Microfinance: A General Discussion of Microfinance

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Microfinance: A General Discussion of Microfinance

Post by Tigger34 on Wed Mar 30, 2011 6:38 pm

I think a thread for the general discussion of microfinance might be a good idea.

To start the thread I thought I would post the link to an article entitled "Does Microfinance Work?"

This article was written by Anis Chowdhury, Professor of Economics at the Universtity of Western Sydney, Australia. The article appeared on-line at the following link:

http://www.makingitmagazine.net/?p=1711

The article begins as follows (quote):

"Professor Mohammad Yunus, the originator of the concept of microfinance, believes that 5% of Grameen Bank’s clients exit poverty each year. However, there are few credible estimates of the extent to which microcredit actually reduces poverty.

Ideally one can ascertain the impact of microfinance if the counterfactual – what would have happened to a person who borrowed from a microlender if he/she had not done so – can be easily tested. Many early studies compared borrowers with non-borrowers. But if borrowers are more entrepreneurial than those who do not borrow, such comparisons are likely to grossly overstate the effect of microcredit. Two recent studies attempted to overcome this problem by using randomized sample selection methods. Neither study found that microcredit reduced poverty. One of these studies found no impact on measures of health, education, or women’s decision-making among the slum dwellers in the city of Hyderabad, India. The other study found that the provision of microfinance in Manila, the Philippines, had no discernible effects on the probability of being below the poverty line nor did it find any significant impact on the quality of food that people ate.

The findings of the most cited set of studies, based on empirical evidence drawn from comparative experiences in seven developing countries (published in 1996), are also provocative: poor households do not benefit from microfinance; it is only non-poor borrowers who can do well with microfinance and enjoy sizable positive impacts. A vast majority of those with starting incomes below the poverty line actually ended up with less incremental income after getting microloans, as compared to a control group which did not get such loans.

No miracle cure

These findings imply that credit is only one factor in the generation of income or output. There are other complementary factors, crucial for making credit more productive. Among them, the most important is the recipient’s entrepreneurial skills. Most poor people do not have the basic education or experience to understand and manage even low level business activities. They are mostly risk-averse, often fearful of losing whatever little they have, and are struggling to survive. Most prominent promoters of microfinance, including Professor Yunus and Sam Daley-Harris, director of the Microcredit Summit Campaign, recognize that microcredit is not a miracle cure; for it to succeed other complementary factors are needed. ...................."

The article goes on to discuss these complimentary factors, interest rates, expansion of microfinance, and positive contributions. There are also some interesting comments in the response section below the main article.

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Re: Microfinance: A General Discussion of Microfinance

Post by Tatiana on Wed Mar 30, 2011 9:35 pm

I think I have faith that microfinance can work, and it seems to work for people who, as you say, have an entrepreneurial bent. Just reading the success stories, even if they aren't statistically prevalent, gives me the feeling that microfinance gives people scope for action and possibilities that weren't there before. It's also true that the less-poor people who mainly benefit may be hiring the poorer people in the area, generating jobs.

Of course microfinance can't heal the sick, or help those too debilitated to work. We need Partners In Health type organizations in every country (and rich countries should be helping to fund them), including agriculture projects, clean water, hygiene classes, child-rearing classes, marriage classes, and lots and lots of primary education, secondary education, and scholarships for those students who want to continue their education. We need women's health clinics to repair fistulas and do c-sections when needed, as well as educate women about reproductive health and birth control options.

As I work to help people here locally, as well as abroad, I've discovered or had it reinforced to me that a person's agency, their unalienable right to choose their own path, is primary. You can lift people out of poverty by providing them with good housing, transportation, love and concern, food stamps, doctor visits, and an opportunity to work for a living, but they can still decide to take drugs, steal from you, spend the food money on drugs, and ruin all their new chances. This is one true story of a family I helped. So was that effort wasted? Some might think so. But what I think is that I provided for a couple of God's children an opportunity for them to get out of poverty. What they chose to do with that opportunity was their decision and not mine. I just decided when to start and stop providing my support.

Of course, when helping people, we all hope that every person we offer a chance to is going to jump on that chance and get every possible benefit from it. And we do want to weigh the odds in favor of success, in every way we possibly can.

So I'm in favor of business classes, accounting classes, analysis of what works and doesn't work for small scale entrepreneurs. I'm in favor of insurance to cover risks, and of limiting loans to be for things that will generate more income for families. The ideal that I often cite is an ice-cream seller who needs money for a new freezer that will allow them to double their current business. Another is a farmer who needs a treadle pump to increase crop yields with irrigation. The new income generated will pay back the loan, then provide extra money from there forward.

I'm in favor of loans for housing construction, so people have a decent safe place to live and work.

I'm not expecting every person to be able to benefit from their loans. They have their agency, which matters most. Perhaps some loans can be used by people to learn how not to handle money. This is also a valid use, though of course I would hope and prefer the majority of loans to be a net positive in people's lives. But that's not 100% in my control. The people also get a say, and local conditions, natural disasters, war, economic collapse, and all those things also happen.

I guess what I'm doing primarily is showing people that someone cares, that we are all rooting for them, and what they do matters. I guess that's my feeling about it. And if 5% of the people get some measurable benefit from it, that's a good thing, something I'm glad of. And if we can study things over time and learn how to maximize the benefits, we should do that too. But I'm not giving up on those one billion people who are in extreme poverty. I'm going to do my best to figure out what works and gives them the help they need. They're my brothers and sisters, and they deserve better than they've gotten, they deserve more chances in life.

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Re: Microfinance: A General Discussion of Microfinance

Post by Tigger34 on Wed Mar 30, 2011 10:14 pm

I also think microfinance can work.

My own feeling is that microfinance (for businesses) works best if the MFI provides training in basic education, money management, business administration, financial counseling, etc. I believe other positive services that MFIs can provide and which may help borrowers to succeed and lead improved lives are health services, maternal and child welfare services, empowerment training, and basic education.

It is also my opinion that education is the real key to rising out of poverty. That is the main reason I lend through Vittana. Giving students the financial ability to become professionals or to gain a marketable skill, will (most likely) break the cycle of poverty and improve the prospects for the students and their entire families.

Of course, not all people can go to school and those people who cannot go to school also need assistance to rise above poverty.

For me, it is important to know that my loan money is passing through reputable MFIs that provide needed education and services to the borrowers. It is also important to me that the MFI through which I lend is not charging excessively high interest rates or high fees.

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Re: Microfinance: A General Discussion of Microfinance

Post by RichardF on Wed Mar 30, 2011 10:49 pm

One thing I like to keep in mind is that microfinance is broader than microcredit. Microfinance offers a full range of financial services, like savings, insurance and funds transfers. When you have secure savings, you don't have to borrow so much. When you have insurance, you hedge against risk. When you can transfer funds, you can help family members and better engage in the market economy.

Another thing I like to keep in mind is that microfinance is one approach among many that can be used to help address the lofty aims of the Millennium Development Goals. "The Millennium Development Goals (MDGs) are eight international development goals that all 192 United Nations member states and at least 23 international organizations have agreed to achieve by the year 2015. They include eradicating extreme poverty, reducing child mortality rates, fighting disease epidemics such as AIDS, and developing a global partnership for development."

These two basic considerations help me keep microfinance (and microlending) in a meaningful perspective about what it can and cannot be expected to accomplish.

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Penny Revolution

Post by RichardF on Sat Apr 02, 2011 3:45 pm

“Penny Revolution” is a [Halogen TV] series that shows how a small amount of money can transform the lives of the more than one billion people who live below the international poverty line, earning less than $1 a day. The magic formula is known as microfinance, a revolutionary method of funding projects in the developing world, considered by many experts to be the world’s most effective anti-poverty tool.
Search for "Penny Revolution" on Halogen website


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Re: Microfinance: A General Discussion of Microfinance

Post by Tigger34 on Mon Apr 04, 2011 11:20 am

Towards “Fair Trade Microfinance”
Microfinance Gateway Staff, April 1, 2011

Creating a standard to recognize MFIs that are serving the poor
The Microcredit Summit Campaign recently announced development of a proposed new Seal of Excellence for Poverty Outreach and Transformation in Microfinance. Intended as a sort of “fair trade designation” for microfinance institutions, the Seal of Excellence would recognize superior performance by microfinance institutions (MFIs) which combine financial sustainability with both significant outreach among poor clients and with a strategic approach to poverty reduction and transformation.

Full article at this link:
http://www.microfinancegateway.org/p/site/m/template.rc/1.26.15891/

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Nobel Laureate Loses Last Legal Battle to Save Job at Bank

Post by RichardF on Tue Apr 05, 2011 2:22 pm

New York Times: Nobel Laureate Loses Last Legal Battle to Save Job at Bank

By LYDIA POLGREEN
Published: April 5, 2011

NEW DELHI — Muhammad Yunus, the Bangladeshi Nobel Peace Prize laureate and microfinance pioneer who popularized the notion of giving tiny loans to the poor, lost his legal battle on Tuesday to hold on to his job as managing director of the bank he created more than 30 years ago.

Last month, Bangladesh’s central bank ordered that Mr. Yunus be dismissed from his post at Grameen Bank, the institution he founded and with which he shared the peace prize in 2006. A lower court rejected his challenge to the order, and on Tuesday, the country’s highest court rejected his appeal.

“They passed a one-word order: dismissed,” said Sara Hossein, one of Mr. Yunus’s lawyers. She said Mr. Yunus’s lawyers would ask the court to review its decision, which was made with uncommon speed.

The court did not address a petition from the bank’s board to be able to retain Mr. Yunus, but its ruling upholding his dismissal would appear to render it moot.The ruling is the most recent development in a lengthy and increasingly acrimonious battle over the control of Grameen Bank between the government and Mr. Yunus, an economist celebrated around the world for bringing banking services to the poor — Grameen has 8.3 million borrowers — but who has fallen out of favor with the leaders of his country.

The push to remove Mr. Yunus started last year after a Norwegian documentary accused him and Grameen of improperly transferring to an affiliate $100 million that had been donated by Norway. The money was retransferred after Norwegian officials complained. In a statement last year, Norway cleared Grameen and Mr. Yunus of wrongdoing.

But the case opened the bank to unprecedented scrutiny. Sheikh Hasina Wazed, Bangladesh’s prime minister, said Mr. Yunus and other microfinance firms were “sucking blood from the poor in the name of poverty alleviation.” The government stepped up its supervision of the bank, arguing that it was poorly governed.

Ms. Hasina and Mr. Yunus, who has been critical of politicians, were once close, but their relationship soured when Mr. Yunus briefly floated a political party in 2007.

Ela Bhatt, who heads the Self-Employed Women’s Association in India, a nonprofit organization that also operates a cooperative bank, said the ruling was a blow to antipoverty organizations that work to empower poor women.

"It’s very unfortunate for the movement," she said. "He was the leader of the movement. He has done so much good for his country and for poor women. This could have been done in a different way, in a dignified way, in a peaceful way."

Ms. Bhatt’s organization runs a cooperative bank in the western Indian state of Gujarat that, like Grameen, is owned by its customers.

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Re: Microfinance: A General Discussion of Microfinance

Post by Tigger34 on Wed Apr 06, 2011 8:56 pm

Mercy Corps Press Release, March 30, 2011:

Microinsurance Catastrophe Risk Organization (MiCRO) Created to Help Protect Haiti's Micro Entrepreneurs

International Consortium Unveils Scalable, Innovative Model for Micro-insurance to Combat the Financial Impact of Natural Disasters


“The formation of Microinsurance Catastrophe Risk Organisation (MiCRO), an innovative donor-capitalized insurance facility developed by a syndicate of strategic stakeholders, will empower Haiti's micro-entrepreneurs to protect themselves against the economic aftermath of severe natural catastrophes. The facility’s scalable model for microinsurance is the first of its kind in Haiti and is aimed at the country's ‘informal sector’ – the organized poor who have taken steps to increase their economic standing and stability through the creation of small businesses.”

“MiCRO's founding partners include Swiss Re, a leading and highly diversified global reinsurer committed to working with governments and related entities to further strategic, long term country risk management; Caribbean Risk Managers Limited (CaribRM), the risk analytics arm of CGM Gallagher Group, the Caribbean’s largest risk intermediary; GC Micro Risk SolutionsSM (GC Micro), a division of the world’s leading risk and reinsurance specialist Guy Carpenter & Company, LLC; Mercy Corps , a global relief and development agency; and Fonkoze, Haiti’s leading microfinance institution.”

Policies issued by MiCRO will provide microfinance clients with financial protection against destruction caused by specific natural catastrophes using an innovative settlement process. Through the use of parametric triggers, MiCRO’s policy process increases transparency to buyers and enhances rapid claim settlement after a disaster strikes.

……………

“There are far too many Haitians who work hard to save and build their assets, only to find them destroyed overnight by a hurricane, flood or earthquake,” says Anne Hastings, CEO of Fonkoze Financial Services. “Microinsurance to manage these inevitable events is a prerequisite for escaping poverty and building a sustainable future.”

……………

Full press release at this link:
http://www.mercycorps.org/pressreleases/24128

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Re: Microfinance: A General Discussion of Microfinance

Post by RichardF on Sat Apr 23, 2011 4:29 pm

The 2011 TIME 100
Meet the most influential people in the world. They are artists and activists, reformers and researchers, heads of state and captains of industry. Their ideas spark dialogue and dissent and sometimes even revolution. Welcome to this year's TIME 100

Esther Duflo, Economist
By RANA FOROOHAR
Thursday, Apr. 21, 2011

Over 1 billion people live on less than $1.25 a day. Amazingly, very little is known about how they make economic choices and what might help ease their lives.

Economist Esther Duflo, 38, is changing that. As as a co-founder of the MIT Abdul Latif Jameel Poverty Action Lab with Abhijit Banerjee and Sendhil Mullainathan, she has broken out of the ivory tower to do something economists rarely do: gather real data to see what really works in alleviating poverty. One of her biggest findings is that microfinance, the poverty-reduction solution du jour, isn't all it's cracked up to be. Which, like many great economic insights, seems obvious when you think about it; after all, not everyone is born to be an entrepreneur. Duflo is relentless about questioning conventional wisdom, from the value of foreign aid (overblown) to how to entice parents to get their kids immunized (give the parents free food). Last year she won the John Bates Clark Medal, which makes her a Nobel winner in waiting. But she isn't waiting to make the world a better place.

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Re: Microfinance: A General Discussion of Microfinance

Post by RichardF on Sat Apr 23, 2011 5:22 pm

The Abdul Latif Jameel Poverty Action Lab at MIT - Translating Research into Action

About J-PAL
The Abdul Latif Jameel Poverty Action Lab (J-PAL) is a network of 53 affiliated professors around the world who are united by their use of Randomized Evaluations (REs) to answer questions critical to poverty alleviation. J-PAL's mission is to reduce poverty by ensuring that policy is based on scientific evidence. J-PAL works to achieve this by:
  • Conducting Rigorous Impact Evaluations- J-PAL researchers conduct randomized evaluations to test and improve the effectiveness of programs and policies aimed at reducing poverty. There are more than evaluations that have been either completed or are ongoing.
  • Building Capacity- J-PAL provides expertise to people interested in rigorous program evaluation, and training to others on how to conduct randomized evaluations.
  • Impacting Policy- J-PAL’s policy group performs cost-effectiveness analysis to identify the most effective ways to achieve policy goals, disseminates this knowledge to policymakers, and works with governments, NGOs, foundations, and international development organizations to promote the scale-up of highly effective policies and programs around the world.
J-PAL is organized both by regional offices and by research themes called Programs. J-PAL's headquarters is a center within the Economics Department of the Massachusetts Institute of Technology (MIT), with regional offices in Africa, Europe, Latin America, and South Asia that are hosted by a local university. J-PAL's Programs include Agriculture, Education, Energy and Environment, Finance, Health, Labor Markets, and Political Economy and Governance. These regional offices and Programs are directed by members of the J-PAL Board, which is composed of J-PAL affiliates and senior management. However, J-PAL's affiliated professors set their own research agenda and raise funds to support their evaluations.

J-PAL and its partners are driven by a shared belief in the power of scientific evidence to understand what really helps the poor, and what does not. J-PAL's many partners include:
  • Nonprofits (NGOs) and governments that run the programs that J-PAL affiliates evaluate;
  • Governments, foundations, international development organizations and NGOs that use J-PAL's policy lessons on what works in poverty reduction to scale-up the most cost-effective programs;
  • Donors that provide funding for evaluations, scale ups and special initiatives, and
  • Research centers that help administer J-PAL affiliates' randomized evaluations and who employ the staff associated with these evaluations. Partners include Innovations for Poverty Action (IPA), Centre for Microfinance, Center for International Development's Micro-Development Initiative, Center of Evaluation for Global Action, Ideas 42, and the Small Enterprise Finance Center.
The lab is named for Abdul Latif Jameel, father of MIT alumnus Mohammed Abdul Latif Jameel, who supported the Poverty Action Lab with three major endowments in 2005, and in 2009 gave another substantial gift of endowment support. For more information about J-PAL's history, please see our history page.

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Re: Microfinance: A General Discussion of Microfinance

Post by RichardF on Sat Apr 23, 2011 5:30 pm


More Than Good Intentions: How a New Economics is Helping to Solve Global Poverty
By DEAN KARLAN and JACOB APPEL


When it comes to global poverty, people are passionate and polarized. At one extreme: We just need to invest more resources. At the other: We’ve thrown billions down a sinkhole over the last fifty years and accomplished almost nothing.

Dean Karlan and Jacob Appel present an entirely new approach that blazes an optimistic and realistic trail between these two extremes. In this pioneering book Karlan and Appel combine behavioral economics with worldwide field research that take readers with them into villages across Africa, India, South America, and the Philippines, where economic theory collides with real life. They show how small changes in banking, insurance, health care, and other development initiatives that take into account human irrationality can drastically improve the well-being of poor people everywhere.
We in the developed world have found ways to make our own lives profoundly better. We use new tools to spend smarter, save more, eat better, and lead lives more like the ones we imagine. These tools can do the same for the impoverished. Karlan and Appel's research, and those of some close colleagues, show exactly how.

In America alone, individual donors contribute over two hundred billion to charity annually, three times as much as corporations, foundations, and bequests combined. More Than Good Intentions provides a new way to understand what really works to reduce poverty; in so doing, it reveals how to better invest that money and begin transforming the well-being of the world.

EXCERPT FROM THE BOOK

Morning in the harbor at Marina del Rey in Los Angeles is steely bright, and it smells of brine and of fish, and it is filled with the sound of pelicans. They congregate by the hundreds on the end of the jetty, strutting and chattering and throwing their heads back to slug down great bulging beakfuls of breakfast. Completely absorbed in the guzzling of their food, they seem not to notice the dinghies puttering by.

Jake was in one of those dinghies with his girlfriend Chelsea and her father, returning from a short ride out on the gentle rolling swell of the Pacific. They passed the gray-brown pelicans on the gray-brown rocks and continued into the marina. Coming down the causeway, they passed the gas pumps, the big prow of the Catalina ferry, and the Buddhist monks.

Yes, the Buddhist monks: those unassuming men and women, some dressed in saffron robes and others in street clothes, standing on the dock around a folding card table on which was erected a little altar with a statue of a sitting Buddha and an oil lamp. On the ground in front of the table was a plastic tub as big as a steamer trunk. From the boat, low in the water, Jake couldn’t see what was inside. They were saying prayers over it.

Chelsea’s father put the boat into idle and turned in a half-circle to stay even with the monks. They came to the end of their prayer and bowed deeply, and the two closest to the bin took it by the handles and dragged it forward to the edge of the dock. Then they tipped it.

Out came a great torrent of water and minnows, which landed in the causeway with a silvery clatter. The minnows disappeared instantly, darting away in every direction, and the ripples from the splash were drawn down the causeway to the ocean by the outgoing tide. The monks bowed again, deeply, and began to pack up their things.

What Jake had seen, Chelsea told him afterward, was a regular ritual. Those particular Buddhist monks set a tubful of fish free every couple of weeks. It was their small way of setting right something they believed was wrong. They didn’t think those fish ought to be killed, so they bought their freedom. They would approach some fishermen, purchase their day’s catch, say a prayer, and release the fish into the causeway to return to the ocean.


READ FULL EXCERPT (PDF)

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Re: Microfinance: A General Discussion of Microfinance

Post by RichardF on Sat Apr 23, 2011 5:46 pm


The Abdul Latif Jameel Poverty Action Lab
Finance Program


J-PAL’s Program in Finance brings together leading academics to expand both the understanding of how household and firms demand and use financial services and how financial service providers perform and engage in the market. The program is especially interested in recent financial innovations that are improving the quantity and quality of financial access at all levels of financial actors.

Recent evidence suggests that product innovations, new contract structures, and regulation can be effective tools for overcoming market failures. With public, private, and nonprofit institutions working to increase financial access around the world, the time is right to explore new ideas, expand conceptual frameworks, and collect compelling evidence in order to better understand financial constraints, especially among the poor, as well as the implications of alternative policy strategies.
To generate rigorous scientific evidence for best practices, J-PAL’s Finance Program works with Innovations for Poverty Action (IPA) and uses randomized evaluations to measure impact of specific interventions, assess efficacy of product and process innovations, and understand more about why financial markets fail in the first place.

The program will synthesize key insights and evidence while identifying new research areas that are conceptually and practically appropriate in expanding access to quality financial services as a mechanism to reduce poverty and spur economic development. By helping to define such a research agenda, the Finance Program provides a framework for decision-making built around rigorous evidence. This framework will help generate research that offers practical tools policymakers, development practitioners, and donors can readily access and use to guide financial policy decisions.

The program also works collaboratively with the Policy Group at J-PAL and IPA to coordinate the dissemination of key findings in finance research to policymakers and to encourage and provide support for the scale-up and replication of successful programs in the field. The Finance Program is co-chaired by Dean Karlan and Asim Ijaz Khwaja, and the program manager is Cristobal Marshall, supported by Anna Yalouris at J-PAL and Nathanael Goldberg at IPA. For further inquiries, please contact cmarshal@mit.edu.

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Re: Microfinance: A General Discussion of Microfinance

Post by RichardF on Sat Apr 23, 2011 5:58 pm


Innovations for Poverty Action (IPA)
Fighting Poverty with Innovation, Evidence & Action


Innovations for Poverty Action (IPA) applies rigorous techniques to develop, test and scale up proven solutions to real-world problems faced by the poor in developing countries.

About IPA


Fighting Poverty with Innovation, Evidence and Action

Innovations for Poverty Action is a nonprofit dedicated to discovering what works to help the world’s poor. We design and evaluate programs in real contexts with real people, and provide hands-on assistance to bring successful programs to scale.

What makes us different?

IPA evaluates what works in fighting poverty using the most rigorous methodology available: the randomized controlled trial.

We are led by researchers including some of the most recognized names in development economics, many holding faculty positions at universities such as Harvard, Yale, MIT, and LSE.
  • We have experience working in over 40 countries around the world.
  • Our research spans a variety of fields, including microfinance, education, health, agriculture, charitable giving, political participation, and social capital.
  • We work with a variety of different organizations, including non-profits, governments, and for-profit companies.
    Our staff receive rigorous training in implementing randomized controlled trials in the field, so that we always maintain the highest scientific standards for our evaluations.
  • We are committed to not just measuring the impact of a program, but also working with organizations to facilitate integration of research results into operations to ensure continuous improvement and the replication of successful ideas.
We strive to bridge the gap between cutting-edge academic research and action by nonprofits, governments, and firms.

We share the evidence we generate with development practitioners, policy-makers and donors. Where appropriate, we work closely with partners to facilitate the replication of effective programs in other areas of the world.

You can also watch us on Youtube, download our 2009 Annual Report and our Brochure, follow us on Facebook, Twitter and LinkedIn, and sign-up for Email Updates.

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Re: Microfinance: A General Discussion of Microfinance

Post by RichardF on Sat Apr 23, 2011 10:47 pm



Country: India
Sector: Microfinance & Enterprise
Policy Goal: Access to Credit
Innovations for Poverty Action (IPA)
Project Evaluations


The miracle of microfinance? Evidence from a randomized evaluation
This study was the first rigorous randomized evaluation of the "traditional" microlending model. The findings from the study suggest that access to microcredit has important effects on household expenditure patterns and the creation and expansion of businesses, but no effect on health, education, women’s decision-making, or average monthly expenditure overall, at least in the short term. It is possible that impacts on education, health, or women’s empowerment would emerge after a longer time, when the investment impacts (may) have translated into higher total expenditure for more households. However, at least in the short-term, microcredit does not appear to be a recipe for changing education, health, or women’s decision-making.

Microfinance & Enterprise
Rapid growth in microfinance over the last three decades has provided over 130 million of the world's poor with access to microcredit and savings services, but for many of the world’s poor, these services remain out of reach. The IPA projects in this sector seek to answer the questions: What is the impact of microcredit, microsavings, and microinsurance? How can we help facilitate access to credit and savings services? How can microfinance reach the ultra-poor?

Agriculture
An estimated 70 percent of the world's poor rely on agriculture for all or some of their household income. Farmers face a number of risks to their livelihoods, including unpredictable weather and crop price variation. These risks may also affect how they choose to borrow and invest to improve their business. The IPA projects in this sector seek to find out how we can help poor farmers in the developing world increase productivity and deal with the risks inherent in farming.

Charitable Giving
In order for non-profits to make a difference, they must secure continued support from donors. This means that, in addition to providing services, most non-profits must dedicate time to fundraising. The IPA projects in this sector are increasing our understanding of what prompts donors to give, and why they may choose one cause over another.

Education
School enrollment has been steadily increasing around the world in the past decade, but there remains much to be done to improve children’s access to quality education. The IPA projects in this sector seek to understand what works and what doesn't to increase school attendance, educational quality, and achievement in the developing world.

Governance & Community Participation
The poor are often marginalized from the decision-making processes that can greatly affect their daily lives. They may be isolated because of past conflicts or longstanding government structures that systematically leave out the poor. The IPA projects in this sector hope to discover the best ways to empower the poor to fully participate in community and political life.

Health
The world’s poor disproportionately suffer from ill health, which in turn makes adults less able to work and children less able to go to school. Unexpected health expenses can devastate a poor family’s fragile household budget. Improving the health of the poor will allow more people to create and seize opportunities to live a better life. The IPA projects in this sector are helping us find out what interventions are the most effective in changing health outcomes to improve the lives of the poor.

Water & Sanitation
Two million children die of diarrheal disease each year, mostly as the result of drinking contaminated water. Though health experts worldwide know a lot about treating diarrheal disease, we understand a great deal less about the relative impacts and cost-effectiveness of preventing diarrhea and other water-borne illnesses through health interventions or sanitation projects.

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Re: Microfinance: A General Discussion of Microfinance

Post by RichardF on Sun May 01, 2011 4:52 pm

Livemint.com - The Wall Street Journal: Policy, savings rates may go up by 50 bps
Central bank likely to shift to single-policy rate system, may accept report on norms for microfinance firms

Posted: Sun, May 1 2011. 11:30 PM IST
Banker’s Trust | Tamal Bandyopadhyay

It’s given that the Indian central bank will hike its policy rate once again when it unveils the annual monetary policy on Tuesday, the ninth raise since March 2010, even as economists and analysts are debating on the exact quantum of the hike. ...

MFI regulation

I am also fairly certain that RBI will formally accept the Malegam panel recommendations on regulating the Rs. 22,000 crore Indian microfinance industry in this policy with minor tweaks. The industry has been reeling under a crisis ever since the Andhra Pradesh government passed a law restricting the microlenders’ activities in the southern state that accounts for roughly one-fourth of their market.

The Malegam panel has made several recommendations, including capping the annual family income of the borrower at Rs. 50,000; a ceiling on loans to a single borrower (of Rs. 25,000); and said not more than two microfinance institutions (MFIs) can lend to a particular borrower.

RBI, I think, will announce a framework for regulating the microfinance industry and make it abundantly clear that if such institutions want to access money from banks, they will have to conform to the regulations. This will not make the Andhra Pradesh law redundant, but prevent the contagion of such a law in other Indian states, and if MFIs agree to follow the RBI norms, the Andhra Pradesh government may not push for the implementation of the law aggressively.

MFIs’ business in the southern state has taken a severe beating and the loan repayment rate from borrowers has dropped to 10%. Rising defaults have made the banks wary of giving money to such institutions, and quite a few of them are facing closure of business as borrowers are not paying back their money and bankers are unwilling to give fresh loans.

Under current norms, banks are required to give 40% of their loans to agriculture and small businesses, defined as a priority sector. Their exposure to MFIs, too, is recognized as priority sector loans. MFIs typically borrow from banks at 12-14% and give tiny loans to borrowers in rural India at 24-30%.

Unless MFIs agree to be regulated by RBI, banks’ exposure to such institutions will lose the priority sector tag. Once that happens, there will not be any incentive for banks to lend money to MFIs. They do so now as they find it difficult to lend directly to farmers and small rural businesses 40% of their loans.

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Re: Microfinance: A General Discussion of Microfinance

Post by Tigger34 on Tue May 17, 2011 12:10 pm

Experts Warn Africa Must Learn From India’s Microfinance Problems

By Teo Kermeliotis, for CNN
March 23, 2011

CNN) -- It has been lauded as one of the most promising ways of using the market to reduce poverty and boost economies in some of the world's most deprived areas.

But in recent months the work of microfinance institutions (MFIs), which provide small loans to poor people with no access to traditional banking services, has come under scrutiny after a spate of suicides in the Indian province of Andhra Pradesh was linked to borrowers' inability to repay their loans.

The news made international headlines and highlighted how accumulated debt can harm borrowers required to pay interest rates typically as high as 30%.

"Microcredit itself it has not really proved a panacea," says Kamal Munir of the UK's Cambridge Judge Business School, who has been monitoring the industry as an advisor to various international financial institutions.

"If anything, it has trapped a lot of people in a vicious debt cycle," he adds, noting that many borrowers find they need to take extra loans to repay previous debts.

According to the Microfinance Information Exchange, a non-profit group that tracks the industry, there are eight million microfinance borrowers in Africa, in contrast to industry leader South Asia where there are more than 50 million.

A 2010 study focused on sub-Saharan Africa painted a mixed picture about the impact of microfinance on the lives of poor people in the region.

Researchers from the University of London's Institute of Education (IOE) and the University of Johannesburg found that some microfinance projects have the potential to boost the quality of borrowers' lives by increasing incomes and improving food security as well as access to health and housing.

But the authors of the report "What is the impact of microfinance on poor people?" also note that in some cases microfinance in Africa fails to improve the lives of deprived people, while sometimes it even makes them poorer.

According to the study, this happens because these high-risk borrowers often need to use the money for day-to-day consumption, instead of investing in their futures. In other cases, their "businesses fail to produce enough profit to pay high interest rates."

Report author Ruth Stewart, of the IOE, says that because the repayment of loans usually has to start very quickly -- often within a week or a month of the loan being taken out -- many borrowers turn to short-term investments hoping they will make a quick profit.

Such investments usually fail to produce enough long-term returns to pay the interest on the loan, which pushes people to turn to borrowing again.

"There are clear indications that microcredit clients in some areas, the longer they remain in the credit programs and the more cycles of loans they go through, the more likely they are to fail," says Stewart.

Such failures can be damaging not only for the borrowers themselves but also for the industry as a whole, which relies on debt repayments.

Stewart says the crisis in Andhra Pradesh can provide some key lessons to MFIs operating in Africa that will help maximize benefits for borrowers and minimize harm.

"Because it is a young industry there's a potential to learn from what's going on in India and make some understanding to prevent the crisis from escalating," she says.

She calls on MFIs to adopt a more careful approach to lending instead of using it as a blanket solution and offering it to everybody.

"Given that there is potential for harm as well as good, there is a responsibility for institutions to be more cautious about who they lend to in order to maximize the chance of what they're doing is helping Africa's poor instead of creating a problem," says Stewart.

Some voices within the industry agree that there needs to be more responsible lending as well as better due diligence and increased transparency in pricing policies.

"It is absolutely critical that a microfinance institution will not lend a second or a third loan to a client that can't afford to repay it," says Mary Ellen Iskenderian, chief executive of Women's World Banking, a global network of MFIs.

She adds that better risk assessment would be beneficial not only for the borrowers but for the industry as well.

"What we've seen globally since the financial crisis set in is that MFIs, even if they are group lenders, the ones that did individual credit analysis and actually assessed the household's capacity for a loan are the ones who performed most strongly in the last two years," says Iskenderian.”

Article at this link:

http://edition.cnn.com/2011/BUSINESS/03/23/microfinance.africa.lessons/

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Re: Microfinance: A General Discussion of Microfinance

Post by Tigger34 on Mon May 23, 2011 3:24 pm

Cambodia’s Micro-credit Trap, by Simon Marks, May 23, 2011

India isn't the only country with problems

Roaming the streets as a motorcycle taxi driver in Dangkao district on the edge of Phnom Penh, Ek Sovannara is lucky to earn US$2.50 a day. But his aspirations once stretched much further.
In 2005 he was presented with an opportunity to borrow US$500 from Credit Microfinance Institution, a firm established by the Christian charity World Relief US in 1993, to set up a small food stall in Trapaing Krasaing commune where crowds of garment workers pass on their way to work. His decision that day to take the money would stay with him for years. Since then, borrowing more and more from private lenders to pay back microlenders, he has fallen into a complicated web of debt now so severe that he is considering selling his house and about 50 square meters of land, together worth around US$6,000. Though he has managed to pay back some of what he borrowed, his business ceased turning a profit two months ago. After successive borrowing to repay other loans, Sovannara still owes US$1,520 to Credit Microfinance Institution and a further US$400 to seven private moneylenders. Sovannara, 39, is far from alone in his battle with debt. From its nascent days in the mid-1990s, Cambodia now has more than a million families with a microcredit loan in a population of 14 million people. That number is growing fast. Total outstanding loans as of the end of the first quarter amounted to US$711.8 million, an almost 10 percent increase over the previous quarter.
Like many others in his village, he has been approached by both private moneylenders and licensed microfinance institutions that hand out small loans with few strings attached, offering anywhere between US$50 and US$2,000.

Private lenders often allow borrowers to pay back the formal lenders, who in return agree to provide their clients with more credit. A lack of available credit history has also produced cases where clients have taken loans from more than one microfinance institution at the same time. It is hard to know if this scenario is representative of the broader microcredit sector. Only licensed microfinance institutions are obliged to report on loan defaults, while smaller, registered institutions do not. According to figures from the Cambodia Microfinance Association, non-performing loans among licensed institutions were calculated to be just 0.99 percent in the first three months of the year. Defaults on loans appear to be even lower. At Chamroeun Microfinance, defaults on loans amounted to just 0.01 percent in 2010 while at Hatta Kaksekar Ltd, which started offering micro-loans as an NGO in 1994 and became a licensed MFI in 2004, defaults on loans was just 0.2 percent in 2010.

Microfinance institutions "have invested in improving systems and there are higher levels of control than before," said John Brinsden, vice president of Acleda Bank, the country's largest microcredit lender. He added that commercial banks in Cambodia were beginning to look at many licensed institutions as "serious peers" in the financial services industry. Nonetheless, microfinance institutions admit that loan officers need more training to assess borrowers' creditworthiness and analysts say high levels of debt are a growing problem. As Cambodia's microfinance sector has established itself, particularly over the last five years, a plethora of institutions have flooded into the market. Meanwhile dozens of non-governmental organizations and private moneylenders have also sought a piece of the action.

"In difficult times I took money from private moneylenders to pay back the loans I borrowed from the microfinance institutions," said Sovannara, who now relies on his wife’s job in a nearby garment factory as well as his meager income from the motorcycle taxi service. "I feel scared I will lose my home as so many people in my village lost their house to debt problems." The scenario being played out in Sovannara's village in Trapaing Krasaing commune -- a tight-knit community where strife in the quest to earn a living is shared -- is at times dismal. Both poverty and crippling debt levels loom over the heads of many here. By day, credit officers from some of Cambodia's 27 licensed microfinance institutions travel round on motorbikes looking for new clients and collecting outstanding debts.

While acknowledging instances of high debt levels, those in the industry say that most microfinance institutions are largely healthy and have stringent policies on only handing out loans to those with viable incomes. Still, Chan Mach, general manager of Credit Microfinance Institution, which has a loan portfolio of US$35 million in micro-loans, making it the country's fifth largest microcredit institution, said he was aware of the problems facing the microfinance sector. "The main concern in the microfinance sector in Cambodia is over indebtedness," he said, acknowledging that he had identified cases where loans his institution had made were being repaid by overlapping loans from other institutions or private lenders. "We need to commit ourselves to revise the policy, to guide our staff about the loan assessment." Mach said Credit Microfinance Institution plans to conduct research with its clients to find out exactly how many of them have overlapping loans. To combat the problem, he said his institution is also giving training to its clients in family budgeting, saving techniques and debt management.

Hout Ieng Tong, general manager at Hatta Kaksekar Ltd, said that some microfinance institutions had problems with their credit officers' level of training and doubted the purpose of handing out loans of as little as US$100. "To do some business here you must have some capital...otherwise you cannot do the business," he added. "I think the microfinance that lend with small amount, maybe it doesn't help the client. What can you do to a business with US$50 or US$100?" Tong said that 10 percent, or US$1.5 million of total revenues at HKL, is spent on training staff every year to ensure that all employees are capable of carrying out robust loan assessments.

However, while less than 1 percent of microloans are considered non-performing, analysts say that number would be much higher if private lenders did not prevent borrowers from defaulting with microfinance institutions.

The National Bank of Cambodia says it is aware of the risks facing the microfinance sector and will include an entire chapter on how to ensure the industry's strength in its financial sector development strategy for 2011 to 2020, to be completed shortly. "We will try to find a solution and a road map in order to strengthen the microfinance institutions," said Ngoun Sokha, director general of the National Bank of Cambodia. She said that part of the strategy would be to encourage MFIs to inform borrowers of the benefits of taking money from formal lenders--lower interest rates and more flexibility--rather than those which operate outside central bank regulation.

A credit bureau, which is due to be launched by the end of the year, will also help MFIs to better target suitable borrowers.

The circumstances there have drawn critics to accuse microfinance institutions of handing out loans with little regard for the ability of borrowers to make repayments. Analysts say that as the microfinance sector has grown its policy has come to be guided by a desire for profits rather than for reducing poverty.

"When a borrower has defaulted, the collateral land most often end up with the private lender, who has paid off the MFI," said Jan Ovesen, a professor of cultural anthropology at Uppsala University in Sweden, who has completed extensive research on microcredit lending in Cambodia. "We also have examples of private lenders taking MFI loans." Ovesen said that research in Cambodia had shown that borrowers would take a private loan for a couple of days in order to pay the microcredit loan, because when the loan is paid according to schedule, the borrower is eligible for a new one. This scenario has brought about what she described as "predatory lending" among both microfinance institutions and private lenders in Cambodia.

Article here: http://www.asiasentinel.com/index.php?option=com_content&task=view&id=3206&Itemid=221

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Re: Microfinance: A General Discussion of Microfinance

Post by iampaul on Tue May 31, 2011 12:12 pm

Tigger34 wrote:Cambodia’s Micro-credit Trap, by Simon Marks, May 23, 2011
Interesting piece, Tigger, thanks for sharing this article. It highlights a number of points I have wondered about and suspected as I have watched the growth of microcredit from my lender's - and layman's - perspective. It appears the real trap of microcredit is the microlenders as they try to find the accurate limit to which their borrowers can be squeezed into debt in the name of alleviating poverty but perhaps more correctly in support of the microcredit industry. The image of credit officers scouring the streets for new borrowers is one that really sticks in my mind.

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Re: Microfinance: A General Discussion of Microfinance

Post by Tigger34 on Tue May 31, 2011 6:05 pm

I agree, Paul.

The sub-prime mortgage disaster came to my mind as I was reading that article. In both situations the lenders are increasing their own profits by lending to people who cannot afford to make the repayments.

I think it would be highly enlightening for someone to do a study on how many people lose their land and homes as a result of predatory microlending or microlending done without appropriate assessment of the borrowers' ability to repay.

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Re: Microfinance: A General Discussion of Microfinance

Post by RichardF on Fri Jun 03, 2011 8:28 am

The New York Times: Instead of Student Loans, Investing in Futures
May 30, 2011, 8:25 pm By DAVID BORNSTEIN

As the global economy has become more knowledge-based, the importance of a university education has risen dramatically. However, only 7 percent of the world’s population currently has a college degree. There are many reasons why people fail to reach college, including, of course, lack of access to quality primary and secondary schooling. But for millions of students who could succeed in college, the limiting factor is money.

At Fixes, we like to explore ideas that re-imagine how systems can work. Today, I’d like to look at the question of whether there may be a better way to pay for college than with scholarships, grants and loans. Is it possible to finance higher education the way we finance start-up companies?

That’s the approach taken by a social enterprise called Lumni that has raised $17 million to finance the education of a wide array of students in Chile, Colombia, Mexico and the United States. Lumni offers “human capital contracts” to people like Jairo Sneider, who grew up in a low-income, single parent family in Colombia.
...


Lumni investing in talent

About
Lumni is a pioneer is the field of human capital financing. The company designs and manages social-investment funds that invest in the education of diversified pools of students. In exchange, each student commits to pay a fixed percentage of income for 120 months after graduation. The student’s obligation is complete at the end of that period regardless of the sum paid to date. Under this design, students face little risk of overly burdensome debt payments, providing peace of mind for the debt-averse populations that are most in need of funding.

Lumni brings together students and investors in a win-win partnership. The model allows individuals and institutions to invest in their community’s most valuable asset: the future of its youth. In exchange, students receive the flexible source of financing they need to complete their education and pursue their dreams. Lumni’s fund management model allows for a broad range of different type of projects, each with its own distinct characteristics. Funds may serve students from different demographic groups, focus on a particular city or region, or offer investors different levels of social and financial return on investment.

Lumni currently operates both for-profit and non-profit funds in Chile, Colombia, Mexico and the United States, where it has raised and obtained commitments of more than $15 million from over 100 investors. Lumni has financed nearly 2,000 students to date, nearly all from low or very low-income backgrounds where funding recipients are the first family members to attend college.
...


Lumni USA investing in a brighter future

About
Who We Are

Founded in 2002, Lumni is a social mission company created to help make higher education affordable for more people. In the United States, even after exhausting financial aid options, the average student is left with a $5,000 balance for which they must find alternative financing. Lumni provides a flexible source of financing to cover that gap in funding. The program is different from existing loan options because unlike traditional loans with fixed monthly payments, the student agrees to pay a percentage of their income, around 4-8%, for 120 months after graduation.
...


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Re: Microfinance: A General Discussion of Microfinance

Post by Tigger34 on Fri Jun 03, 2011 1:27 pm

Thanks for posting the article about Lumni, Richard. I found it quite interesting. It will also be interesting to see how Lumni's concept/program works out over time.

I do think the real key to escaping poverty is education and I applaud programs and ventures that aid students in getting an education.

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Re: Microfinance: A General Discussion of Microfinance

Post by RichardF on Fri Jun 03, 2011 2:57 pm

RichardF wrote:Lumni currently operates both for-profit and non-profit funds in Chile, Colombia, Mexico and the United States, where it has raised and obtained commitments of more than $15 million from over 100 investors.
And if you have about $150,000 or so, you probably can join in as one of the investors! Wink

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Re: Microfinance: A General Discussion of Microfinance

Post by Tigger34 on Fri Jun 10, 2011 9:44 pm

The following article is from CGAP, Microfinance Gateway. Full article here: http://www.microfinancegateway.org/p/site/m/template.rc/1.26.15891/

Towards “Fair Trade Microfinance”

Microfinance Gateway Staff

Creating a standard to recognize MFIs that serve the poor

The Microcredit Summit Campaign recently proposed a new Seal of Excellence for Poverty Outreach and Transformation in Microfinance. Intended as a sort of “fair trade designation” for microfinance institutions, the Seal of Excellence would recognize superior performance by microfinance institutions (MFIs) which combine financial sustainability with both significant outreach among poor clients and a strategic approach to poverty reduction and transformation.

The concept note Beyond ‘Ethical’ Financial Services describes the Seal of Excellence (Seal) as an effort aimed "to set a vision for the sector" that emphasizes poverty alleviation and to recognize MFIs whose work advances that vision.

The proposed Seal was developed by a steering committee1 consisting of leaders from many of the existing initiatives already focused on social performance and poverty alleviation. The committee produced the current concept note in consultation with more than 100 other industry stakeholders over the course of the past 11 months.

Initial Reactions

Larry Reed serves on the Seal steering committee and was also the author of the Microcredit Summit State of the Campaign Report in which the idea for the Seal was formally announced. Reed says that while the comments to date have been largely supportive of the SOE conceptually, there is concern about imposing additional reporting burdens on already-stretched MFIs.


Other concerns have also been raised on clarifying the demand for the Seal (and its value as distinct from other initiatives), the role of raters, and a host of implementation challenges. Steering Committee member Laura Foose believes that the main challenge may simply be one of timing. Foose, who also coordinates the Social Performance Task Force, noted during an interview with the Microfinance Gateway that the industry only recently began the process of collecting poverty data in a systematic way.

“For most of its history, microfinance relied on anecdotal evidence about poverty issues, partly because the tools to measure poverty had not been standardized. Instruments like the PPI, PAT, and FCAT are relatively recent developments. So Step One of social performance reporting is to baseline your clientele – who are you reaching, and are they poor? But Step Two is to track them across three years – is their poverty status improving? We have more institutions all the time who can answer the first question. But then there’s that three-year lag time. At the moment, only a handful can answer both questions, as they will have to be able to do in order even to be eligible for the Seal. It may be several years before we have a meaningful number of institutions in a position to qualify.”

Integration with Existing Initiatives

The concept note describes the Seal as intended to be an adjunct rather than an alternative to existing industry initiatives around social performance and consumer protection. Foose describes the Seal as the third stepping stone in a continuum. “The SMART campaign is essentially: ‘First, do no harm.’ Then the Social Performance Task Force work is to set standards in social performance, a big piece of which is transparency: you have to demonstrate effort to measure and track whether you are fulfilling your mission, whatever that mission may be. Then the Seal of Excellence focuses on financial service providers with a specific social mission - to reach poor clients and improve their lives. For these institutions to obtain the Seal, they have to demonstrate they can achieve this objective.”

What the Seal of Excellence is Intended to Be

The overall goal of the proposed Seal, according to the concept note, is a microfinance sector that is responsible, genuinely inclusive (including the poor, the bottom 30-40% of the population), and that contributes to positive change. Larry Reed also says there will be no ceiling on the number of Seals awarded. It will be given to as many institutions as meet the criteria eventually defined.

The note stresses that the judgment criteria remain to be finalized – indeed, that is what the public commentary period is intended to help shape. But it sets out a broad framework of “Defining What We Would Like to See” (e.g., responsible and transparent pricing, targeting and outreach to under-developed regions, gender equity, commitment to poverty reduction, evidence of positive change over time in clients’ lives) and “Addressing What We Do Not Want to See” (e.g., an approach to growth by any means necessary, institutional claims of poverty focus without evidence of an actual strategy, excessive executive compensation or shareholder dividends).

Why Now?

The concept note describes the current state of affairs as “a time for reflection and reassessment of the sector.” Events in markets as diverse as India, Nicaragua, Bosnia, and Morocco suggest that what microfinance expert Beth Rhyne has called “the hypnotic mantra of ‘scale, scale, scale’ can have catastrophic consequences for end clients, institutions, and the sector as a whole. The sector also faces increasing criticism in both the industry and the mainstream press, especially about perceived profiteering (e.g., the April 2010 New York Times article Banks Making Big Profits From Tiny Loans).

Next Steps

The steering committee will meet in early June to review feedback from the public and discuss broad categories and criteria. Assuming the proposal goes forward, implementation will include establishment of a technical committee, alpha testing, piloting and beta testing, establishment of processes for verification and certification, and development of a business model.

Larry Reed envisions the Seal as a point of pride for recipient institutions, an award whose significance they will go out of their way to ensure that actual and potential clients understand.

Laura Foose notes that not every microfinance provider has – or needs to have -- poverty outreach and poverty reduction as its mission. “We need the full spectrum of providers. Those who are focused purely on access to finance as an end unto itself have their place, and it’s important to remember that not every MFI needs to go for this Seal. But for that specific subset of providers who claim poverty alleviation as their mission, the Seal is a call to be truthful.”

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Re: Microfinance: A General Discussion of Microfinance

Post by Tigger34 on Wed Jun 15, 2011 2:55 pm

The following article is from IPS-Inter Press Service International Association:

Microfinance Craze Conceals Multiple Problems
By Adam Robert Green

LONDON, Jun 2, 2011 (IPS) – “The microfinance industry is expanding at breakneck pace, with more banks and private equity firms now entering the fray. Yet there is growing unease about the naive assumptions, and evangelical predictions, of its advocates."

"In 2009, 128 million people received microfinance loans, according the Microfinance Summit Campaign. Such services are increasingly being used in untested settings, from post-disaster reconstruction in Haiti and entrepreneurship programmes in Iraq to consumption smoothing during seasonal famines in Bangladesh.

"Microfinance has a certain populist appeal," says Ha-Joon Chang, professor of economics at Cambridge University.

"(But) simply throwing money at people and hoping for the best, without extending complementary inputs to raise productivity, such as warehousing, fertilizer, export marketing, market research support and so on, means you reproduce poverty rather than eliminating it," he told IPS in an interview.

One issue is market saturation: "If you lend to one person to buy a phone and rent it out, she might make some money but very quickly many others enter the market, unleashing intense competition. There are a limited range of things that poor people can do in many of these contexts, and limited scope for productivity gains.

"How much more efficient can you get at frying food or raising chickens?" Chang asks.

While microcredit modestly raises rates of business creation, it is not clear that such enterprises grow. Professor Abhijit Banerjee from the Massachusetts Institute of Technology (MIT) has conducted a series of randomised controlled trials of microfinance and claims to have found scant evidence of enterprise expansion.

"We see lots of business creation, but little business growth. Of course, there is no solid proof that such growth could not happen, but none of the evidence is pointing in that direction at the moment," Banerjee points out.

One consequence of business creation without growth, warns Professor Aneel Karnani at the University of Michigan, could be the formation of "atomised" economies with many small-scale activities, and a "missing middle" of small to medium-sized enterprises (SMEs).

Karnani told IPS: "This is a zero sum game, in the sense that resources are limited. Microcredit is attracting a lot of money, human and political capital and energy and enthusiasm from NGOs (nongovernmental organisations) and government officials that could have been channelled into SMEs, the real engine of job creation."

Karnani also believes the poor overwhelmingly desire access to formal jobs, rather than the opportunity to be entrepreneurs. "Microcredit is based on a fallacy that people not only want to be entrepreneurs but have the will, ability and preference to do so.

"Most people are not like that. In the U.S. and UK, 90 percent of the workforce chooses to work for a salary rather than be an entrepreneur. If 90 percent of people in rich countries choose not to be entrepreneurs, with all that education and excellent public infrastructure, why do we think people in poor countries want to?"

Reports of fraudulent microfinance institutions and unwise investments, for instance in pyramid schemes such as happened in Tanzania in 2010, have led to calls for complementary training in financial literacy, but Dean Karlan, professor of economics at Yale University and co-author of a recent book "More Than Good Intentions", has reservations.

"I am concerned about the scalability of financial literacy programmes. Perhaps we should instead accept the state of people’s knowledge and work with that. The government can play a role on the consumer protection side, such as regulating for clear disclosure policies. We need tests, not assumptions and dogmatic rhetoric, to know the way forward."

Karlan, like Banerjee, is interested in building the evidence base to improve the evaluation of microfinance and describes ‘‘before and after’’ studies, used by both advocates and critics, as "analytically silly". The criteria against which successes are measured, such as whether a post-loan client no longer ‘‘sells assets at fire-sale prices during shocks’’, are impossible to prove.

Randomised controlled trials may be one way to rigorously establish impact. Yet, however impact is evaluated, some have fundamental concerns regarding the consequences of inevitable defaults, or the personal distress resulting from the fears of default, in large part due to the public shame associated with failure.

Kasia Paprocki of the Goldin Institute told IPS: "The claim that microcredit is collateral-free is false. Loan officers will document what you have – pots, pans, productive assets, a rickshaw and so on - and retrieve it if you do not pay. People have literally had their roofs removed for defaulting."

Paprocki cites evidence of physical and sexual abuse from loan officers, and claims that in Bangladesh some people sell government food aid during seasonal famines to pay off loans. She also claims that many women who struggle to repay become isolated in the community and cannot call upon social networks.

She expresses concern at donor enthusiasm. Some, she claims, are telling NGOs "they will not receive funds for their programmes unless they adopt microfinance".

Most critics acknowledge that micro-finance is here to stay. Some, such as Karnani, would like to see the back of it while more moderate voices, such as Chang, believe it can play a role in development, but in the context of broader development interventions.

Others, such as the so-called ‘randomistas’ at the likes of Yale and MIT, simply wish to improve the state of knowledge about impact before the industry expands on heightened expectations. One thing is clear: the honeymoon is over.” (END)

Link to article: http://ipsnews.net/news.asp?idnews=55901


Last edited by Tigger34 on Tue Sep 06, 2011 11:43 pm; edited 1 time in total

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Re: Microfinance: A General Discussion of Microfinance

Post by Tigger34 on Fri Oct 07, 2011 11:29 am

From MarketWatch: October 7, 2011

A lending model that could alleviate poverty

By Thomas Kostigen


SANTA MONICA, Calif. (MarketWatch) — “If we change the banks’ mind, the whole world will change,” wrote Muhammad Yunus at the opening of Grameen America’s New York City branch last year.

His timing couldn’t be better. Yunus’s Grameen America bank is betting that what worked on the streets of Bangladesh can work in the United States.

Grameen America provides small loans, known as microloans, and other financial services to individuals living below the U.S. poverty line who want to grow a small business.

As people occupy Wall Street among other places in the country in protest of the increasing dichotomy between the rich and the poor in America, and as the number of people living in poverty grows to record levels, a “Third World America” — as Arianna Huffington puts it — is indeed developing before our eyes.

Financial instruments geared to the less well-off should therefore be in high demand and should be looked at seriously by investors. In fact, it’s exactly these types of vehicles that the “occupiers” on Wall Street should be embracing to effect change.

Blocking traffic is one way to gain attention, but that isn’t going to change much, if anything, about the economy; Grameen’s system would.

Here’s how Grameen America works: An individual who lives below the poverty line selects four others in the same predicament and forms a group. Sponsored by Grameen America’s bank, the group goes through a five-day financial training program and opens a savings account.

Each borrower gets a small business loan — no collateral or credit history required. Weekly group meetings are held with a credit manager. The borrowers begin to repay their loans and deposit savings.

Over the past year more than 7,000 loans have been disbursed totaling $24 million.

Pulling people out of poverty and putting them on the right track to financial success can shift the economic landscape. By leveraging community, the plight of the poor can change. And boy is it in need of change.

Almost 50% of the income earned in the United States goes to the 20% who make the most, according to recent Census Bureau data. Meanwhile, the number of people living in poverty in America exceeds 15% of the population — the highest poverty rate since the census began tracking incomes.

Most disturbing is the number of people living in “deep poverty,” defined as 50% below the poverty line. At nearly 7%, it’s the highest level on record in the U.S. The poverty line is defined as a household of four living on less than $22,113 per year.


What Grameen also does, if you pay close attention to its model, is leverage community. They found when borrowers are in a group and held accountable to their peers, their repayment rates increase.

Community-based lending sites such as Prosper.com have also found success using this model.

As social network sites lap up people around the world and arm them with information and the kind of education that incites them to revolt, the powers that be ought to rethink the way they run their financial kingdoms.

Decentralizing the financial structure and lending more power to the people, through community and peer-based programs, may allay the fears of aristocracy sweeping America today.

If enough dollars are invested in the bottom of the pyramid, it will stabilize the U.S. economic foundation and begin to point the country in the right direction again.

The days of high finance are over, and it’s the dawn of microfinance in America."



Link to original article here:

http://www.marketwatch.com/story/a-lending-model-that-could-alleviate-poverty-2011-10-07



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Re: Microfinance: A General Discussion of Microfinance

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