1987); Harris and Raviv (1990); Grossman and Hart (1982); and
Jensen (1986) have debunked the assertion made by Modigliani and Miller.
Studies however, on the impact of capital structure on firm performance have been few and have in most
of the cases been carried out in developed economies on large and listed firms. It is in this vacuum that
this study is being carried out especially within Sub-Saharan region. We must however indicate that there
are two studies on the Ghanaian economy regarding capital stricture. While Abor (2005) looked at the
effect of capital structure on profitability of listed firms, Boateng (2004) looked at the determinants of
capital structure in international joint ventures. Thus, the authors deem it appropriate to investigate how
capital structure of microfinance institutions (MFIs) affects their performance. The microfinance sub-sector
has evolved as a development tool intended to provide credit and financial services to the productive poor
who do not have access to formal financial intermediation and are engaged in small and micro
enterprises. In the beginning, such micro finance institutions were set up through state-run subsidized
credit schemes and therefore were directly controlled by the state. Through their evolution, MFIs have
benefited from the establishment of mutual funds as part of shareholder structure and/or the connection
of such organizations with capital markets. These developments have several implications for their capital
structure, operations and performance essentially because the presence of debt exerts pressure on
management to ensure efficiency and profitability and to be able to honour such debt obligations.
Microfinance is not a recent phenomenon in Ghana. Empirical evidence establishes that less than 15
percent of the population in developing countries, including Ghana, has access to the mainstream
financial services Aryeetey (1995). It is in this regard that microfinance is very crucial. Formal MFIs in
Ghana consist of 133 Rural and Community Banks (R and CBs), 200 Credit Unions, 8 Savings and Loans
Companies, ROSCAS and Regular Savings and Credit Associations (RESCAS) and some commercial
and development banks, especially the Agriculture Development Bank, Ghana Commercial Bank Ltd, and
SSB Bank. These service small-scale farmers, artisans, fishermen and small-scale traders. GHAMFIN
was established in 2000 with the aid of the World Bank to partly regulate and keep database of MFIs in
Ghana. Its membership includes over 70 regulated and non-regulated MFIs serving over 260,000 clients.
A number of studies (Aryeetey, 2001; Ouainoo, 1999; Ansah, 1999; World Bank,1997) commissioned by
the World Bank give some insight into some MFIs in Ghana in areas of service provision and linkages
with the informal financial sector. These studies point to a generally successful situation with potential
future benefits and recommend more studies into MFI activities. For example, in 2001, the total number of
depositors recorded by all rural and community banks was 1.2 million and with about 150,000 borrowers.
Again, by 2002, eight savings and loans institutions had over 160,000 depositors, 10,000 borrowers, and
offerings savings and credit products similar to rural and community banks. Furthermore, in 2002, private
deposits with MFIs in Ghana amounted to about 6 percent of commercial bank deposits, Basu et al.
(2004). The government of Ghana has in recent times been instrumental in promoting MFIs and has
through the Central Bank and the Ministry of Finance and Economic Planning began the implementation
of a Rural Finance Services Project (RFSP) with funding from donor agencies (World Bank, African
Development Bank, UNDP, IFAD, etc.) aimed at training and building capacity, as well as institutional
development and product design of IVIFIs. In summary therefore, it must be pointed out that microfinance
has for the past few years been used as a way of providing credit to the poor in small-scale enterprises, in
order to improve upon their income levels thereby reducing poverty. Thus, the critical role played by the
sector motivated us to examine how their capital structure influences performance.
The paper seeks to address two-fold problem: the first is to provide an insight into the capital structure of
microfinance institutions in Ghana, and secondly to examine how this structure impacts on performance.
Not only will the findings of the study help the ongoing debate on issues related to micro finance
institutions, but it will also serve as a foundation for further studies in this important sector. The rest of the
paper is organised as follows: section two reviews both theoretical and empirical literature; section three
discusses methodology and the data; section four discusses empirical results and section five concludes
and offers recommendations emanating from the findings of the study.
Review of research literature
Theoretical underpinnings
One of the important financial … .
………………………………………………………………………………………………………………………
34. Microfinance and Third World Poverty and Development--Posner
The award earlier this month of the Nobel Peace Prize to Muhammad Yunus and his Grameen Bank of
Bangladesh has directed attention to the phenomenon of microfinance, which Yunus and his bank have
pioneered. The term refers to the making of tiny loans to poor people in underdeveloped countries, like
Bangladesh. The amounts are sometimes only tens of dollars, the borrowers are small farmers,
shopkeepers, artisans, and other minute commercial enterprises--overwhelmingly female (97 percent)-and the interest rates, which are designed to compensate the lenders fully, are high—sometimes as
high as 20 percent a day. Although Yunus's motivation is not primarily commercial, the high interest
rates and a relatively low default rate (in part because groups of women related to or friends with the
borrower often agree to guaranty repayment of the loan), said to be only 1 percent, enable the
Grameen Bank and its imitators (collectively referred to as "MFIs"--microfinance institutions--to cover
their costs. The MFIs provide other services to poor entrepreneurs as well, but the loans ("micrcredit")
are the most interesting feature of this experiment in helping poor countries throw off their poverty.
Microfinance began with the Grameen Bank in the 1980s, and to date the bank has disbursed almost $6
billion in loans to some 6 million people. The total number of borrowers from all microfinance
institutions is expected to reach 100 million by next year. The aggregate value of these loans is a drop in
the bucket so far as alleviating Third World poverty is concerned, but the award of the Nobel Prize is a
vote of confidence that may encourage continued growth of the program. What exactly microfinance
has to do with "peace" is obscure. The causes of war are complex, and it is by no means clear that
poverty is a major one. In any event the actual contribution of microfinance to peace must be slight and
speculative. So the award of a Nobel Peace Prize to Yunus was questionable, but that is not to criticize
Yunus's project. The experiment is a worthy one, though its success has yet to be demonstrated despite
glowing appraisals by Kofi Annan and others. It may simply be the latest development fad. It does
however seem superior to philanthropy in the sense of handouts, which in this case would mean giving
grants (or heavily subsidized loans) to small entrepreneurs on the basis of competitive applications. For
that is a competition in rhetoric. Middlemen would spring up to assist the applicant in writing a
persuasive application, and the fees charged by the middlemen would be a good example of how the
prospect of obtaining economic rents (crudely, something for nothing) channels the expected rents into
costs. And the grants would frequently be misallocated. The high interest rates that the microfinanciers
charge induce self-selection by the borrowers: a borrower has to have confidence in the project for
which he is seeking microcredit in order to be willing to assume the burden of servicing his debt. Of
course such confidence is sometimes, and perhaps among the poor often, misplaced. An obvious
question is why, if microfinance is remunerative, commercial banks and other commercial lenders did
not enter the market long ago; for as I said, microfinance began in the 1980s. One possibility is that
regulations designed to protect the solvency of banks limits their ability to make risky loans. Usury laws
may be an obstacle too, if they are differentially applied to ordinary lenders as distinct from
microfinanciers--yet the Grameen Bank seems to be an ordinary stock corporation, not a nonprofit.
More important may be the existence of a close substitute for microfinance in the form of informal
loans by relatives and clan members, a method of financing that is feasible (and extremely common) in
societies in which the clan and the extended family can discipline members by threat of ostracism and
other informal sanctions. The total capital possessed by the family or clan might be slight by usual
commercial standards, yet if only one or a few members have any real entrepreneurial prospects, the
limited capital may be sufficient to finance their tiny projects. So microfinance is perhaps best
understood as a device for easing the transition from an economy based on trust to a normal
commercial society. As a substitute for trust, microfinance has obvious drawbacks. Extremely high
interest rates, though justified not only by the risk of default (and the opportunity cost of money, that is,
the riskless interest rate) but also by the very high transaction costs of a tiny loan (since those costs are
largely fixed, rather than varying with the size of the loan), burdens the borrower with very heavy fixed
costs, since he must repay the loan regardless of the success of his enterprise. The higher a producer's
fixed costs relative to his total costs, the riskier his enterprise, since if demand for his product falls or his
marginal costs rise he will find it extremely difficult to adjust by cutting output; the cut will reduce the
revenue out of which he has to pay principal and interest on the loan. Borrowing at astronomical
interest rates seems an unlikely formula for commercial success--and the more unlikely the poorer the
borrower. In the family or clan alternative, trust may provide an extremely low-cost substitute for the
transaction costs involved in microfinance. Perhaps then microfinance will occupy a narrow niche in
capital markets between family and clan resource pooling at one end and commercial lending at the
other. Indeed, the fact that the overwhelming majority of microfinance borrowers are women suggests
that the particular market failure that microfinance corrects is discrimination against women in the
family and clan capital markets. An alternative form of microfinancing would be equity rather than debt
financing, on the model of private equity firms like Blackstone and the Carlyle Group. Of course these
multibillion dollars firms have no interest in making $100 loans in Bangladesh. But the Grameen Bank
could presumably furnish equity in lieu of loans to its customers, thus sharing the risk with them and so
reducing the risk to them; and it is a superior risk sharer because of size and diversification. But maybe
the bank would find it too difficult to evaluate projects, or would fear being inundated by applications
from the impecunious. I end on a skeptical note. The evidence for the efficacy of microfinance in
stimulating production and alleviating poverty is so far anecdotal rather than systematic. The idea of
borrowing one's way out of poverty is passing strange. And I am unaware of any historical examples of
nations that climbed out of poverty on the backs of small entrepreneurs financed by credit. Also, recall
that Grameen Bank has lent almost $6 billion to some 6 million persons. This implies an average loan of
almost $1,000, which in a country like Bangladesh is not chicken feed and makes one wonder how much
of the Grameen Bank's loan portfolio is actually microfinance. (Yet the bank's financial statement
indicates that the average loan balance in 2005 was only $85--I don't understand how this squares with
the aggregate figures that I gave above, which are also published by the bank!) Then too, the bank has
been in operation since 1983, which is more than 20 years and indicates that the average number of
borrowers is only 300,000 a year, with presumably many repeat borrowers. Bangladesh has a population
of almost 150 million people. It is true that the microfinance movement is growing--and as it grows we
may see default rates rising and the microfinanciers adjusting, as the Grameen Bank may already have
done, by greatly increasing the minimum size of loans. Think back to that low default rate for the
Grameen Bank. The bank does not have written loan agreements and does not sue defaulters or invoke
other legal remedies against them. The natural inference to draw is that the bank is extremely selective
in its choice of persons to whom it is willing to lend, and such selectivity, if imitated by other
microfinanciers, must greatly limit the scope and impact of microfinance. I suggest, albeit tentatively,
that there may be a good less to microfinance than its boosters claim.
35. Are loans at 100 per cent APR good for the poor?
An article written by Tim Harford on the 7th December,
2008.
Published on Highlights, Other Writing.
FT Magazine, 6 December 2008
Bob Annibale’s corner office, high up in one of London’s few real skyscrapers, overlooks the
Thames and the Millennium Dome from one window, Greenwich Park and the Royal
Observatory from another. It is the kind of enviable perch you’d expect Citigroup’s senior
treasury risk manager to enjoy. But that is the job Annibale left three years ago; now he is Citi’s
“global director of microfinance”…
Microfinance, the system of providing tiny loans and savings accounts to the poor, seems an
unlikely and somewhat ironic candidate for Citigroup’s attention. It was because banks weren’t
interested in serving the poor that the pioneers of microfinance saw a gap to be filled, back in the
1970s.
The most celebrated microfinance institution, the Grameen Bank, was born in Bangladesh in
1976 after Muhammad Yunus, a young economics professor, found that craftswomen were
struggling to deal with the high costs of borrowing in order to buy raw materials. Village
moneylenders charged up to 10 per cent interest per day. At such rates, a debt of a single cent
would balloon to the size of the US economy in just over a year.
Yunus began lending – originally, less than a dollar each to a group of 42 families – and found
that the poor were capable of investing the money, lifting themselves out of poverty and paying
back the loans with near-perfect reliability. “All people are entrepreneurs,” he proclaimed.
From small beginnings, a global microfinance movement has developed, with perhaps $25bn of
loans outstanding and 125m to 150m customers. It has been blessed by the United Nations,
which declared 2005 the International Year of Microcredit, and by the Nobel committee, which
awarded the Nobel Peace Prize to Yunus and Grameen Bank in 2006.
Now multinational banks at last see microfinance as a profit opportunity. “Colleagues asked me
if was giving up a business role,” says Annibale, who became Citi’s first microfinance chief in
2005. “I’d say, ‘No, I’m taking up a new one’.” He plans to make money for Citigroup by
providing technology, advice and investment banking services to microfinance lenders. His
division has so far been unaffected by this year’s market turmoil.
The Citigroups of the world are not the only commercial players to get involved in what was
once a purely philanthropic endeavour. Sequoia Capital, the venture capital fund that backed
Google, Apple and Cisco, has taken an $11m stake in SKS Microfinance, a large Indian lender.
Private equity groups such as Helios Capital are making similar moves. Pierre Omidyar, founder
of eBay, gave $100m to Tufts University in 2005 with the stipulation that the donation be used to
create a fund seeking its returns only through investments in microfinance. The fund’s director,
Tryfan Evans, recently predicted that it would be fully invested by the end of this year.
Most surprising and controversial are those microfinance institutions that have been transformed
from charities to profitable companies through hugely successful initial public offerings. The
most notorious, Mexico’s Compartamos (“Let’s Share”), used a $6m investment to turn itself
into a billion-dollar company in less than a decade, expanding rapidly while charging very high
rates to borrowers. What was once an idealistic movement is now a fast-growing industry – one
that is rapidly losing its innocence.
The commercialisation of microfinance has sparked a fierce debate between profit advocates
such as Carlos Danel and Carlos Labarthe, the founders of Compartamos, and traditionalists such
as Yunus, who see microfinance lenders like Compartamos as indistinguishable from the
moneylenders he set out to replace in 1976. Between these two poles lie the majority of
microfinance practitioners, eager to gain access to capital and commercial expertise but
concerned that competitive market forces may not help the poorest.
Commercialisation is a huge opportunity to lift people out of poverty. Despite the credit crisis,
most of us take for granted the ability to save, to borrow for emergencies or to buy assets, to
move money around and to insure ourselves. But several billion people lack these basic, lifeimproving services. The microfinance industry today serves fewer than one in 10 of them. Few
people believe microfinance can grow quickly enough without adopting a more commercial
model.
It is not just that commercialisation would provide plentiful access to foreign capital – although
that is likely – but also that expertise from commercial players might allow microfinance lenders
to move beyond simple loans. If lenders could take deposits, they should easily be able to fund
their own loans: many poor people are would-be savers who lack a safe place to put their money.
But as the credit crisis has made clear, deposit-taking is a difficult business requiring regulatory
supervision even in rich countries. Commercial expertise is therefore indispensable for a deposittaking bank.
Yet this is also a dangerous moment. Microfinance harnesses market forces to bring basic
financial services to the poor, but many microfinance institutions do much more than that. Using
donor funds or reinvested profits, coupled with their reach into remote villages, they provide
subsidised education and healthcare. There is a risk that commercial logic could threaten these
subsidised services by repelling donors or poaching the best customers. There is also the risk that
competition misfires, leaving the poor paying higher rates rather than lower ones.
More than 500 years before the birth of modern microfinance, Franciscan monks in Perugia,
Italy, developed their own method of social finance. They would lend money to the poor in times
of crisis; as collateral, they would hold some precious item and charge a fee for its safekeeping to
cover their operating costs. The idea was endorsed by the Pope and widely emulated. The monks
called the fund a “Monte di Pieta”, a Fund of Mercy. Today, we would call it a pawnshop.
This cautionary tale – told by Larry Reed of the Boulder Institute of Microfinance – resonates in
a social movement that is sharply divided over commercialisation.
The crisis was provoked by Compartamos’s initial public offering in April last year.
Compartamos was founded in 1990 as a non-profit organisation, but after a decade converted
itself into a profit-making company, with investors including Acción International, which is partfunded by the United States Agency for International Development (USAid) and the
International Finance Corporation, which is the World Bank’s private sector lending arm.
(Disclosure: I used to work for the IFC.)
Many microfinance schemes have a profit-making structure, including Grameen Bank; what was
unusual with Compartamos was how profitable it turned out to be. The initial investments of
about $6m, between 1998 and 2000, were worth about $1.5bn at the time of the public offering
in 2007. That valuation was justified by a combination of fast growth and high interest rates. Just
how high is not quite clear – to their discredit, it is rare for microfinance lenders to report such
things – but a report from the Consultative Group to Assist the Poor, an independent
microfinance think-tank housed by the World Bank, estimated that Compartamos charged
interest rates of more than 100 per cent APR (annual percentage rate), after tax.
That is not as usurious as it might seem. Most microfinance lenders charge rates that would make
credit-card companies blush – often more than 30 per cent a year – because small, short-term
loans are costly: a loan of $50, borrowed at an annual interest rate of more than 50 per cent and
repaid over four months, will produce less than $5 in interest repayments. That isn’t much to
cover overheads. Yet Compartamos was so profitable that it could have lowered rates without
jeopardising its expansion. It chose not to.
Yunus’s response to that was little short of an excommunication. He declared himself “shocked”
by the public offering. In a documentary on US public television, he described his attitude to the
profit motive in microfinance. “You [profit-focused microfinance practitioners] are on the
moneylender’s side. Because your aim is the moneylender’s aim. Your thinking is the
moneylender’s thinking. So I don’t want to associate with you, I want to battle with you and to
fight you.”
Compartamos itself was silent on the subject for a long time, eventually producing a response
that defended its motives, beliefs and mission more than a year after the public offering. The
language of the battle had been defined: a lexicon of mission and motives, them and us, good and
evil. “Yunus is concerned that his legacy, even the language of microcredit, is being
appropriated,” says Jonathan Morduch, a microfinance expert at New York University. “But the
rest of the world doesn’t care and shouldn’t care.”
There is nothing intrinsically sinful about pawnbroking or intrinsically virtuous about
microloans: what matters is the effect on the clients. And to our discredit, we don’t really know
what that effect is. There have been only two serious cost-benefit analyses – and they’ve
produced a split decision as to whether, given the subsidies involved, microfinance delivered
value for donor dollars.
Dean Karlan, a microfinance economist at Yale, is frustrated by this lack of serious research into
what works. He also thinks Yunus’s talk of “the moneylender’s thinking” is unhelpful. “If you’re
trying to make the world a better place but you’re not, that’s bad. If you’re trying to make profits
and don’t care about people, but make them better off anyway, that’s good,” he says.
So, can you lift people out of poverty by lending money to them at 100 per cent APR? Karlan,
with Jonathan Zinman of Dartmouth College, is behind one of the few pieces of research to hint
at an answer.
In South Africa in late 2004, Karlan and Zinman persuaded an anonymous consumer finance
company that we’ll call “ZaFinCo” to participate in an experiment. Ordinarily, almost half of its
borrowers would have been turned away as a bad credit risk. But for two months, ZaFinCo loan
officers were instructed to identify applicants who had narrowly failed to pass credit checks.
From this pool of near-customers, a computer selected almost half and requested that branch
managers reconsider and offer a loan anyway.
This procedure emulated the randomised trials of new medicines – after all, a more typical, nonrandom comparison of borrowers versus non-borrowers would not be able to tell whether
borrowers were doing well because they had access to loans, or because they were confident,
entrepreneurial people.
Karlan and Zinman wanted to know what value there might be in expanding access to credit.
ZaFinCo was no dewy-eyed social business, but a hard-nosed, profit-minded company, charging
11.75 per cent per month on a four-month loan, or 200 per cent APR, much more than
Compartamos was generally judged to have been charging.
Despite the high rates, the results were astonishing. “We expected to see some good effects and
some bad,” explained Karlan, who checked in with the experiment’s participants six to 12
months after they had filed their initial loan applications. “But we basically only saw good
effects.”
Most strikingly, those “treated” by the experiment – that is, those for whom the computer
requested a second chance at a loan – were much more likely to have kept their jobs than the
control group. They were also much less likely to have dropped below the poverty line or to have
gone hungry. All these outcomes were recorded well after the loan had been taken out and
(usually) repaid, so this was not measuring a temporary debt-funded binge.
This seems mysterious. How can a loan at 200 per cent APR help people to stay out of poverty?
One answer is that most people turned down for a 200 per cent APR loan would be able to get
one at 300, 500 or over 1,000 per cent from an informal moneylender. More important is that
these loans were not used to start businesses but to help people keep jobs that they already had. If
a smart new blouse or a spare part for the family moped is what it takes to stay in work, then who
is to say that an expensive loan isn’t a wise investment?
Karlan is the first to warn against extrapolating too much from a single experiment. “This is the
last thing in the world that I would use to develop policy,” he warns. “You’ve got to replicate.”
The trouble is that the replication just isn’t happening. For all the optimism about microfinance –
and the ZaFinCo experiment only encourages that optimism – it is striking how much we do not
know about when it works, and why.
This matters because non-commercial microfinance projects often depend on donor subsidies.
And while microfinance has a good reputation among development professionals, that doesn’t
mean guaranteed access to those subsidies. More credible evaluation would help preserve the
programmes that deserve to be preserved.
Already, solidly held beliefs about microfinance have been shaken. The “group liability” system,
in which a group of borrowers guarantee one another’s loans, is still supposed by many to be the
secret behind Grameen Bank’s low default rates. But a randomised trial in the Philippines
conducted by Karlan and a World Bank economist, Xavier Gine, found that group liability was
discouraging new customers without improving repayment rates. Grameen itself quietly dropped
group liability some time ago.
Another sacred cow of microfinance is that women make best use of the money – the Grameen
Bank says 97 per cent of its borrowers are women. But another randomised trial, conducted in
Sri Lanka by a team of researchers including David McKenzie of the World Bank, found that
male borrowers seemed to make a far higher return on their capital. As with the ZaFinCo study,
it’s just one experiment in one country.
Yet it raises a worrying question: for how long will donors fund microfinance projects with so
little compelling evidence about exactly what kinds of project really work?
While many non-profit microfinance institutions depend on donor subsidies to cover overheads,
reduce interest rates, or provide parallel schemes, some use profits from the best customers to
cross-subsidise other operations. These parallel schemes can be vast. BRAC, a Bangladeshi
microfinance organisation often called the world’s largest NGO, provides primary education,
mobile libraries, legal aid and healthcare, all on an astonishing scale. But what is the future for
such programmes in the face of commercial competition? Cross-subsidies are rarely sustainable
in a competitive market: commercially minded banks will simply lure the best customers –
usually those borrowing the largest sums, and with the best credit records – by offering them
better rates.
The trouble is that the world cannot rely on commercial operations alone; they will miss far too
many people. ZaFinCo’s clients were ideal customers for a commercial lender: they were city-
dwellers and therefore cheap to reach; they were poor enough to want loans but rich enough that
the loans were profitably chunky. A peasant farmer in Sudan ticks none of those boxes: living in
the middle of nowhere, he is expensive to reach and so poor that he can afford only tiny loans.
Nor does he have job that a ZaFinCo-style loan can help preserve or any business prospects
either. Then there are the destitute, the disabled, the elderly and the orphans. Such people cannot
repay loans at a rate that would cover costs. Heavy subsidies or outright grants would be needed.
“All people are entrepreneurs,” says Muhammad Yunus. If only he were right.
At least commercialisation seems likely to help those borrowers who can be served on
commercial terms. After all, if even a 200 per cent APR loan can help moderately poor
customers, surely anything goes as long as the market expands? Sadly, the truth is not so easy.
The ZaFinCo study showed not that loans at 200 per cent are good for everybody, merely that
they are good for the people who choose to apply for them – in other words, that ZaFinCo’s
borrowers knew what was good for them. Most people will only be helped by loans at lower
rates. Competition should bring down those rates, of course, and one of the strongest defences of
Compartamos is that its success is attracting competitors with exactly that effect.
Healthy competition is a better protector of consumer interests than good intentions. The trouble
is transparency. Competition works when customers know what they’re paying and what they’re
paying for – which is why lenders in the US have been required for the past 40 years to disclose
their interest rates in a standardised format. Few microfinance institutions do the same thing, and
the results can be baffling. “You have a borrower comparing two institutions across the street
from each other, and she can’t tell which has the cheaper product,” complains Chuck Waterfield,
the founder of a non-profit called Microfinance Transparency.
The lack of a standardised format for reporting loan costs makes it hard to compare what lenders
are offering. One common practice is to charge “flat interest”, meaning that interest is calculated
on the initial loan amount, rather than the declining balance as the loan is gradually repaid. The
apparently small tweak almost doubles the effective rate.
It is, in any case, misleading to think that the only aim should be to provide, sustainably, as many
cheap loans as possible. That would be the impression gained from Muhammad Yunus, who
always emphasises “microcredit” rather than “microfinance”. But there is more to finance than
credit: even the Grameen Bank has moved away from pure microcredit to provide a wider range
of financial services. In fact, if you did not have the ability to save or to insure yourself, for
example, you would be forced to rely on loans to handle emergencies.
“There is lots of evidence suggesting that poor people would rather save, turning small amounts
into a lump sum, rather than borrow a lump sum and then pay it back,” explains Elizabeth
Littlefield, the head of the CGAP microfinance think-tank. “But the only way you can offer a
safe place to save money is if you have sound, government- licensed, well-governed institutions.
And that is what commercialisation really means.”
As microfinance institutions move into deposit-taking, the stakes become higher. Governments
almost always impose arduous regulations on deposit-taking institutions, and understandably so:
just imagine what will happen if the manager of a microbank in Peru or Pakistan or Nigeria
decides to use his customers’ deposits to fund his retirement. Yet governments, especially in the
world’s poorest countries, are not known for their ability to draft the kind of light-touch
regulation that will allow a fledgling microbanking industry to spread its wings.
Ironically, if microfinance institutions can find ways to provide savings accounts to the very poor
– despite sceptical regulators, a difficult business environment and tiny transactions – they will
not need much of the foreign capital commercialisation is supposed to provide. Most poor
households are savers, or would like to be. Many poor countries are savers. All that is needed to
raise the capital for making fresh microcredit loans is a successful deposit-taking bank for the
poor.
The future of microfinance, we must hope, will be one in which the poor enjoy the financial
services that surround the rest of us. For the poorest, subsidies will still be necessary, and the
industry is running out of excuses as to why rigorous trials are still so rare. But Yunus and his
fellow pioneers have shown that many poor people can be served profitably by commercial
organisations.
Making that vision a more widespread reality will require less finger-pointing, and more thought
about how competition really works. The sector’s problems are beginning to look more like
those of the retail banking industry in developed markets: accessing wholesale capital, protecting
consumers, safeguarding deposits and making competition work for customers. The credit crisis
has reminded us that these are not trivial problems – but beyond doubt, they are symptoms of
success.