Transcripts
"Micro Finance: A New Hope"
by Matthieu Chemin
Poverty-fighting tools often come under attack these days. Some accuse the World Bank of selling out the poor to corporate interests while others argue that aid to the Third World has been wasted. But a new initiative called microfinance seems to reconcile everybody. What is exactly microfinance?
Microfinance started in 1976 when Mr. Yunus visited a village in southern Bangladesh. He met a woman who wove bamboo stools but had to sell them for small profits to the man providing the material. Mr. Yunus lent a total of $27 to 42 women in the village. All of them repaid and launched their business. The Grameen Bank was founded. Today, Grameen lends $380 million accounting for 3.82 million loans with a repayment rate of 95%, in 35,000 villages and with a staff of 14,000 people. Grameen has been replicated worldwide and has inspired 7,000 microfinance institutions in Latin America, Africa, and Asia with 25 million poor clients. The two main features of microfinance are the attribution of small loans to poor people without any collateral who usually don’t have access to the traditional banking system.
Most of the success of Microfinance comes from the failures of the traditional banking system. Indeed, most of the banking systems in developing countries remain underdeveloped. They suffer from poor management, interference by the state, weak financial intermediation and a high spread between lending and deposit rates which prevents the mobilization of savings.
Today, the traditional banking system does not reach the poorest who cannot provide collateral, guarantees or credit history. This situation is particularly harmful for the low end of the market for business loans, namely small and often one-member business entrepreneurs. Without adequate financial means, small enterprises are condemned to remain trapped in a vicious circle in which they can finance only unproductive investments with no effect on the scale and scope of production. Thus, by providing relevant credit terms to people who otherwise would not have access to financial services, Microfinance should help create new opportunities to the poor and could be the key to long-term development.
Everyone can agree on the concept of Microcredit. All the other development programs are based on an unequal relationship between actors: funds, as well as knowledge, come from the North. Active funds deal with a passive beneficiary. The main problem of that model is that with each operation, funds for aid decrease. Microfinance brings a new dimension: the micro-borrower becomes an active customer; taking decisions about organisation, purchases, sales and investments. With each credit operation funds for aid actually increase. Microfinance uses private enterprise, can be profitable, gets money straight to the poor, empowers women, creates employment opportunities and raises income (or at least smoothes consumption). A new hope emerges: what if social profitability was synonymous with financial sustainability?
Unfortunately this rosy picture was darkened on the 27th of November 2001 with the article from Pearl and Phillips in the Wall Street Journal entitled “Grameen Bank has hit a repayment snag”. In this article, the authors criticise the loose accounting criteria from the Grameen Bank. Grameen defines a loan as bad if it remains unpaid two years after its due date. Under those terms, 10% of all the loans are overdue. 19% of the loans are one year overdue and in Tangail in Bangladesh, 32.1% of the loans are two years overdue. The Consultative Group to Assist the Poorest from the World Bank recommends micro-lenders to report as “at risk” loans with a payment more than 90 days overdue and Accion requires this after 30 days. The Grameen Bank for obvious reasons does not publish the figures under those criteria.
The Grameen bank is a victim of the 1998 flood in Bangladesh but also of its own success. Competition is now fierce among the seven micro-lenders in Bangladesh; the tolerance of arrears is increasing and profits are shrinking. People repay a loan with another one. Grameen converts many overdue loans into new flexible loans to avoid writing off some loans.
In Burkina Faso, out of 136 Microfinance institutions registered in 1998, only 11 provided reliable data on their abidance to prudential ratios. The inability of Microfinance institutions to provide financial information is indicative of weak internal structures. Moreover, the share of non-performing loans of total loans rose to 13% in 1999. For the time being this development does not threaten the viability of microfinance institutions simply because of a higher volume of subsidies from NGOs.
Some questions remain predominant and must be clarified: are microfinance institutions subsidized charities or sustainable businesses? Do they help the poor or just add to their burden by increasing their debts? In any case, Microfinance and its flagship, the Grameen Bank, are in great danger today. The practices of microfinance need to be improved. Some people suggest the establishment of an appropriate regulatory framework, the creation effective financial controls conducted both internally by the institutions and externally by the authorities, the creation of new saving products to mobilize more resources, the setting up of deposit insurance to increase the legitimacy of microfinance institutions, the creation of a regional investment bank to provide microfinance institutions with short- and medium-term credit lines and better integration with the traditional financial system.
Irrespective of whether the informal system must be formalised or the formal system informalised, better access to financial services for the poor is key for long-term development. Sustained and diversified economic growth cannot be achieved without the support of a well developed and effective financial system.
{Matthieu is completing his Phd at the LSE and currently works at The World Bank}
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