Microfinance & Microcredit Reference
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Content derived from Wikipedia article on Microfinance
Microfinance - From Wikipedia, the free encyclopedia
The primary differentiator between microfinance and the conventional credit disbursal mechanism lies in the "joint liability" concept. A group of individuals, almost always women, form an association to apply for loans. For instance, the groups in India are called "Self Help Groups' (SHG). All members of the association undergo a training programme on the basic procedures and system requirements. Loans to individuals within the group are approved by its other members; the group is likewise jointly responsible for its repayment. Recently many institutions have abandoned strict joint liability, giving the groups an important, but largely social function. A prime example is the Grameen Bank. To minimise the financial burden, there are upper limits on the amounts lended and lower limits on the duration of repayment.
9 Microfinance in Use
10 Articles and Other Information
10.1 Online resources (collections of information)
Microfinance as a development tool
Access to financial services, such as loans, savings services, insurance, and money transfers enable people to increase income and smooth consumption flows, thus expanding their asset base and increasing their ability to respond to a crisis. The availability of financial services acts as a buffer against sudden emergencies, business risk, and seasonal slumps that can push a family into destitution. Since low income people are often ineligible for traditional financial services, microfinance specifically targets low-income groups. As a development tool it is believed making these services available to poor households can help them to move from mere subsistence for daily survival to planning for the future and investing in better nutrition, improved living conditions, and children's health and education.
Impact studies show that in many cases, microfinance reduced poverty through increasing income levels. Studies also show that microfinance has resulted in improved healthcare, children’s education and nutrition, and women’s empowerment. In particular, the ability to borrow, save, and earn income reduces economic vulnerability for women and their households.
Nonetheless, microfinance is not a panacea. Even the most innovative and participative programmes can lead to unwanted negative impacts. In many cases, microfinance has been shown to benefit the moderately poor more than the truly destitute. Many early impact studies on microfinance showed increased income levels, but more recent and better-designed studies have shown that the impact can vary per income group. In most cases the better-off benefit more from microcredit, due to their higher skill levels, better market contacts, and higher initial resource base. Lower income groups may be more risk-averse, and benefit more from microsavings and microinsurance.
Many microfinance and microcredit programmes target women, largely due to their (generally) higher repayment rates. There are mixed thoughts on the impact of this discrimination. If a programme excludes men, particularly in areas where access to financial services is limited, the man may require his wife to get the loan for him leading to greater burden on the woman in terms of debt, family violence and increased workload. Others have argued that exclusive access for women actually increases her bargaining power within the household, leading to greater improvement in their family's health and education, and their communities economic outlook than when loans are not targeted.
Traditional Microfinance Systems
Microfinance schemes were not developed by international aid agencies or NGOs. Many such schemes have long histories in the developing world. One such microfinance scheme is known variously as a sou-sou, box money, meeting turn, partner hand in the Caribbean and tinton in Senegal. Another term for this type of scheme is a rotating savings and credit association (ROSCA).
The scheme requires the formation of a committed group. The participants in the sou-sou are required to pay a certain amount of money to a coordinator at regularly scheduled intervals (for example, $200 every month for a fixed or unfixed length of time). At each such interval, all the collected money (less any fee to the coordinator) is disbursed to one of the members; a different member receives the entire pot (or "hand") each time - the times of one's hand often scheduled to coincide with a predicted future need.
Once each member has received a hand, a new cycle begins, often with the same members, but with an adjustment of the order of receipt. A sou-sou thus serves as a method for the members to make interest-free loans to one another on a rotating basis. In the tinton (Senegalese) version of this scheme, interest is paid back to the group by the borrowing member, so that the amount of money in the "pot" grows at a faster rate. There are in fact numerous ways in which this type of scheme can be organized; with variants based on the frequency and length of the cycle period, the contribution amount, and mode of selecting the person who will receive the payout.
Advantages of this form of microfinance are that it offers an opportunity for members to save, and at the same time keep such savings fairly liquid, facilitates the availability of a lump sum of money, which allows for higher investment to be made earlier than accumulation of savings, bypasses and in many places replaces official financial institutions that may be out of reach for the participants due to poverty, immigration status, etc. distributes the risk of default evenly across the members and usually employs peer pressure to ensure compliance.
Disadvantages are the risk of mismanagement and fraud on the part of the group's organizer who in theory could abscond with the group's funds, a disconnect between the timing of a payout and the recipient's need, and the inavailability of committed funds to other uses, including that of saving outside of the group.
How Many People Have Access to Microfinance?
The Consultative Group to Assist the Poor (CGAP) estimates that of the three billion poor people of working age who could be making use of these services, about 500 million - one sixth -currently have access to formal financial services. To reach the estimated three billion poor people who could use financial services will require a whole range of institutions, not just traditional NGO microfinance institutions.
Microfinance is unique as a development tool because of its potential to be self-sustaining. Successful microfinance institutions have proven that providing financial services to the poor can be an effective means of poverty reduction and be a profitable business. Dozens of institutions have proven that financial services for poor people can cover their full costs, through adequate interest spreads, relentless focus on efficiency and aggressive enforcement of repayment. A large and growing proportion of today's microfinance services are being provided by institutions that are profitable, even after adjusting for subsidies that they may have received.
How Does Microfinance Contribute to the Millennium Development Goals?
Evidence confirms that access to financial services significantly impacts the lives of the poor:
Eradicate Extreme Poverty and Hunger. Empirical evidence shows that, among the poor, those who participated in microfinance programs were able to improve their living standards – both at the individual and household level – much better than those without access to financial services. For example, the clients of BRAC, formerly known as the Bangladesh Rural Advancement Committee, and the largest NGO in the world, increased household expenditures by 28% and assets by 112%. In El Salvador, the weekly income of FINCA clients increased on average by 145%.
Achieve Universal Primary Education. Impact studies show that, in poor households with access to financial services, children are not only sent to school in larger numbers – including girls - but they also stay in school longer. In Bangladesh, almost all girls in Grameen client households had some schooling, compared to 60% of non-client households.
Promote Gender Equality and Empower Women. Access to financial services and the resultant transfer of financial resources to poor women can lead women to become, over time, more confident, more assertive, and better able to confront systemic gender inequities. Microfinance enables poor women to become economic agents of change by increasing their income and productivity, accessing markets and information, and decision-making power. In Indonesia, female clients of Bank Rakyat Indonesia (BRI) were more likely than non-clients to make joint decisions with their husbands regarding allocation of household money, children’s education, use of contraceptives and family size, and participation in community events.
Combat HIV/AIDS, Malaria, and Other Diseases. In many cases, disease prevention is more cost-effective than disease treatment; however, funding of the capital costs is often required. The World Bank estimates that malaria costs Africa millions of lives a year, and $12 billion in lost productivity. Economic advisor Jeffrey Sachs estimates that malaria can be controlled for $3 billion a year. A simple mosquito net costing $2-$5 is effective in preventing malaria for a household; however, this capital cost is often considered unaffordable by a farmer who may earn
$250 per year. In cases where preventative measures exist, microfinancing can help make these solutions more affordable to all.
Access to permanent and relevant financial services creates the local foundation for achieving nearly all of the Millennium Development Goals.
The Current State of Microfinance
These are interesting times for those involved in the provisioning of financial services for the poor. The boundaries between microfinance and the formal financial sector are finally breaking down. In some areas, microfinance is now an inherent part of the financial system. In other areas, new and innovative financial delivery methods are being developed to overcome the barriers of sparse population and large distances between settlements, as well as poor infrastructure. Technology can play an important role, but we may have to accept that for the moment, some areas truly are unbankable.
Many microfinance institutions, many whose origins were social, are professionalizing, becoming sustainable and in some cases even profitable. Many of these institutions are now seeking commercial funding. To attract this type of funding, they must become transparent in their financial reporting. The Microfinance Information Exchange (MIX) is an information exchange website where more than 600 MFIs and 75 funds post information on their organisations and their performance.
At the same time, commercial institutions are also beginning to get involved in providing financial services to poorer clients. CGAP has identified over 200 domestic retail banks or consumer credit companies getting involved in microfinance, often driven by competition and technologies that promise to allow them to make smaller transactions more cost effective. E-Banking, smart cards and telephone technology are beginning to be used by microfinance providers to reduce transaction costs, a key to reaching poorer clients.
The real challenge facing the microfinance industry today is scaling up services to reach the estimated three billion people in developing countries who still lack access to formal financial services. Successful microfinance institutions have proven that providing financial services to the poor can be an effective means of poverty reduction and be a profitable business. A major bottleneck to the development of sustainable microfinance is limited institutional and managerial capacity at the level of retail microfinance institutions, as reflected in inadequate management information systems, poor strategic planning, and high operating costs. There is also a marked shortage of organizations that can provide safe savings facilities for the poor and that can sustainably mobilize these domestic savings for on-lending.
Many of the necessary elements needed to scale up microfinance are already in place. A great deal of the knowledge about the requirements of sustainable microfinance already exists. High-performing microfinance institutions have developed innovative methodologies to extend credit, savings and other services to poor clients. A number of banks and other institutions with nationwide distribution systems are beginning to take active interest in reaching poorer clients. Advances in information technology have the opportunity to lower the cost and risk of providing microfinance to the poor. The challenge is to mobilize this knowledge and apply it on a much vaster scale, creating financial systems that work for the poor and boost their contribution to economic growth.
One approach is to tap into developed capital markets through microfinance investment funds that enable individual investors and portfolio managers to allocate a part of their equity and/or fixed income investments to microfinance as an asset class.
There is, however, criticism towards microfinance institutions. In 2001, a Wall Street Journal article raised the following questions regarding the Grameen Bank:
Low repayment rate. 19% of their loans are one year overdue, and 10% are over 2 years overdue. Meanwhile, the bank generally claims a much lower deliquency rate.
Allegations of using harsh methods to push people for repayment, such as removing the tin roof from people's homes.
The bank's attempt to conceal problem loans by relabelling and hiding account information.
Lack of formal supervision in its operation.
In addition, some people argue that an overemphasis on microfinance to combat poverty will lead to a reduction of other assistance to the poor, such as government welfare.
Microfinance in Use
OPP-OCT, Karachi, Pakistan
Aga Khan Agency for Microfinance
A Self-help Assistance Program (ASAP Africa) Detailed information and a photo gallery of a self-funded rural microfinance project in Zimbabwe.
DOEN Foundation, The object of DOEN's Financial Sector Development programme is to improve access to the financial sector in both transition and developing countries.
Freedom from Hunger
Village Enterprise Fund
Negros Women for Tomorrow Foundation
NICA Fund Nicaraguan Credit Alternatives Fund
Opportunity International A Microfinance organization providing opportunities for people in chronic poverty to transform their lives
Microloan Foundation A microfinance institution focussing on Malawi and sub Saharan Africa
The ProCredit Group
Unitus An innovative group that uses a hybrid venture capital model to increase local access to microfinance
www.kiva.org The world's first website that let's you make a micro-loan to a specific entrepreneur
M2i Consulting - Microfinance Management and Investment Advisory
Mifex Solutions for creating easier access to financial services and business training.
Ujjivan, an urban microfinance organization, based in Bangalore, INDIA.
Andromeda, is a fund which supports the empowerment of entrepreneurs in developing countries.
Articles and Other Information
Commercialization: Overcoming The Obstacles To Accessing Commercial Funds While Maintaining A Commitment To Reaching the Poorest June 15, 2006
Alleviating Global Poverty through Microfinance, October 10, 2005: Factors and Measures of Financial, Economic, and Social Performance
The New Yorker Millions For Millions, October 30 2006.
The Economist. The hidden wealth of the poor: A survey of microfinance, November 2005.
The MicroBanking Bulletin, Premier source of microfinance benchmarks, published by The MIX.
PBS documentary about microcredit called Small Fortunes.
Measuring the Impact of Microfinance: Taking Stock of What We Know; Nathanael Goldberg, December 2005.
Hype and Hope: The Worrisome State of the Microcredit Movement, Thomas Dichter.
Microfinance and the Environment - several articles on the effect of microfinance on the environment, sanitation and water.
^ Small Change: Bank That Pioneered Loans for the Poor Hits Repayment Snag --- `Microcredit' Icon Grameen Faces Questions as Rate Of Delinquencies Rises --- Mrs. Begum's Missing Cow, by Daniel Pearl and Michael M. Phillips, The Wall Street Journal (Eastern edition), November 27, 2001, page A.1, URL
^ A Nobel loan shark? by Patrick Bond
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