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Microfinance

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Microfinance is a term for the practice of providing financial services, such as microcredit, microsavings or microinsurance to poor people. By helping them to accumulate usably large sums of money, this expands their choices and reduces the risks they face.[1] Suggested by the name, most transactions involve small amounts of money, frequently less than 100 USD.[2]

History

Microfinance is often dated to the 1970s. Only then, did any programs pass two key tests:

  • show that people can be relied on to repay their loans and
  • show that it's possible to provide financial services to poor people through market-based enterprises without subsidy.

Recent evidence gathered by Timothy Guinnane, an economic historian at Yale, raises questions about this view. Guinnane demonstrates that the success of Friedrich Wilhelm Raiffeisen's village bank movement in Germany, which began in 1864 and reached 2 million rural farmers by 1901, resulted in large part from its ability to pass both these tests.

Guinnane shows how the village-based bonds of associations of these early cooperatives gave them both the information and enforcement advantages needed to make loans to people who were both too poor and too remote to access bank loans.[3] Raiffeisen was moved to action by the poverty of the recently freed serfs, and by the degree of exploitation they faced from local moneylenders.[4]

The caisse populaire movement founded by Alphonse Desjardins in Quebec, also met these tests. Desjardins and his wife Dorimène must have had strong faith in these principles. From 1900, when he founded the first caisse (which she managed), until 1906, when a law governing them was passed in the Quebec assembly, they both risked their personal assets for the liabilities of the entire movement.[5].

Like Raiffeisen, Desjardins was concerned about the poverty. But he was spurred to action by his outrage over usury. In 1897 as parliamentary reporter, he learned of "one notable [court] case in Montreal within the last few days, in which a man obtained a loan of $150, and was sued for, and was compelled to pay in interest, the sum of $5,000".[6]

In the 1970s, a new wave of microfinance initiatives introduced many new innovations into the sector. In the early 1970s, several pioneering enterprises began experimenting with loaning to the poor and underserved. An early pioneer of microfinance at the time was Akhtar Hameed Khan.

The first fully-incorporated microfinance and community development bank was ShoreBank, founded in 1973 in Chicago.[7]

Economics professor Muhammad Yunus is often credited with disbursing the first microloan in Bangladesh in 1974.[8] He later went on to found the Grameen Bank and was awarded the 2006 Nobel Prize for his efforts.

Composition

Microfinance is composed of many finance services such as loans, credit (See microcredit), insurance, etc, run on a smaller scale.[9]

Criticism

There is, however, criticism towards microfinance institutions. In 2001, a Wall Street Journal article raised the questions regarding the Grameen Bank,[10] including repayment rate, collection methods and questionable accounting practices.

On a larger scale, some argue that an overemphasis on microfinance to combat poverty will lead to a reduction of other assistance to the poor, such as government welfare.[11]

Research on the actual effectiveness of microfinance as a tool for economic development remains slim, in part owing to the difficulty in monitoring and measuring this impact.[12] Questions have arisen regarding whether microfinance can ever be as important a tool for poverty alleviation as its proponents and practitioners would submit.[13]

Key debates

One key debate within microfinance has been whether donors and practitioners should focus on impact, i.e. improved living standards for the poor, or financial sustainability. The former approach has been called 'poverty lending' or 'the welfarist approach', whereas the latter is sometimes termed 'the institution-building' or 'financial system approach' [1]. Whereas the welfarist approach often supplements financial services with other services such as education and health, institution-builders focus solely on financial service. The arguments for this approach include the following: 1. if poor people are willing to pay to use the institution, it must be offering them value, 2. only by ensuring financial sustainability can the huge demand be met, and 3. donors are best to direct subsidies to other services like education and health through separate non-profit organizations. Examples of the welfarist approach are FINCA International and Women's World Banking. Examples of the institution-building approach are Accion International and BRI Unit Desa.

Another key debate centres on the appropriate target group for microfinance services. One view is that the most important form of microfinance is credit targeted to poor people who are also talented entrepreneurs. If these people gain access to credit, they will expand their businesses, stimulate local economic growth and hire their less entrepreneurial neighbours. This will result in fast economic development. While this approach has had significant results in the cities of the developing world, it has failed to reach the majority of poor people who are rural subsistence farmers with little, if any, non-farm income. As urban-rural income inequities continue to rise in the developing world, this result is increasingly viewed with dissatisfaction.

The World Bank estimates that of approximately 1.2 billion people who subsisted on less than US $1 a day in 2003, 850 million lived in rural ares.[14] There is increasing recognition that poor people can and do save informally at home -- but lose much of their savings because home is a risky place to save.[15] There is also recognition that before rural farmers will have the confidence to start businesses, they must be able to gain more control over other household risks such as hunger, disease and natural disaster. This requires access to safe, flexible small-balance savings accounts.

A new microfinance paradigm is taking shape, with the goal of developing full-service for-profit banks for all poor people. This approach is exemplified by the transformations at Grameen Bank (referred to as 'Grameen II') since 2000 and has been championed by practitioners such as Stuart Rutherford, Graham Wright, Madeleine Hirschland and Marguerite Robinson. The Consultative Group to Assist the Poor (CGAP) has also published extensively on the new microfinance. These banks will be able to support their clients' efforts to control family risks as well as capitalize on business opportunities. They will offer their clients' opportunities to protect and grow their assets as well as to increase their incomes. They will offer their clients' loans for consumption as well as business purposes. They will offer savings, insurance and remittance services.

See also

Opportunities for Microfinance Lending

www.kiva.org is a non-profit organization which allows the average person to lend out microfinance loans to the poor using just a credit card or paypal account. Users can choose who they will lend to, and how much -- contributing as little as $25 of a larger loan.

In addition, several wallstreet funds currently exist which lend microfinance loans which help the poor while raising profits.

Notes

  1. ^ Rutherford, Stuart. The Poor and their Money. Oxford University Press, Delhi, 2000.
  2. ^ "Fairfield University :: Dolan School of Business :: Center for Microfinance Advice and Consulting (CMAC)". Fairfield University. Retrieved January 2. {{cite web}}: Check date values in: |accessdate= (help); Unknown parameter |accessyear= ignored (|access-date= suggested) (help)
  3. ^ see especially Co-operatives as information machines: German rural credit co-operatives, 1883-1914. (Journal of Economic History Vol 61, No. 2. June 2001.) and Regional organizations in the German co-operative banking system in the late 19th century. (Research in Economics, Vol 51. Academic Press Ltd., 1997.)
  4. ^ an interesting work on nineteenth century microfinance is Henry W. Wolff, People's Banks: A Record of Social and Economic Success, P.S. King & Son, London (1910).
  5. ^ http://www.biographi.ca/EN/ShowBio.asp?BioId=41452&query=Desjardins
  6. ^ Ronald Rudin, In Whose Interest? Quebec's Caisses Populaires: 1900-1945, McGill-Queens University Press (1990).
  7. ^ Mark Thomsen, ShoreBank Surpasses $1 Billion in Community Development Investment, SocialFunds.com, 2001-10-01. Retrieved 2007-02-07.
  8. ^ Bruck, Connie (2006-10-30). "Millions for millions:This year's Nobel Peace Prize winner and some high-tech entrepreneurs are competing to provide credit to the world's poor". The New Yorker. Retrieved 2007-01-10. {{cite news}}: Check date values in: |date= (help)
  9. ^ "CGAP: About Microfinance". CGAP. Retrieved January 1. {{cite web}}: Check date values in: |accessdate= (help); Unknown parameter |accessyear= ignored (|access-date= suggested) (help)
  10. ^ Pearl, Daniel, and Phillips, Michael M., "Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a Repayment Snag", The Wall Street Journal, p. A1, 2001-11-27, URL retrieved 2007-01-10.
  11. ^ Bond, Patrick, "A Nobel loan shark?", Z Communications, 2006-10-19, URL retrieved 2007-01-10.
  12. ^ Littlefield, Elizabeth (2003-01-01). "Is Microfinance an Effective Strategy to Reach the Millennium Development Goals?" (PDF). FocusNote (24). Consultative Group to Assist the Poor. Retrieved 2007-03-27. {{cite journal}}: Check date values in: |date= (help); Unknown parameter |coauthors= ignored (|author= suggested) (help)
  13. ^ Dichter, T. "Hype and Hope: The Worrisome State of the Microcredit Movement". The Microfinance Gateway. Retrieved 2007-03-27.
  14. ^ Reaching the Rural Poor: A Renewed Strategy for Rural Development. World Bank, 2003.
  15. ^ Graham Wright & Leonard Mutesasira. The relative risks to the savings of poor people 'Small Enterprise Development' Sept., 2001.

[2] Agabin, Meliza and John Owens Experience of Philippines' Rural Banks in Microfinance Finance for the Poor, June 2006 Volume 7 Number 2, Asian Development Bank

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