Micro-financing encompasses a broad category, with the common design of expanding access to financial services in under-serviced and disadvantaged communities, thereby fostering empowerment and development.
Problems and Purpose
Microfinance encompasses a broad category of financial products and services offered to poor or socially marginalized individuals. Unlike other products and services under the banner of 'alternative financial institutions', microfinance typically serves those living in poor countries or communities lacking access to "high-quality financial products and services, including not just credit but also savings, insurance, payment services, and fund transfers."[1]
According to the Consultative Group to Assist the Poor, the goal of microfinance is to increase the availability of financial services and products to those in poor or socially marginalized societies.[1] Microfinance is a broad category, so there is mixed evidence of its impacts. However, its main intended purpose is to increase or enhance financial inclusion.[2]
Origins and Development
The beginnings of microfinance are attributed to Bangladeshi economist Muhammad Yunus' poverty-reducing rural economic programme, which was initially designed as a research project at Chittagong University after the Bangladesh Liberation War in the 1970s.[3] In 1976, Dr. Yunus began issuing 'micro-loans' of $27 (USD) from the bank he founded, Grameen Bank (meaning “Village Bank” in Bengali), to women in the village of Jobra; through this lending, he was able to create what he refers to as a virtuous cycle of "low income, injection of credit, investment, more income, more savings, more investment, more income".[3]
Yunus' work eventually won him the Nobel Peace Prize and inspired other microfinance organizations and institutions, such as Kiva.[2] Kiva is known for leveraging the power of the internet and online crowdsourcing funds to increase the scale and reach of microfinance services.[2] According to the organization, between their founding in 2005 and 2015, they have "enabled more than 1.5 million people to fund over 2 million borrowers in over 80 countries [resulting in] nearly $1 billion dollars lent to borrowers and repaid at a rate greater than 97%."[2]
Participant Recruitment and Selection
Micro-financing institutions are responsible for screening their borrowers, a responsibility assumed by the borrowing group in the case of peer lending.[4] With the original microfinance bank that Professor Yunus began, the vast majority of participants were women living in poverty.[3]
How it Works: Process, Interaction, and Decision-Making
There are several methodologies for microfinance depending on the target borrowing group, with the Grameen Bank model among the best known.[5] Some of “the most successful methodologies” use lessons from the traditional financiers for poor individuals, such as moneylenders and middlemen; they offer quick, local access to credit with high interest rates, requiring borrowers to save small amounts, and rely on peer pressure to help self-manage contracts.[6]
Laura Brandt and her co-authors identify two general categories, namely individual lending programs and peer-lending programs.[5] Individual lenders identify individual borrowers based on credit histories, references, and the proposals for how they will spend the money.[5] Individual lending is typically associated with conventional banking systems, which are often reluctant to offer loans to individuals who are unable to make guarantees, thereby excluding the poor.[3] Thus, the uniqueness of Yunus’ innovation is with the short-term loans being given out without collateral.[7] Instead, they are backed by group guarantee and “borrowers are required to save some amounts”, resulting in high recovery rates while allowing borrowers to escape poverty.[7] Group lending is accompanied by high interest rates, given that it is considered riskier than indiviudal lending.[8]
Group lending can be further divided into two categories: “solidarity group approaches and community-based organization (CBO) approaches” where the difference is that CBOs intend for the borrower group to eventually become independent from lenders, since savings are more central than external funding.[9] The Grameen Bank case illustrates the solidarity model.
According to Brandt et al., the Grameen model begins with the identification of a potential village, training community members on the rules of the program, and groups of five being formed.[9] The self-selected group appoints a leader, which is a rotating role; they then “determine the rotation of access to credit” with timely repayment being a prerequisite for each member to receive a subsequent turn at being the borrower.[10] Loans typically range from $50 to $300.[11] If a member defaults on a loan - that is, they are unable to repay - the other members are held collectively responsible.[10] Thus, repayment is guaranteed through peer pressure, with borrower groups becoming part of the institutional micro-financing structure.[10] They assume some “functions typically performed by bank staff”, such as screening clients to accept into their group.[12]
Influence, Outcomes, and Effects
Professor Yunus’ original micro-financing bank grew to cover “more than 97 percent of the total villages in Bangladesh” and have “8.93 million [Bangladeshi] borrowers, 97 percent of whom are women” by late 2017.[13] According to Grameen Bank’s official website, external organizations such as the World Bank and Bangladesh Institute of Development Studies have verified the positive impact that microfinance has had on impoverished borrowers.[13] The U.S. government’s volunteer program, Peace Corps, states that “small amounts of cash allow the poor to acquire these assets, increase their productivity, and improve their economic well-being.”[14] For instance, they are enabled to start micro-enterprises with the loans, potentially earning the funds to repay their loan and provide for their families. However, budding entrepreneurs may also encounter low demand in impoverished communities.[17]
Micro-finance has grown not only in Bangladesh, but has been replicated to varying degrees of success in other parts of the world, among them Uganda and parts of Latin America. Indian daily newspaper, The Hindu, reported that microfinance has been “conceptualised and implemented with a high degree of success” in India as well as other developing countries, which often neglect women.[7] Advanced industrial economies such as the U.K. and the U.S. are also implementing microfinance to improve financial inclusion for impoverished communities.[7]
Analysis and Lessons Learned
According to the Norwegian Nobel Prize Committee, microcredit has been a “liberating force in societies where women in particular have to struggle against repressive social and economic conditions.” [15] Microfinance has, after all, shown that “despite high transaction costs and no collateral, in some cases it is possible to lend profitably to low-income households.”[16] Furthermore, Jonathan Morduch suggests that microfinance has lifted the profile of the NGOs involved in organizing and financing the lending.[16] Importantly, he notes that microfinance does not present the solution to destitution, but could aid households below the poverty line; Morduch points to the fact that microfinance drives self-employment, but not necessarily employment generation or overall economic growth, which has a greater influence on living standards.[17]
However, the results have been mixed, with many questioning the positive impacts of microfinance.[18] An article in The Guardian points to the South African experience, where “consumption accounts for 94% of microfinance,” noting that this fact suggests the loans will not be repaid.[19] Relatedly, micro-financial institutions have also faced criticism over their high interest rates, with arguments that they exacerbate debt, as well as allegations of coerced payments.[3] A study by Craig McIntosh and Bruce Wydick revealed that growing competition between microfinance institutions in developing countries “yields an equilibrium in which poor borrowers are worse off.”[20]
See Also
References
[1] Robert Peck Christen, Richard Rosenberg, and Veena Jayadeva, "Financial Institutions with a 'Double Bottom Line': Implications for the Future of Microfinance," Consultative Group to Assist the Poor (Vol. 8, July 2004): https://goo.gl/Lim9gp
[2] "What is Microfinance," Kiva, accessed February 8, 2019, https://www.kiva.org/microfinance
[3] “Profile: Muhammad Yunus, ‘world’s banker to the poor’”, BBC News online, last modified March 2, 2011, https://www.bbc.com/news/world-south-asia-11901625
[4] “Where Kiva Works,” Kiva, accessed February 8, 2019 https://www.kiva.org/about/where-kiva-works
[5] Laura Brandt, Natalya Epifanova, and Tatiana Klepikova, “The Russia Microfinance Project”, University of Washington-Evans School of Public Affairs, accessed February 8, 2019, https://goo.gl/wfvU9x, 2
[6] “A Microenterprise Training Guide for Peace Corps Volunteers,” Peace Corps, accessed February 8, 2019, https://files.peacecorps.gov/multimedia/pdf/library/M0068_microent_2-3.pdf, 49
[7] “Grameen Bank, a Nobel-winning concept,” The Hindu, last modified March 24, 2012, https://www.thehindu.com/todays-paper/tp-business/grameen-bank-a-nobelwinning-concept/article3208913.ece
[8] Laura Brandt, Natalya Epifanova, and Tatiana Klepikova, “The Russia Microfinance Project”, University of Washington-Evans School of Public Affairs, accessed February 8, 2019, https://goo.gl/wfvU9x, 3
[9] Laura Brandt, Natalya Epifanova, and Tatiana Klepikova, “The Russia Microfinance Project”, University of Washington-Evans School of Public Affairs, accessed February 8, 2019, https://goo.gl/wfvU9x, 4-5
[10] Laura Brandt, Natalya Epifanova, and Tatiana Klepikova, “The Russia Microfinance Project”, University of Washington-Evans School of Public Affairs, accessed February 8, 2019, https://goo.gl/wfvU9x, 6
[11] “A Microenterprise Training Guide for Peace Corps Volunteers,” Peace Corps, accessed February 8, 2019, https://files.peacecorps.gov/multimedia/pdf/library/M0068_microent_2-3.pdf, 52
[12] Charles Waterfield, and Ann Duval, “CARE Savings and Credit Sourcebook”, CARE, 1996. Chapter 6, quoted in Laura Brandt, Natalya Epifanova, and Tatiana Klepikova, “The Russia Microfinance Project”, University of Washington-Evans School of Public Affairs, accessed February 8, 2019, https://goo.gl/wfvU9x, 3.
[13] “Introduction,” Grameen Bank, accessed February 8, 2019, http://www.grameen.com/introduction/
[14] “A Microenterprise Training Guide for Peace Corps Volunteers,” Peace Corps, accessed February 8, 2019, https://files.peacecorps.gov/multimedia/pdf/library/M0068_microent_2-3.pdf, 49
[15] “The Nobel Peace Prize for 2006” NobelPrize.org, accessed February 8, 2019, https://www.nobelprize.org/prizes/peace/2006/press-release/
[16] Jonathan Morduch, "The Microfinance Promise." Journal of Economic Literature 37, no. 4 (1999): 1609. https://www.aeaweb.org/articles/pdf/doi/10.1257/jel.37.4.1569
[17] Jonathan Morduch, "The Microfinance Promise." Journal of Economic Literature 37, no. 4 (1999): 1609. https://www.aeaweb.org/articles/pdf/doi/10.1257/jel.37.4.1569, 1610.
[18] Maren Duvendack, Richard Palmer-Jones, James G. Copestake, Lee Hooper, Yoon Loke, and Nitya Rao, “What is the evidence of the impact of microfinance on the well-being of poor people?” (London: EPPI-Centre, Social Science Research Unit, University of London, 2011), https://www.givedirectly.org/pdf/DFID_microfinance_evidence_review.pdf
[19] Jason Hickel, “The Microfinance Delusion: Who Really Wins?” The Guardian online, last modified June 10, 2015, https://goo.gl/VoiVvB
[20] Craig McIntosh and Bruce Wydick. 2005. “Competition and microfinance.” Journal of Development Economics 78 (2): 271, https://repository.usfca.edu/econ/25/
External Links
'The Microfinance Delusion - Who Really Wins?' (The Guardian): https://www.theguardian.com/global-development-professionals-network/201...
Kiva Official Website: https://www.kiva.org/
Grameen Bank Method of Action: http://www.grameen.com/method-of-action/
Lies, Hype, and Profit: The Truth About Microfinance (The Atlantic): https://www.theatlantic.com/business/archive/2011/01/lies-hype-and-profit-the-truth-about-microfinance/70405/
Notes
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