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Content derived from Wikipedia article on Microfinance
Microfinance - From Wikipedia, the free encyclopedia
Microfinance is a term used to refer to the activity of provision of financial services to clients who are excluded from the traditional financial system on account of their lower economic status. These financial services will most commonly take the form of loans (see microcredit) and micro-savings, though some microfinance institutions will offer other services such as micro-insurance and payment services.
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.
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Contents
1 Microfinance as a development tool 2 Traditional Microfinance Systems 3 How Many People Have Access to Microfinance? 4 Sustainable Microfinance 5 How Does Microfinance Contribute to the Millennium Development Goals? 6 The Current State of Microfinance 7 Challenges Ahead 8 Criticism 9 Microfinance in Use 10 Articles and Other Information 10.1 Online resources (collections of information) 11 References
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.
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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.
Sustainable Microfinance
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.
Challenges Ahead
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.
Criticism
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 ACCION International ACDI/VOCA 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. The Consultative Group to Assist the Poor 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. cooperative Grameen Bank Grameen Foundation FINCA 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 Microfinance Opportunities 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[1]. 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.
References
^ 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 Retrieved from http://en.wikipedia.org/wiki/Microfinance
End of WIkipedia content, http://en.wikipedia.org/wiki/Microfinance
Content derived from Wikipedia article on Microcredit
Microcredit - From Wikipedia, the free encyclopedia
Contents
1 History 1.1 Pakistan (now Bangladesh) Academy for Rural Development 1.2 Opportunity International 1.3 ACCION International 1.4 Muhammad Yunus and Grameen Bank 1.5 FINCA International 1.6 The SEEP Network 1.7 Today 2 2006: Microcredit awarded Nobel Peace Prize 3 Fundamental Principles 4 Strengths 5 Criticism 6 Investment Groups 7 See also 8 Notes 9 References 10 Further reading 11 External links 11.1 General information 11.2 Microcredit or microfinance institutions 11.3 Humanitarian organizations supporting microfinance
Microcredit is the extension of very small loans to the unemployed, to poor entrepreneurs and to others living in poverty who are not bankable. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimum qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of financial services to the very poor; apart from loans, it includes savings, microinsurance and other financial innovations.
Microcredit is a financial innovation which originated in developing countries where it has successfully enabled extremely impoverished people (mostly women) to engage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty. Due to the success of microcredit, many in the traditional banking industry have begun to realize that these microcredit borrowers should more correctly be categorized as pre-bankable; thus, microcredit is increasingly gaining credibility in the mainstream finance industry and many traditional large finance organizations are contemplating microcredit projects as a source of future growth. Although almost everyone in larger development organizations discounted the likelihood of success of microcredit when it was begun in its modern incarnation as pilot projects with ACCION and Muhammad Yunus in the mid-1970s, the United Nations declared 2005 the International Year of Microcredit.
Women have become the center focus of many microcredit institutions and agencies worldwide. The reasoning behind this is the observation that loans to women tend to more often benefit the whole family than loans to men do. It has also been observed that giving women the control and the responsibility of small loans raises their socio-economic status, which is seen as a positive change to many of the current relationships of gender and class. However, there is an ongoing debate about whether microcredit loans have the power to truly change established political and economic relationships.[1]
According to the Microcredit Summit Campaign:
"1.2 billion people are living on less than a dollar a day. Women are often responsible for the upbringing of the world’s children and the poverty of the women generally results in the physical and social underdevelopment of their children. Experience shows that women are a good credit risk, and that women invest their income toward the well being of their families. At the same time, women themselves benefit from the higher social status they achieve within the home when they are able to provide income."
Many microcredit organizations focus completely on women borrowers. Pro Mujer and NamasteDirect are two organizations that directly work with women, but the Grameen Foundation, UN Secretary General Kofi Annan, and Hillary Rodham Clinton all emphasize women when they speak about microcredit.
History
The concept of microcredit can be traced back to portions of the Marshall Plan at the end of World War II in the middle of the 20th century or even back to the mid-1800s and the writings [1] of abolitionist/legal theorist Lysander Spooner who wrote concerning the benefits of numerous small loans for entrepreneurial activities to the poor as a way to alleviate poverty. It is also tied to New York's Providence Fund. However, in its most recent incarnation it can be linked to several organizations starting in the 1970s and onward.
Pakistan (now Bangladesh) Academy for Rural Development
Dr. Akhter Hameed Khan introduced the revolutionary idea of microcredit (microfinance), thereby opening a new door for billions of destitute and underprivileged. As head of the Pakistan Academy for Rural Development (now Bangladesh Academy for Rural Development, BARD) in Comilla, Bangladesh, Dr. Khan pioneered microcredit through the Comilla Cooperative Pilot Project in 1960. Source:
"The Works of Akhter Hameed Khan" Vol: I-III "Rural Development in Action" by Arthur F Raper
Opportunity International
In 1971, Al Whittaker resigned as president of Bristol Myers and established Opportunity International’s first US office in Washington DC. The first loan was made to Carlos Moreno in Colombia to expand his one-man spice and tea business - cited in The Economist as the first "microloan." About the same time Australian philanthropist, David Bussau, began making microloans in Indonesia. The two men met and formed the global organization, Opportunity International that provides opportunities for people in chronic poverty to transform their lives by creating jobs, stimulating small businesses, and strengthening communities. Small loans ranging from USD 25 to USD 500 helped poor families lift themselves out of poverty with dignity.Other Opportunity International offices are in Australia, Great Britain and Canada, each targeting countries within their region.
ACCION International
In 1973 Accion International, a Peace Corps-like group, started to switch their focus toward providing economic opportunity to poor people instead of working on construction/infrastructure projects in order to create lasting improvements in the lives of those they were helping. Their plan first appeared in Recife, Brazil in 1973 when ACCION staff began to offer microloans to poor people eager to start small businesses. ACCION offered an alternative to the under-served population that were ineligible for traditional loans and wanted to avoid the exploitive lending practices of loan sharks.
Within four years, the experiment had shown its success in having provided 885 loans with a repayment rate of over 90%. The loans also helped to create or stabilize 1,386 new jobs. This success in making a lasting impact in peoples lives, as contrasted with the previous projects they had done seemingly steered ACCION firmly in the direction of being a microfinance organization. Since this beginning ACCION has expanded its microlending operation to countries throughout South and Central America, the United States, Africa and India.
ACCION claims that these loans were the first modern pioneers of microcredit.
Muhammad Yunus and Grameen Bank
Around the same time as ACCION's experiment, and apparently independently, Muhammad Yunus, a U.S.-educated professor of economics started a similar experiment. Around 1974 during a famine in his native Bangladesh Yunus discovered that very small loans could make a significant difference in a poor person's ability to survive, but that traditional banks were not interested in making tiny loans to poor people, who were considered poor repayment risks. His first loan consisted of $27 from his own pocket which he lent to 42 people including a woman who made bamboo furniture, which she sold to support herself and her family.
In 1976, Yunus founded the Grameen Bank to make loans to poor Bangladeshis. Since then the Grameen Bank has issued more than $5 billion in loans to several million borrowers - at the close of 2005 the number of outstanding loans is more than 4 million. To ensure repayment, the bank uses a system of "solidarity groups": small informal groups, nearly all of them exclusively female, that meet weekly in their villages to conduct business with representatives of the bank, and who support each other's efforts at economic self-advancement. As it has grown, the Grameen Bank has also developed other systems of alternate credit that serve the poor. In addition to microcredit, it offers housing loans as well as financing for fisheries and irrigation projects, venture capital, textiles, and other activities, along with other banking services such as savings.
The success of the Grameen model has inspired similar efforts throughout the developing world and even in industrialized nations including the United States. Many, but not all, microcredit projects also emulate its emphasis on lending specifically to women. Close to 96 percent of Grameen loans have gone to women, who have been found to be much more likely than men to repay loans and to devote their earnings to serving the needs of the entire family. Originally the program started with men and women, but later focused on women when data showed a dramatically lower credit risk in women. In 2006, Yunus and the Grameen bank were honored for this achievement with the Nobel Peace Prize.
FINCA International
In the 1980s FINCA International continued the successful trend of microcredit in Bolivia. John Hatch, founder of FINCA, had worked on other international credit programs and started doing microcredit on his own in Bolivia, stressing local autonomy and putting the poor in charge of the programs. “Give poor communities the opportunity, and then get out of the way!” he said. He called the idea "village banking".
One of the unique things about Hatch's "village banking" was how quickly he implemented it. After he had assembled a team, within four weeks, they had created 280 village banks serving 14,000 families with loans worth $630,000. While the original program was shut down, it was not because of a lack of success, but because its backers felt uncollateralized lending was too risky.
Despite this setback, Hatch continued to pursue his work and incorporated FINCA in 1985, this time working in El Salvador. In El Salvador the program focused on women, as many of the other micro credit programs have.
The mission of FINCA International is to provide financial services to the world's lowest-income entrepreneurs so they can create jobs, build assets, and improve their standard of living. In 2005, FINCA reached more than 400,000 clients, providing in excess of $100 million in small loans averaging $360. FINCA currently operates programs in 21 countries in Africa, Latin America and the Caribbean, Eastern Europe and Central Asia. Women comprise 80 percent of its small loan clients, and the organization has a loan repayment rate of 97 percent.
The SEEP Network
The SEEP Network is an organization of more than 50 international non-governmental organizations that support micro and small business and microfinance institutions in the developing world. Its mission is to advance the practice of micro and small enterprise development among its members, their international partners, and other practitioners through innovation and practitioner-led tools and learning products.
SEEP began as The Small Enterprise Evaluation Project, “The SEEP Project,” in 1985. As a single-focused endeavor, The SEEP Project convened 25 International nongovernmental organizations to develop an alternative, practitioner-focused approach to evaluating small business projects for private development organizations. Practitioners wanted to implement a bottom-up approach to evaluations that would influence the way donors approached the subject. The work was carried out through workshops, engaging field staff to develop a monitoring system that would fit their own organization. Two years later, The SEEP Project published Monitoring & Evaluating Small Business Projects: A Step by Step Guide For Private Development Organizations (1987).
The successful completion and dissemination of the Step-by-Step Guide prompted the transformation of The SEEP Project into The SEEP Network. To jump-start the Network, SEEP established three working groups, Financial Services, Non-Financial Services and Institutional Development, in order to build a broader learning agenda. Over the years SEEP has followed the same methodology of testing and defining best practices ‘by practitioners, for practitioners’ that resulted in a number of key publications and training courses. The working groups have grown and evolved; today SEEP supports nearly fifteen working groups composed of its members and partners. Out of the working groups come learning products and publications that represent industry best practices and cutting-edge innovations. SEEP’s more than 47 Technical Notes, Progress Notes and discussion syntheses are available as free downloads on the SEEP website, www.seepnetwork.org; SEEP’s books in topics such as financial performance monitoring and client assessment are available via SEEP’s online bookstore. SEEP’s mission has evolved from being a thought leader and learning center to advancing the practices of small and microenterprise development among its members, their international partners, and other practitioners. The depth and outreach of the SEEP Network has become broader as it supports collective research to promote learning that advances professional development, increases program impact, fosters continuing innovation, and informs the policy arena.
During 1997–2000 SEEP expanded its programs to include work with regional and country-level microenterprise networks to build their capacity and provide relevant services to their clients. SEEP now provides mentoring and coaching services to over 25 networks. Additionally, SEEP opened up a competitive<-- ? clarify --> grant-making process that reaches deep<-- how deep? --> into the field for action research projects, and has made 47 grants in the meantime.
In 2005, over 100 member volunteers contributed to 17 working group activities shaping action research agendas in a range of topics: Standardized financial statements, small enterprise market research tools, HIV/AIDS and microenterprise, and environment and microenterprise development. These peer learning groups produce practical and innovative solutions to real problems by leveraging member knowledge and resources. Additionally, SEEP opened up its membership to regional and country-level microfinance networks. SEEP members are the center of its operations, and SEEP will remain devoted to its members.
Today
The World Bank estimates that there are now more than 7,000 microfinance institutions, serving some 16 million poor people in developing countries. According to Le Monde newspaper, World Bank experts estimated that 500 million people benefited from these small loans (about 80 euros), on a total of three billion poor people. Cambodia and Kenya were put forward as examples. Asia and the Pacific region represent 83% of the opened accounts in developing countries, which is equivalent to 17 accounts for 100 persons [3]. In November 1997, more than 2000 delegates from 100 countries gathered at a Microcredit Summit in Washington, DC, with the goal of reaching 100 million of the world's poorest families, with credit for self-employment and other financial and business services by the year 2005. Support for these goals has come from prominent world leaders and major financial institutions.
UNDP Year of Microcredit LogoThe Economic and Social Council of the United Nations proclaimed the year 2005 as the International Year of Microcredit to call for building inclusive financial sectors and strengthening the powerful, but often untapped, entrepreneurial spirit existing in communities around the world. There are five goals associated with "The Year" which are:
Assess and promote the contribution of microfinance and microcredit to the MDGs; Increase public awareness and understanding of microfinance and microcredit as vital parts of the development equation; Promote inclusive financial sectors; Support sustainable access to financial services, and Encourage innovation and new partnerships by promoting and supporting strategic partnerships to build and expand the outreach and success of microcredit and microfinance for all.
2006: Microcredit awarded Nobel Peace Prize
Grameen Bank and its founder Muhammed Yunus were awarded the Nobel Peace Prize for 2006. The press release states:
"The Norwegian Nobel Committee has decided to award the Nobel Peace Prize for 2006, divided into two equal parts, to Muhammad Yunus and Grameen Bank for their efforts to create economic and social development from below. Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights.
Muhammad Yunus has shown himself to be a leader who has managed to translate visions into practical action for the benefit of millions of people, not only in Bangladesh, but also in many other countries. Loans to poor people without any financial security had appeared to be an impossible idea. From modest beginnings three decades ago, Yunus has, first and foremost through Grameen Bank, developed micro-credit into an ever more important instrument in the struggle against poverty. Grameen Bank has been a source of ideas and models for the many institutions in the field of micro-credit that have sprung up around the world.
Every single individual on earth has both the potential and the right to live a decent life. Across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development.
Micro-credit has proved to be an important liberating force in societies where women in particular have to struggle against repressive social and economic conditions. Economic growth and political democracy can not achieve their full potential unless the female half of humanity participates on an equal footing with the male.
Yunus’s long-term vision is to eliminate poverty in the world. That vision can not be realised by means of micro-credit alone. But Muhammad Yunus and Grameen Bank have shown that, in the continuing efforts to achieve it, micro-credit must play a major part."
Fundamental Principles
An increasingly large body of published literature and conference proceedings has begun to seriously study the implications and debate the relative significance of different aspects of this important financial innovation. For those who are interested in a reading more detailed, theoretical studies of this field of economics and finance, a separate ESR Review has existed since the fall of 1999. From published literature and conference proceedings, it is possible to surmise several fundamental lessons from the microcredit success and failures over the last three decades.
A savings|investment as preferable aid: Independent borrowers earn the dignity and lasting self-confidence associated with responsible loan repayment. Institutional managers are more careful to ensure borrower success and generally perform better when there are risks involved.
Entrepreneurial talent and energy are scarce invaluable resources for economic growth: Our economies cannot afford not to find and develop independently responsible entrepreneurs and public bankers who are financial critical thinkers. These individuals can be attracted to the microcredit industry, but they are individuals with options – they will not risk their future on short-term or unpredictable bureaucratic support.
Traditional private banks should not be expected to offer microcredit: Existing banks with a traditional operating philosophy typically have significant investments in facilities and costly operating structures. Because of the significant overhead of such banking operations, these bank operations naturally gravitate to large, profitable transactions with affluent borrowers.
A new generation of banking institutions [and the banking professionals to run them] is arising: Banking institutions motivated by a less myopic vision of profitably serving the common good can be capitalized for the primary purpose of entry-level economic development. By lowering the transaction costs through institutional specialization and innovation in delivery systems, they will be able to operate profitably in markets characterized by very small transaction sizes and less affluent clients.
Poor entrepreneurs possess the same survival skills as the toughest, most affluent business operators: Poor entrepreneurs save money, carefully apply their entrepreneurial energy and repay debts as scheduled to maintain access to future loans. In other words, poor entrepreneurs are not only prebankable, they represent the population of those individuals who will be aggressively pursued as successful, very affluent captains of enterprise in 10, 25 or 50 years from now.
A radically efficient, large-scale, NEW banking operating infrastructure required: Simply modifying old methods will not successfully expand poor people's participation in their country's economy. Investment in self sustaining institutions that finance poor residents is a comparatively cost-effective use of scarce subsidies for economic development. The costs of doing research in the microcredit and microenterprise areas are extremely low compared to other strategies to stimulate economic development such as tax abatement or continued support for welfare programs.
Beyond enterprise lending and savings: Increasingly, microfinance is expanding beyond its roots in savings and business lending and now offers other forms of financial services, including most notably insurance and housing microfinance. In many ways, microfinance offers the promise that it could eventually evolve into a specialized form of banking catering to economically active poor people who currently happen to be unbanked. Some new microfinance focused-organizations, see for instance the Development Innovations Group (DIG),have embraced this more expanded vision of microfinance and speak of financial services for the poor or of development finance, rather than of microfinance.
Strengths
In the past few years, savings-led microfinance has gained recognition as an effective way to bring very poor families low-cost financial services. For example, in India the National Bank of Agriculture and Rural Development (NABARD) finances more than 500 banks that on-lend funds to self-help groups (SHGs). SHGs comprise twenty or fewer members, of whom the majority are women from the poorest castes and tribes. Members save small amounts of money, as little as a few rupees a month in a group fund. Members may borrow from the group fund for a variety of purposes ranging from household emergencies to school fees. As SHGs prove capable of managing their funds well, they may borrow from a local bank to invest in small business or farm activities. Banks typically lend up to four rupees for every rupee in the group fund. Groups pay a reasonable 11-12% annual rate of interest. Nearly 1.4 million SHGs comprising approximately 20 million women now borrow from banks, which makes the Indian SHG-Bank Linkage model the largest microfinance program in the world. Similar programs are evolving in Africa and Southeast Asia with the assistance of organizations like Opportunity International, Catholic Relief Services, CARE, APMAS and Oxfam. Also helps in the development of an economy by giving everyday people the chance to establish a sustainable means of income. Eventual increases in disposable income will lead to economic development and growth.
Criticism
Gina Neff of the Left Business Observer has described the microcredit movement as a privatization of public safety-net programs.[4] Enthusiasm for microcredit among government officials as an anti-poverty program can motivate cuts in public health, welfare, and education spending. Neff maintains that the success of the microcredit model has been judged disproportionately from a lender's perspective (repayment rates, financial viability) and not from that of the borrowers. For example, the Grameen Bank's high repayment rate does not reflect the number of women who are repeat borrowers, and have become dependent on loans for household expenditures rather than capital investments. Studies of microcredit programs have found that women often act merely as collection agents for their husbands and sons, such that the men spend the money themselves while women are saddled with the credit risk.[5] As a result, borrowers are kept out of waged work and pushed into the informal economy.
Another group of critics believe that traditional schemes of credit for the poor, such as pawn shops and payday loans, are more effective, and claim that many microcredit schemes are simply disguised charity rather than an effective business model. Bangladesh's Finance and Planning Minister M. Saifur Rachman has pointed out that some microfinance institutions charge excessive interest rates.[6]
Some other problems that have been reported with microcredit:
Turning a profit on the loan Inability to reach the poorest of the poor Microcredit dependency Durability of poverty reduction Excessive political interference to gain a vote bank
Investment Groups
It is possible to invest in microcredit via certain investment groups including:
Microcredit Enterprises, Ltd was founded in 2005 with the conceptual leadership, seed funding and policy analysis of Freedom from Hunger. ACCION Investment Funds, Since 1984, ACCION's financial experts have been successfully investing for double bottom line returns. Visit our site to learn more about socially responsible investment possibilities with ACCION International including the ACCION Global Bridge Fund, ACCION Latin America Bridge Fund, ACCION Investments in Microfinance, and the ACCION Gateway Fund. Calvert Foundation, Community development financial institutions (CDFIs) are organizations which provide financing programs to do microenterprise lending and microcredit development work, providing the means for your community investment capital to impact disadvantaged communities. Many CDFIs accept direct investments from relatively wealthy individuals; on the other hand, financial intermediary facilities from socially-responsible investing organizations such as the Calvert Foundation allow individuals with a smaller amount to commit (as little as $1000) to purchase notes that is a piece of a larger pool of CDFI investments. The Council of Microfinance Equity Funds(CMEF) is the first membership organization bringing together the leading private entities that make equity investments in microfinance institutions (MFIs) in the developing world. The Council’s members seek both social and financial returns from their investments in these institutions, all of which provide a range of financial services to poor households in developing countries. PENSCO Trust Company, PENSCO Trust Company, chartered in New Hampshire, is a single-service special asset custodian for self-directed IRAs. Since 1989, the company has exclusively focused their services on the administration and custody of IRAs invested in non-traded assets, such as real estate and private placements. Permissible alternative self-directed investments include limited-liability companies, limited partnerships, corporations, and socially responsible charitable investing. Grameen Bank Support Group Australia Kiva, Taking more of an aggregator/enabler stance, Kiva partners with microfinance institutions across the globe who are on the ground vetting loan applications and working with entrepreneurs to ensure the best chance at their business succeeding. Kiva's partners are a critical link in the chain that reaches from your computer to an African goatherder or a Cambodian lunch cook. Their knowledge of the local population and presence in the area ensure a smooth loan process in a responsible and sustainable way.
See also
Freedom from Hunger, US charity promoting Credit with Education Cooperative banking
Notes
^ Microcredit, Macro Problems thenation.org ^ Microcredit Summit Campaign microcreditsummit.org ^ "500 millions de pauvres disposent d'un microcrédit", Le Monde, January 27, 2006 (in French). ^ Microcredit, microresults The Left Business Observer #74, October 1996 ^ Goetz, A.M. and R. Sen Gupta. "Who takes the Credit? Gender, power and control over loan use in rural credit programmes in Bangladesh." World Development Vol. 24, January 1995. ^ Large NGOs Becoming Rockefellers. The Financial Express, November 22, 2005
References
The Works of Akhter Hameed Khan Vol: I-III. Publisher: Bangaldesh Rural Academy, Comilla, Bangladesh Rural Development in Action by Arthur F Raper . Publisher: Cornell University Press. Yale Economic Review. Microcredit in South Africa, Summer 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[2]. Neff, Gina. Microcredit, Microresults. Left Business Observer, October 1996.
Further reading
Helms, Brigit. Access For All: Building Inclusive Financial Systems, The World Bank, 2006. Christen, Robert. Banking Services for the Poor: Managing for Financial Success - An Expanded and Revised Guidebook for Microfinance Institutions, 1999. Dunford, Chistopher, Microcredit Summit Campaign. Building Better Lives: Sustainable Integration Of Microfinance and Education in Health, Family Planning and HIV/AIDS Prevention for the Poorest Entrepreneurs, 2001. Kaddaras, James and Elisabeth Rhyne. Characteristics of Equity Investment in Microfinance: A Report by the Council of Microfinance Equity Funds, 2004. Rhyne, Elisabeth. Mainstreaming Microfinance: How Lending to the Poor Began, Grew, and Came of Age in Bolivia. Kumarian Press, 2005. ISBN 1-56549-126-2 "The Financing of Microfinance" in SED Journal, March 2005 Daphnis, Franck and Bruce Ferguson, Housing Microfinance: A Guide to Practice], Kumarian Press, January 2005. Several books on this topic are available and are listed on Amazon under the title Start Your Own Microcredit.
Microcredit or microfinance institutions
OPP-OCT, Karachi, Pakistan Accion International, a large network of microfinance institutions working in Asia, Latin America, and Africa Adelante Foundation is a grass roots micro credit organization in Honduras, working with the poorest of the poor. The Aga Khan Agency for Microfinance Compartamos Development Innovations Group (DIG), a private firm providing training, product and program design, and management support to commercial banks and to microfinance institutions. Fonkoze - Fondasyon Kole Zepòl Fonkoze - Haiti's Alternative Bank for the Organized Poor - is the largest micro-finance institution offering a full range of financial services to the rural-based poor in Haiti. Freedom from Hunger, a large network of microfinance institutions focused on the very poor in Asia, Latin America and Africa. Freedom from Hunger is a pioneer for sustainably integrating education with microfinance. The Organization is currently exploring new models for increased scale under its Reach initiative and new innovations to integrate health and microfinance Grameen Foundation, replicating the Grameen Bank model around the world Grameen Bank, generally regarded as the originator of the microcredit movement in finance Kiva, the only peer-to-peer Microfinance gateway, using the power of the internet to facilitate micro-lending. Allows anyone to participate in Microfinance with as little as a $25 loan. Microfinance Information eXchange (The MIX), The global information service for the microfinance industry Microloans Mapped on Platial. MIX Market, MIX's microfinance information platform featuring profiles on microfinance industry participants NamasteDirect a non-profit devoted to providing credit for first-time women borrowers in Guatemala. Nirdhan Utthan Bank Limited "the bank for upliftment of the poor" is a microfinance bank which provides microfinance services such as Loans, Deposits, Microinsurance and Remittance services to rural poor of Nepal. Omidyar-Tufts Microfinance Fund, a partnership between Pierre Omidyar and Tufts University. Opportunity International, a large microfinance network focusing on giving the poor around the world a working chance. Also a pioneer in using microfinance to fight HIV/AIDS in Africa. ProCredit Holding- ProCredit group consists of 19 different banks in developing countries. The core business of the banks is lending to micro and small enterprises. Pro Mujer SafeSave pioneers basic banking services (not just microcredit) for very poor people Sarvodaya Nano Finance Ltd., A Microfinance NBFC in India. The SEEP Network, membership association of private and voluntary organizations that support micro and small business and microfinance institutions in the developing world. Tameer Microfinance Bank Limited. Currently poised to become Pakistan's second largest Microfinance Bank (MFB), Tameer is a commercial non-subsidised MFB. TrickleUp.org gives small grants to emerging entrepreneurs among the very poor. Currently operating in 14 countries including USA. Offers business training to the poor and encourages savings groups among the entrepreneurs. Started by Millie Leets and her husband 27 year ago, it has helped over 130,000 poor start their own businesses, gain self esteem and join savings groups. Ujjivan, an urban microfinance organization, based in Bangalore, INDIA. Unitus, a global microfinance accelerator, acting as a social venture capital investor for the microfinance industry. Also, they have launched a blog which discusses microfinance and microcredit topics.
Humanitarian organizations supporting microfinance
Orangi Pilot Project (OPP) A poverty alleviation project started by Dr.Akhter Hameed Khan in 1980 CARE International CARE - Empowering the vulnerable. Self Help Development InternationalSHDI is an Irish agency engaged in promoting long term sustainable development projects in Africa. The organisation promotes micro-finance as a means of income diversification as part of its integrated development programmes. PlaNet Finance, PlaNet Finance is an international non-profit organisation dedicated to the development of microfinance as a tool to alleviate poverty in the world. World Relief WorldVision, runs and finances microcredit programs through the world. [3] Coady International Institute provides educational program and technical support in community-based microfinance. Appui au Développement Autonome (ADA) NGO specialised in microfinance. Financial and non-financial support of microfinance institutions. HOPE International HOPE International is a global, faith-based, non-profit organization focused on poverty alleviation through microenterprise development. Retrieved from http://en.wikipedia.org/wiki/Microcredit
End of Wikipedia content, http://en.wikipedia.org/wiki/Microcredit
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