Professional Documents
Culture Documents
Microfinance
Microfinance is the provision of financial
services to low-income clients or solidarity
lending groups including consumers and the
self-employed, who traditionally lack access
to banking and related services.
More broadly, it is a movement whose
object is "a world in which as many poor
and near-poor households as possible have
permanent access to an appropriate range of
high quality financial services, including not
just credit but also savings, insurance, and
fund transfers."[1] Those who promote
microfinance generally believe that such Community-based savings bank in Cambodia. There is a rich variety of financial
institutions serving poor people.
access will help poor people out of poverty.
Microfinance is a broad category of services, which include microcredit. Microcredit can be defined as the provision
of credit services to poor clients. Although microcredit by definition can achieve only a small portion of the goals of
microfinance, conflation of the two terms is endemic in public discourse. In other words, critics attack microcredit
while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of microfinance
services, it is difficult to assess impact, and no studies to date have done so.
Challenges
Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income.
Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved. For
example, although the total gross revenue from delivering one hundred loans worth $1,000 each will not differ
greatly from the revenue that results from delivering one loan of $100,000, it takes nearly a hundred times as much
work and cost to manage a hundred loans as it does to manage one. The fixed cost of processing loans of any size is
considerable as assessment of potential borrowers, their repayment prospects and security; administration of
outstanding loans, collecting from delinquent borrowers, etc., has to be done in all cases. There is a break-even point
in providing loans or deposits below which banks lose money on each transaction they make. Poor people usually
fall below that breakeven point. A similar equation resists efforts to deliver other financial services to poor people.
In addition, most poor people have few assets that can be secured by a bank as collateral. As documented extensively
by Hernando de Soto and others, even if they happen to own land in the developing world, they may not have
effective title to it.[2] This means that the bank will have little recourse against defaulting borrowers.
Seen from a broader perspective, the development of a healthy national financial system has long been viewed as a
catalyst for the broader goal of national economic development (see for example Alexander Gerschenkron, Paul
Rosenstein-Rodan, Joseph Schumpeter, Anne Krueger ). However, the efforts of national planners and experts to
develop financial services for most people have often failed in developing countries, for reasons summarized well by
Adams, Graham & Von Pischke in their classic analysis 'Undermining Rural Development with Cheap Credit'.[3]
Because of these difficulties, when poor people borrow they often rely on relatives or a local moneylender, whose
interest rates can be very high. An analysis of 28 studies of informal moneylending rates in 14 countries in Asia,
Latin America and Africa concluded that 76% of moneylender rates exceed 10% per month, including 22% that
exceeded 100% per month. Moneylenders usually charge higher rates to poorer borrowers than to less poor ones.[4]
Microfinance 2
While moneylenders are often demonized and accused of usury, their services are convenient and fast, and they can
be very flexible when borrowers run into problems. Hopes of quickly putting them out of business have proven
unrealistic, even in places where microfinance institutions are active.
Over the past centuries practical visionaries, from the Franciscan monks who founded the community-oriented
pawnshops of the 15th century, to the founders of the European credit union movement in the 19th century (such as
Friedrich Wilhelm Raiffeisen) and the founders of the microcredit movement in the 1970s (such as Muhammad
Yunus) have tested practices and built institutions designed to bring the kinds of opportunities and risk-management
tools that financial services can provide to the doorsteps of poor people.[5] While the success of the Grameen Bank
(which now serves over 7 million poor Bangladeshi women) has inspired the world, it has proved difficult to
replicate this success. In nations with lower population densities, meeting the operating costs of a retail branch by
serving nearby customers has proven considerably more challenging. Hans Dieter Seibel, board member of the
European Microfinance Platform, is in favour of the group model. This particular model (used by many
Microfinance institutions) makes financial sense, he says, because it reduces transaction costs. Microfinance
programmes also need to be based on local funds. Local Roots [6]
Although much progress has been made, the problem has not been solved yet, and the overwhelming majority of
people who earn less than $1 a day, especially in the rural areas, continue to have no practical access to formal sector
finance. Microfinance has been growing rapidly with $25 billion currently at work in microfinance loans.[7] It is
estimated that the industry needs $250 billion to get capital to all the poor people who need it.[7] The industry has
been growing rapidly, and concerns have arisen that the rate of capital flowing into microfinance is a potential risk
unless managed well.[8]
9. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which
chokes off the supply of credit.
10. Microfinance institutions should measure and disclose their performance – both financially and socially.
Microfinance is considered as a tool for socio-economic development,and can be clearly distinguished from charity.
Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan,
should be recipients of charity. Others are best served by financial institutions.
Microfinancial services may be needed everywhere, including the developed world. However, in developed
economies intense competition within the financial sector, combined with a diverse mix of different types of
financial institutions with different missions, ensures that most people have access to some financial services. Efforts
to transfer microfinance innovations such as solidarity lending from developing countries to developed ones have
met with little success.[15]
In Stuart Rutherford’s recent book The Financial needs and financial services.
Poor and Their Money, he cites several
types of needs:[16]
• Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood, old age.
• Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.
• Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings.
• Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job
(which often requires paying a large bribe), etc.
Poor people find creative and often collaborative ways to meet these needs, primarily through creating and
exchanging different forms of non-cash value. Common substitutes for cash vary from country to country but
typically include livestock, grains, jewellery and precious metals.
As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that "microfinance
could provide large-scale outreach profitably," and in the 1990s, "microfinance began to develop as an industry"
(2001, p. 54). In the 2000s, the microfinance industry's objective is to satisfy the unmet demand on a much larger
scale, and to play a role in reducing poverty. While much progress has been made in developing a viable,
commercial microfinance sector in the last few decades, several issues remain that need to be addressed before the
industry will be able to satisfy massive worldwide demand. The obstacles or challenges to building a sound
commercial microfinance industry include:
• Inappropriate donor subsidies
• Poor regulation and supervision of deposit-taking MFIs
• Few MFIs that meet the needs for savings, remittances or insurance
• Limited management capacity in MFIs
• Institutional inefficiencies
• Need for more dissemination and adoption of rural, agricultural microfinance methodologies
Microfinance 5
Member-owned organizations
These include self-help groups, credit unions, and a variety of hybrid organizations like 'financial service
associations' and CVECAs. Like their informal cousins, they are generally small and local, which means they
have access to good knowledge about each others' financial circumstances and can offer convenience and
flexibility. Since they are managed by poor people, their costs of operation are low. However, these providers
may have little financial skill and can run into trouble when the economy turns down or their operations
become too complex. Unless they are effectively regulated and supervised, they can be 'captured' by one or
two influential leaders, and the members can lose their money.
NGOs
The Microcredit Summit Campaign counted 3,316 of these MFIs and NGOs lending to about 133 million
clients by the end of 2006.[26] Led by Grameen Bank and BRAC in Bangladesh, Prodem in Bolivia, and
FINCA International, headquartered in Washington, DC, these NGOs have spread around the developing
world in the past three decades; others, like the Gamelan Council, address larger regions. They have proven
very innovative, pioneering banking techniques like solidarity lending, village banking and mobile banking
that have overcome barriers to serving poor populations. However, with boards that don’t necessarily represent
either their capital or their customers, their governance structures can be fragile, and they can become overly
dependent on external donors.
Formal financial institutions
In addition to commercial banks, these include state banks, agricultural development banks, savings banks,
rural banks and non-bank financial institutions. They are regulated and supervised, offer a wider range of
financial services, and control a branch network that can extend across the country and internationally.
However, they have proved reluctant to adopt social missions, and due to their high costs of operation, often
can't deliver services to poor or remote populations. The increasing use of alternative data in credit scoring,
such as trade credit is increasing commercial banks' interest in microfinance.[27]
With appropriate regulation and supervision, each of these institutional types can bring leverage to solving the
microfinance problem. For example, efforts are being made to link self-help groups to commercial banks, to network
member-owned organizations together to achieve economies of scale and scope, and to support efforts by
commercial banks to 'down-scale' by integrating mobile banking and e-payment technologies into their extensive
branch networks.
Other criticisms
Most criticisms of microfinance have actually been criticisms of microcredit, delivered in the absence of other
microfinance services such as savings, remittances, payments and insurance.
For example, there has been much criticism of the high interest rates charged to borrowers. The real average
portfolio yield cited by the sample of 704 microfinance institutions that voluntarily submitted reports to the
MicroBanking Bulletin in 2006 was 22.3% annually. However, annual rates charged to clients are higher, as they
also include local inflation and the bad debt expenses of the microfinance institution.[40] Muhammad Yunus has
recently made much of this point, and in his latest book[41] argues that microfinance institutions that charge more
than 15% above their long-term operating costs should face penalties.
Milford Bateman, the author of Why Doesn't Microfinance Work?, argues that microcredit offers only an "illusion of
poverty reduction". "As in any lottery or game of chance, a few in poverty do manage to establish microenterprises
that produce a decent living," he argues, but "these isolated and often temporary positives are swamped by the
largely overlooked negatives." Bateman concludes that "The international development community is now faced
with the reality that, overall, microfinance has been a development policy blunder of quite historic proportions."[42]
Here Bateman, like many writers, confuses microfinance as a broad sector with microcredit, a single microfinance
intervention (see delineation above).
The role of donors has also been questioned. The Consultative Group to Assist the Poor (CGAP) recently
commented that "a large proportion of the money they spend is not effective, either because it gets hung up in
unsuccessful and often complicated funding mechanisms (for example, a government apex facility), or it goes to
partners that are not held accountable for performance. In some cases, poorly conceived programs have retarded the
development of inclusive financial systems by distorting markets and displacing domestic commercial initiatives
with cheap or free money."[43]
There has also been criticism of microlenders for not taking more responsibility for the working conditions of poor
households, particularly when borrowers become quasi-wage labourers, selling crafts or agricultural produce through
an organization controlled by the MFI. The desire of MFIs to help their borrower diversify and increase their
incomes has sparked this type of relationship in several countries, most notably Bangladesh, where hundreds of
thousands of borrowers effectively work as wage labourers for the marketing subsidiaries of Grameen Bank or
BRAC. Critics maintain that there are few if any rules or standards in these cases governing working hours, holidays,
working conditions, safety or child labour, and few inspection regimes to correct abuses.[44] Some of these concerns
have been taken up by unions and socially responsible investment advocates.
For example, BusinessWeek reported that some Mexicans are stumbling with terms of newly available funding.[45]
[46]
Other criticism was raised by the IPO (Initial Public Offering) of a Mexican MFI Banco Compartamos in 2007. As
the company put its shares on Mexican Stock Exchange it was able to generate very high profits that were achieved
by rising interest rates on their micro-loans that at some point reached 86% per year.[47] In July 2010 India's biggest
MFI, SKS Microfinance also went public. In both instances Muhammad Yunus publicly stated his disagreement,
saying that the poor should be the only beneficiaries of microfinance.[48] [49]
Microcredit has been blamed for many suicides in India: aggressive lending by microcredit companies in Andra
Pradesh is said to have resulted in over 80 deaths in 2010.[50]
Microfinance 10
Bibliography
• Adams, Dale W., Douglas H. Graham & J. D. Von Pischke (eds.). Undermining Rural Development with Cheap
Credit. Westview Press, Boulder & London, 1984.
• de Aghion, Beatriz Armendáriz & Jonathan Morduch. The Economics of Microfinance, The MIT Press,
Cambridge, Massachusetts, 2005.
• Branch, Brian & Janette Klaehn. Striking the Balance in Microfinance: A Practical Guide to Mobilizing Savings.
PACT Publications, Washington, 2002.
• Christen, Robert Peck, Jayadeva, Veena & Richard Rosenberg. Financial Institutions with a Double Bottom Line.
Consultative Group to Assist the Poor, Washington 2004.
• Dichter, Thomas and Malcolm Harper (eds). What’s Wrong with Microfinance? Practical Action, 2007.
• Dowla, Asif & Dipal Barua. The Poor Always Pay Back: The Grameen II Story. Kumarian Press Inc., Bloomfield,
Connecticut, 2006.
• Gibbons, David. The Grameen Reader. Grameen Bank, Dhaka, 1992.
• Helms, Brigit. Access for All: Building Inclusive Financial Systems. Consultative Group to Assist the Poor,
Washington, 2006.
• Hirschland, Madeline (ed.) Savings Services for the Poor: An Operational Guide. Kumarian Press Inc.,
Bloomfield CT, 2005.
• Khandker, Shahidur R. Fighting Poverty with Microcredit, Bangladesh edition, The University Press Ltd, Dhaka,
1999.
• Ledgerwood, Joanna and Victoria White. Transforming Microfinance Institutions: Providing Full Financial
Services to the Poor. World Bank, 2006.
• Mas, Ignacio and Kabir Kumar. Banking on mobiles: why, how and for whom? CGAP Focus Note #48, July,
2008.
• Raiffeisen, FW (translated from the German by Konrad Engelmann). The Credit Unions. The Raiffeisen Printing
& Publishing Company, Neuwied on the Rhine, Germany, 1970.
• Rutherford, Stuart. The Poor and Their Money. Oxford University Press, Delhi, 2000.
• Wolff, Henry W. People’s Banks: A Record of Social and Economic Success. P.S. King & Son, London, 1910.
• Sapovadia, Vrajlal K., Micro Finance: The Pillars of a Tool to Socio-Economic Development. Development
Gateway, 2006.
• Maimbo, Samuel Munzele & Dilip Ratha (eds.) Remittances: Development Impact and Future Prospects. The
World Bank, 2005.
• Wright, Graham A.N. Microfinance Systems: Designing Quality Financial Services for the Poor. The University
Press, Dhaka, 2000.
• United Nations Department of Economic Affairs and United Nations Capital Development Fund. Building
Inclusive Financial Sectors for Development. United Nations, New York, 2006.
• Yunus, Muhammad. Creating a World Without Poverty: Social Business and the Future of Capitalism.
PublicAffairs, New York, 2008.
Microfinance 11
See also
• Bank
• Credit union
• INAFI
• Microcredit
• Microinsurance
• One Hen
• Opportunity finance
• Microfinance in Tanzania
• Microfinance in China
• Microfinance organizations
• Pawnbroker
• ROSCA
• Savings bank
• Alternative data
• Prosper.com
• Crowdfunding
Notes
[1] Robert Peck Christen, Richard Rosenberg & Veena Jayadeva. Financial institutions with a double-bottom line: implications for the future of
microfinance. CGAP Occasional Paper, July 2004, pp. 2-3.
[2] Hernando de Soto. The Other Path: The Invisible Revolution in the Third World. Harper & Row Publishers, New York, 1989, p. 162.
[3] Adams, Dale W., Douglas H. Graham & J. D. Von Pischke (eds.). Undermining Rural Development with Cheap Credit. Westview Press,
Boulder & London, 1984.
[4] Marguerite Robinson. The Microfinance Revolution: Sustainable Finance for the Poor World Bank, Washington, 2001, pp. 199-215.
[5] Helms, Brigit (2006). Access for All: Building Inclusive Financial Systems. Washington, D.C.: The World Bank. ISBN 0821363603.
[6] http:/ / www. inwent. org/ ez/ articles/ 166482/ index. en. shtml
[7] Microfinance: An emerging investment opportunity. Deutsche Bank Dec 2007
[8] http:/ / www. citigroup. com/ citigroup/ microfinance/ data/ news080303b. pdf
[9] Helms (2006), p. xi
[10] Helms (2006), p. xii
[11] Robert Peck Christen. What microenterprise credit programs can learn the moneylenders, Accion International, 1989
[12] See for example Adrian Gonzalez & Richard Rosenberg. The state of microfinance: outreach, profitability and poverty, Consultative Group
to Assist the Poor, 2006.
[13] Microfinance Information Exchange, Inc. (2007-08-01). "MicroBanking Bulletin Issue #15, Autumn, 2007, pp. 46,49" (http:/ / www.
themix. org/ microbanking-bulletin/ mbb-issue-no-15-autumn-2007). Microfinance Information Exchange, Inc.. . Retrieved 2010-01-15.
[14] McKenzie, David (2008-10-17). "Comments Made at IPA/FAI Microfinance Conference Oct. 17 2008" (http:/ / www. philanthropyaction.
com/ nc/ what_is_it_about_women/ ). Philanthropy Action. . Retrieved 2008-10-17.
[15] See for example Cheryl Frankiewicz Calmeadow Metrofund: a Canadian experiment in sustainable microfinance, Calmeadow Foundation,
2001.
[16] Stuart Rutherford. The Poor and Their Money. Oxford University Press, New Delhi, 2000, p. 4. isbn =019565790X
[17] Khandker, Shahidur R. Fighting Poverty with Microcredit, Bangladesh edition, The University Press Ltd, Dhaka, 1999, p. 78.
[18] Graham A.N. Wright and Leonard Mutesasira. The relative risks to the savings of poor people, Micro-Save Africa, January, 2001.
[19] Robert Peck Christen, Richard Rosenberg & Veena Jayadeva. Financial institutions with a double-bottom line: implications for the future of
microfinance. CGAP Occasional Paper, July 2004.
[20] MFW4A - Microfinance (2010-11-05). "MFW4A - Microfinance" (http:/ / www. mfw4a. org/ access-to-finance/ microfinance. html). .
[21] Christen, Rosenberg & Jayadeva. Financial institutions with a double-bottom line, pp. 5-6
[22] Microfinance Information Exchange, Inc. (2009-12-01). "MicroBanking Bulletin Issue #19, December, 2009, pp. 49" (http:/ / www. themix.
org/ microbanking-bulletin/ mbb-issue-no-19-december-2009). Microfinance Information Exchange, Inc.. .
[23] See for example Joachim de Weerdt, Stefan Dercon, Tessa Bold and Alula Pankhurst, Membership-based indigenous insurance associations
in Ethiopia and Tanzania (http:/ / wiego. org/ ahmedabad/ con_papers. php#dercona. ) For other cases see ROSCA.
[24] http:/ / www. inwent. org/ ez/ articles/ 166627/ index. en. shtml
[25] Brigit Helms. Access for All: Building Inclusive Financial Systems. CGAP/World Bank, Washington, 2006, pp. 35-57.
Microfinance 12
[26] State of the Microcredit Summit Campaign Report 2007, Microcredit Summit Campaign, Washington, 2007. (http:/ / www.
microcreditsummit. org/ pubs/ reports/ socr/ 2007. html)
[27] Turner, Michael, Robin Varghese, et al. Information Sharing and SMME Financing in South Africa, [[Political and Economic Research
Council (http:/ / www. infopolicy. org/ _working/ files/ downloads/ South-Africa-compressed-web. pdf)] (PERC), p58.]
[28] Deutsche Bank research, Microfinance: An emerging investment opportunity, December 0207, http:/ / www. dbresearch. com/ PROD/
DBR_INTERNET_EN-PROD/ PROD0000000000219174. pdf
[29] See the recent technical paper "Why we need transparent pricing in microfinance" on the problems with flat rate disclosure (http:/ / www.
mftransparency. org/ media/ pdf/ Why-We-Need-Transparent-Pricing-in-Microfinance--November-2008. pdf)
[30] Dichter, T.. "Hype and Hope: The Worrisome State of the Microcredit Movement" (http:/ / www. legalcity. net/ Index.
cfm?fuseaction=MAGAZINE. article& ArticleID=8803808). Consultative Group to Assist the Poor (CGAP). .
[31] Littlefield, Elizabeth; Morduch, Jonathan and Hashemi, Syed (2003-01-01). "Is Microfinance an Effective Strategy to Reach the Millennium
Development Goals?" (http:/ / web. archive. org/ web/ 20070203045104/ http:/ / www. cgap. org/ docs/ FocusNote_24. pdf) (PDF). FocusNote
(Consultative Group to Assist the Poor) (24). Archived from the original (http:/ / www. cgap. org/ docs/ FocusNote_24. pdf) on 2007-02-03. .
Retrieved 2007-03-27.
[32] Morduch, Jonathan (2008-10-17). "Comments Made at IPA/FAI Microfinance Conference Oct. 17 2008" (http:/ / www. philanthropyaction.
com/ nc/ cutting_edge_research_on_microfinance/ ). Philanthropy Action. . Retrieved 2008-10-17.
[33] BBC.co.uk (http:/ / www. bbc. co. uk/ programmes/ p003s71s)
[34] Kristof, Nicholas (2009-12-28). "The Role of Microfinance" (http:/ / kristof. blogs. nytimes. com/ 2009/ 12/ 28/ the-role-of-microfinance/ ).
The New York Times. .
[35] (http:/ / centerforfinancialinclusionblog. wordpress. com/ 2010/ 01/ 05/ reply-to-nicholas-kristof-microcredit-microsavings-microfinance/ )
[36] Westover J. (2008). The Record of Microfinance: The Effectiveness/Ineffectiveness of Microfinance Programs as a Means of Alleviating
Poverty (http:/ / www. sociology. org/ content/ 2008/ _westover_finance. pdf). Electronic Journal of Sociology.
[37] Kim, J.C., Watts, C. H., Hargreaves, J. R., Ndhlovu, L. X., Phetla, G., Morison, L. A., et al. (2007). Understanding the impact of a
microfinance-based intervention of women's empowerment and the reduction of intimate partner violence in South Africa. American Journal
of Public Health.
[38] Stephen C. Smith, "Village Banking and Maternal and Child Health: Evidence from Ecuador and Honduras," World Development, 30, 4,
707 723, April 2002
[39] Karlan D, Valdivia M. (2009). Teaching Entrepreneurship: Impact of Business Training on Microfinance Clients and Institutions (http:/ /
karlan. yale. edu/ p/ TeachingEntrepreneurship_revision_jan2010. pdf). Forthcoming March 2010, Review of Economics and Statistics.
[40] Microfinance Information Exchange, Inc. (2007-08-01). "MicroBanking Bulletin Issue #15, Autumn, 2007, pp. 48" (http:/ / www. themix.
org/ microbanking-bulletin/ mbb-issue-no-15-autumn-2007). Microfinance Information Exchange, Inc.. .
[41] Muhammad Yunus and Karl Weber. Creating a World Without Poverty: Social Business and the Future of Capitalism. PublicAffairs, New
York, 2007
[42] "The illusion of poverty reduction" (http:/ / www. redpepper. org. uk/ the-illusion-of-poverty-reduction). Red Pepper magazine. 2010-09-01.
.
[43] Brigit Helms. Access for All: Building Inclusive Financial Systems. CGAP/World Bank, Washington, 2006, p. 97.
[44] Farooque Chowdhury. The metamorphosis of the micro-credit debtor (http:/ / www. newagebd. com/ 2007/ jun/ 24/ oped. html) New Age,
June 24, 2007.
[45] Businessweek, The Ugly Side of Microlending (http:/ / www. businessweek. com/ magazine/ content/ 07_52/ b4064038915009. htm)
[46] Mexican microlending bank surges in market debut (http:/ / www. reuters. com/ article/ newIssuesNews/ idUSN2025193920070420)
[47] CGAP, "Banco Compartamos: Interest Rates, Profits, and an Initial Public Offering" http:/ / www. cgap. org/ p/ site/ c/ template. rc/ 1. 26.
4905/
[48] Businessweek, "Online Extra: Yunus Blasts Compartamos" http:/ / www. businessweek. com/ magazine/ content/ 07_52/ b4064045920958.
htm
[49] ABCNews, SKS Launches India's First Microfinance IPO http:/ / abcnews. go. com/ Business/ wireStory?id=11270209
[50] http:/ / www. bbc. co. uk/ news/ world-south-asia-11997571
External links
• Microfinance (http://www.dmoz.org/Science/Social_Sciences/Economics/Development_Economics/
Microfinance//) at the Open Directory Project
Article Sources and Contributors 13
License
Creative Commons Attribution-Share Alike 3.0 Unported
http:/ / creativecommons. org/ licenses/ by-sa/ 3. 0/