Microfinance Methodologies: Successes and Failures

 Off Website (http://floatingsun.net/udai/node/174): This SJC was presented by our special guest: Tara Ramanathan. She is an economics major at UCSD, and went to India last year for her studies abroad. She is actively pursuing her interests in urbanization and the role of microfinance in poverty alleviation. In this talk, Tara discussed what is microfinance (versus microcredit), and how it works. She gave an idea of how it started and how it has progressed in recent years, from the developing to developed countries. She noted that microfinance is only one of the instruments of poverty alleviation, and may not always represent the best solution in every case. The slides are attached below.

 Typically criticism is the first response to the suggestion of Microfinance. How poor people with less financial planning skills will be able to manage larger sums of money and Whether poor people deserve financial services and if they will be able to repay loans  are the first concerns to jump up. Grameen bank has proved to be a great success in Bangladesh and to the areas it has spread, but what about the failed projects. You rarely here about a Microfinance attempt gone wrong or bad because its bad publicity, but it is useful to know why these projects did not work to create better systems for the future.

As I transition my research from third world countries experience under Microfinance projects to its implementation in the United States (which is still in its developmental stages), I am interested in knowing what does not work in the world of Microfinance. I found an informative powerpoint online that addresses exactly that: Microfinance Methodologies: Successes and Failures.

The presentation first goes over some of the basics of the MF field. Why is Microfinance Unique? As I have learned and discussed earlier in this blog, Microfinance offers financial services to the poor who have little or no credit, restricting their access to commercial banking options. With no access to the traditional banking options we are so accustomed to, the poor are forced to make deals with money lords (facing unmanageable interest rates and penalties) or to suffer with insufficient funds, supplies and food for themselves and family members. Less than 2% of poor people have access to legitimate financial services (either credit or savings). Microfinance, especially unique among methods of poverty reduction, incorporates group lending and helps borrowers change their entire lifestyles and start a new way of life through loans. MF offers flexibility, whereas the, “problem with a majority of poverty reduction strategies is that they remain the whether or not they are effectively reaching their goals.” MF has been an evolved process starting with the smallest loans for Muhammad Yunus himself. This evolution of the micro-loaning process developed by the Grameen Bank has, “enabled microfinance to become one of the most prominent and sustainable poverty alleviation institutions around the world.” This is true because of many the reasons discusses early in my blog such as, the macro effect of a loan, they empowerment of borrowers and the change in lifestyle as a results of loans in conjunction with Grameen’s rules.

The powerpoint goes onto suggest that MF is not a new concept, it has just been perfected recently and offers microfinance as just one (albeit, a successful one) method to poverty. A comprehensive definition of poverty is offered: “ Poverty is characterized above all by vulnerability- i.e. inability to meet economic and social needs due to low or fluctuating incomes, and inability to cope with shocks (such as crop failure, fire earthquakes) due to lack of assets or access to credit.” This definition includes aspects beyond income or consumption, which is truly what poverty encompasses.

As previously suggested, microfinance is a strong method of poverty alleviation because of its flexibility to change and desire to evolve into a better and better system. Starting with the Grameen Bank, who reformed its methodologies repeatedly and continue doing so as they move to the US, microfinance programs throughout the world have continually improved practices about financing the poor. Some of the major changes that have promoted microfinance over the years include:

-growing enthusiasm in the 1990s really helped the field take-off as a method for poverty alleviation

-the creation of the village banking unit system through Bank Rakyat Indonesia (BRI), creating the largest microfinance instituion in developing countries.

-biggest change:  in the mid-1990s the term “microcredit” began to be replaced by a “microfinance.” The term “microfinance” includes not only credit, but also saving and other financial services, which the poor also need access to.

-BancoSol, founded in ’92, was the first commercial bank in the world to dedicate itself solely to microfinance. Now many other commercial banks have sectors that focus on microfinance.  

Ramanathan’s powerpoint measures the global progress of microfinance and then addresses some of the challenges to operating Microfinance Institutions in the US, which is the topic I will be next transitioning to in my research.

Global Progress:

-“One year after the UN called 2005 the International year f Microcredit the World Bank estimates that there are more than 7,000 microfinance institutions now operating around the world.” From one institution with a new idea (Grameen Bank) in the 1970’s to over 7,000 just 30 years later is an impressive and telling growth rate. Poverty alleviation through microfinance must be successful for such growth to have occurred. It is clear that the poor were in dire need of financial services and microfinance is providing those necessities. 

-“Microcredit Summit launched a nine-year campaign tor each 100 million of the world’s poorest families, especiall the women of those families, with credit for self-employment and other financial and business services by the year 2005.” Such ambitious goals are made possible through the 7,000 MFIs present around the world. Again women are being targeted by so many of these institutions as the research shows that they benefit most for micro-loans.  

MFIs in the US: A Big Challenge

- In Africa, Eastern Europe, Asia and South America, microfinance programs of all sizes have served millions of people. Yet the US has a very different population makeup than these places with less of a population that would fall into the “poorest poor” category.

-currently the microenterprise sector is large in third world countries, but very small in the US.

This is due to a lack of microfinance projects, more government regulations and again a different make-up of population and definition of “poor” in the US. Typically those who are considered poor in the US would not be considered so in a third world country, or would not be as considered as poor as we believe them to be (its all relative).

Ramanathan’s in her presentation suggest that the bottom line is the necessity to deveise a strategy unique to the poverty situation in the US. I entirely agree with this, but believe that it is possible. I also think that working with the women at the refugee center would be a good place to start because these women comes for third world cultures where microfinance is successful so they hold aspects of culture from their homes and also are being integrated into the US culture. They would function as a good transition step. Also, There are many refugees in the US who would qualify for micro-loans so developing a model that can be applied to refugee populations would be beneficial for many.

New direction to check out: This powerpoint suggests that the two most successful MF institutions are of course, Grameen Bank and in addition, Self Employed Women’s Awareness (SEWA). I have never heard of this second group and would like to do some research on this group considering the overwhelming benefit MF has to especially women and the empowerment it can provide. I have become increasingly interested in the effect of women receiving micro-loans throughout my research and it sounds as though this group is doing precisely that.