Microfinance: A General Discussion of Microfinance
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Re: Microfinance: A General Discussion of Microfinance
by Tigger34 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/
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
by Tigger34 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
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
by iampaul Tue May 31, 2011 12:12 pm
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.Tigger34 wrote:Cambodia’s Micro-credit Trap, by Simon Marks, May 23, 2011
Paul
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Re: Microfinance: A General Discussion of Microfinance
by Tigger34 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.
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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Join date : 2011-03-29
Re: Microfinance: A General Discussion of Microfinance
by RichardF 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.
...
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
by Tigger34 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.
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
by RichardF Fri Jun 03, 2011 2:57 pm
And if you have about $150,000 or so, you probably can join in as one of the investors!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.
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Re: Microfinance: A General Discussion of Microfinance
by Tigger34 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.”
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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Join date : 2011-03-29
Re: Microfinance: A General Discussion of Microfinance
by Tigger34 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
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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Join date : 2011-03-29
Re: Microfinance: A General Discussion of Microfinance
by Tigger34 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
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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