Showing papers on "Microfinance published in 1999"

The microfinance promise

Abstract: In the past decade, microfinance programs have demonstrated that it is possible to lend to low-income households while maintaining high repayment rates--even without requiring collateral. The programs promise a revolution in approaches to alleviating poverty and spreading financial services, and millions of poor households are served globally. A growing body of economic theory demonstrates how new contractual forms offer a key to microfinance success--particularly the use of group-lending contracts with joint liability. For the most part, however, high repayment rates have not translated into profits, and studies of impacts on poverty yield a mixed picture. In describing emerging tensions, the paper highlights the diversity of innovative mechanisms beyond group-lending contracts, the measurement of financial sustainability, the estimation of economic and social impacts, the costs and benefits of subsidization, and the potential to reduce poverty through savings programs rather than just credit. The promise of microfinance has pushed far ahead of the evidence, and an agenda is put forward for addressing critical empirical gaps and sharpening the terms of policy discussion.

Does Microcredit Reach the Poor and Vulnerable? Evidence from Northern Bangladesh

Abstract: Subsidized loans have a history of being diverted to the rich. Yet recently microcredit programs, such as the Grameen Bank in Bangladesh, have become popular among donors and governments as a way to channel funds to the poor. This paper uses a unique panel dataset from two Bangladeshi villages to test if the modern microcredit movement is different from its predecessors. Poverty is measured by levels of consumption. Vulnerability is measured as fluctuations in consumption associated with inefficient risk sharing. We find that subsidized credit is largely successful at reaching the poor and vulnerable. The probability that a microcredit member is below the poverty line is substantially higher than that of a randomly picked household in both villages. In the village where female headed households were found to be vulnerable, nearly half of the female headed households belonged to microcredit programs yet only a quarter of male headed households were microcredit members. While restricting loans to the landless is not effective in reaching the poor and vulnerable, targeting female headed households is.

Where to Microfinance

Abstract: The microfinance industry is characterized by a "schism," or debate, between two camps that represent broadly different approaches to microfinance: the institutionists and the welfarists. How this debate is resolved has crucial implications for the future of microfinance--its guiding principles, its objectives, its clients, and its impact on the poor and poverty in general. The institutionist approach, with its emphasis on financial self-sufficiency and institutional scale, appears to have gained ascendancy over the welfarist approach, with its emphasis on direct poverty alleviation among the very poor. The institutionists, however, base their arguments on a number of debatable assertions and questionable empirical methodologies. This article critically examines some of these with the intent of placing institutionist claims in their proper perspective and tempering the hegemonic aspirations of some institutionist writers. It concludes by proposing a middle ground between the two approaches in the hope that it will lead to more productive dialogue between the two camps in the future. Introduction Like many popular grassroots movements, the microfinance movement is characterized both by widespread agreement on broad objectives and by multiple rifts on key issues. The movement itself is driven by the shared commitment to provide credit for small enterprise formation and growth. It is also bound together by a common rhetoric of concern for the poor. This unity of commitment and rhetoric, however, masks a bewildering variety of philosophical approaches, types of institutions and borrowers, and delivery systems that shelter uneasily together under the big tent called "microfinance." The movement has come to be divided by two broad approaches, or opposing camps, regarding the best way to help the poor through access to financial services: the institutionist approach and the welfarist approach.(1) Jonathan Morduch (1998d) refers to this division as the microfinance schism. The irony is that while the worldviews of each camp are not inherently incompatible, and in fact there are numerous microfinance institutions (MFIs) that appear to embrace them both, there nonetheless exists a large rift between the two camps that makes communication between them difficult. The institutionist approach focuses on creating financial institutions to serve clients who either are not served or are underserved by the formal financial system. Emphasis lies on achieving financial self-sufficiency; breadth of outreach (meaning numbers of clients) takes precedence over depth of outreach (meaning the levels of poverty reached); and positive client impacts are assumed. The center of attention is the institution, and institutional success is generally gauged by the institution's progress toward achieving financial self-sufficiency. The best-known examples of the institutionist approach are Bank Rakyat Indonesia (BRI) and Banco Solidario (BancoSol) in Bolivia. Institutionists argue that a primary objective of microfinance is financial deepening, the creation of a separate system of "sustainable" financial intermediation for the poor. Theirs is a "financial systems" approach to microfinance, in which the future of microfinance is dominated by numerous large-scale, profit-seeking financial institution that provide high quality financial services to large numbers of poor clients. Because of their insistence on financial self-sufficiency, institutionists eschew subsidies of any kind. The institutionist position is articulated in virtually all the literature coming out of the Ohio State University Rural Finance Program, the World Bank and the Consultative Group to Assist the Poorest (CGAP) in the World Bank, and USAID. It is also found in the many writings of Maria Otero (ACCION International) and Elisabeth Rhyne (formerly of USAID). Most published literature in the field of microfinance espouses the institutionist view. …

Migrant worker remittances, micro-finance and the informal economy : prospects and issues

Abstract: Reviews data on unrecorded remittance flows, identifies the determinants of remittance flows and analyses their uses. Explores policy measures to attract remittances and to influence their domestic uses, highlighting the role of microfinance in linking unrecorded remittances to development. Focuses on the Asia-Pacific region, Sudan and Egypt.

Women And Microcredit In Rural Bangladesh: An Anthropological Study Of Grameen Bank Lending

Abstract: As Rahman notes in his introduction, microcredit has become the "new paradigm for thinking about economic development" (p 1) Since the limits of welfare-oriented approaches are now well recognized, an ever-growing wave of microlending initiatives are cloning Bangladesh's Grameen Bank model in efforts to alleviate poverty and empower the "poor" Because of women's higher repayment rates and prioritization of expenditure on family welfare, many of these programs target women specifically, as a means for increasing project cost efficiency and for achieving more effective poverty alleviation Rahman's study of one of the Grameen Bank's oldest village projects is part of a recent literature critiquing the global consensus that microlending to the poor is the key to economic development in the 21st century Rahman challenges the unqualified success of Grameen Bank schemes based on quantitative survey studies to dispute claims that microcredit provides a cost-effective sustainable development model that improves peoples' quality of life Instead, he argues that microlending to women, particularly, systematically fails to reach the poorest, has a limited effect on increasing household income and treats the symptoms rather than the social causes of povertyFocusing on grassroots lending practices to women, Rahman critiques the Bank's hegemonic discourse of control that fosters a "Grameen Culture" through its Sixteen Decisions (code for proper behaviour) and through disciplining borrowers to consider prompt loan repayment their highest priority His analysis makes an important contribution to the recent debates about the effectiveness of microcredit delivery as he repeatedly demonstrates how Grameen Bank culture exists within the "larger structure of patriarchy that consequently retrenches partriarchal hegemony and reproduces new forms of domination over women in [Bangladesh] society" (p 51)Microcredit programmes extend financial services for self-employed livelihood projects to those who do not have access to the formal banking sector because they lack traditional forms of collateral (eg, capital, property) To acquaint the first-time reader on microcredit with the premise of such systems, Rahman begins with a thorough explanation of the operation and philosophy of the Grameen Bank since its inception in 1976 (augmented by two Appendices); and he reviews the major studies on Grameen lending His overview of the literature on women in development (WID) and gender and development (GAD) provides the context for his more detailed analysis of Bangladesh's gender and development projects since the early 1970s, particularly those of group-based institutional lending to womenRahman systematically analyzes (chapters 5-7) each of the major tenets of the Grameen Bank's operation within the theoretical framework of Scott's "hidden" and "public" transcripts Within this paradigm, he confronts the ongoing contradictions between ideology and practice in Grameen Bank culture He persuasively demonstrates the connection between the financial success of the Bank and the debt-cycling of borrowers The Grameen Bank's priority of achieving institutional financial sustainability through prompt and profitable returns to donors causes bank employees at the grassroots level to focus on increasing the number of loans disbursed and loan collection This resonates with the current critique of microcredit in which financial sustainability takes precedence over social change objectives, thus undermining the goals of empowering women By using the joint liability model of lending (eg, peer pressure), both bank workers and group members impose intense pressure on borrowers for timely loan repayments Many borrowers thus maintain their regular repayment schedules, but do so through a process of local recycling; that is, they pay off previous loans with new ones, often from local moneylenders charging high monthly interest rates, thereby increasing borrower debt liability …

Learning from failures in microfinance : What unsuccessful cases tell us about how group-based programs work

Abstract: Money, says the proverb, makes money. When you have got a little, it is often easy to get more. The great difficulty is to get that little. - Adam Smith(1) The success of microfinance programs as agents of poverty alleviation are well known to students of development.(2) Enthusiasts can point to repayment rates of over 95 percent, the high participation of women, associated improvements in the health and education of children, and the potential for programs to become financially sustainable in the long-term. In an era of domestic welfare reform and cutbacks to foreign aid budgets, microfinance programs continue to enjoy strong support across the political spectrum for their capacity to "help the poor help themselves" by "giving them a hand up, not a handout." As the recent Microcredit Summit in Washington clearly demonstrated, academics, politicians, activists, nongovernmental organizations (NGOs), and development agencies around the world now share not only a common concern about the importance of access to institutional credit in helping to overcome poverty, but a common vision for how best to deliver it to those four billion people currently overlooked by the formal banking sector (Sampson, 1989). This concern, and the resolve to do something about it, is to be commended and encouraged. Roughly 80 percent of the world's population are without access to credit and savings facilities beyond that provided by family members, friends, or money lenders, while in developing countries this number rises to over 90 percent (Robinson, 1995). Informal arrangements, such as rotating credit associations and tontines, provide some measure of short-term assistance but do not sufficiently diversify risk and are inadequate for larger-scale projects, while long-term indebtedness to local moneylenders can entrench rather than relieve poverty. Commercial bankers, on the other hand, ignore the poor because of the high costs associated with lending small amounts to borrowers about whom little can be discerned in terms of their creditworthiness. Since the poor, by definition, lack material assets and a formal education, they have little to offer by way of security against any loans that might be extended to them. The very act of negotiating formal contracts, moreover, let alone filling out application forms and preparing a financial plan, is alien to them. These features contribute to a massive failure in financial markets for the poor in developing countries (Stiglitz, 1989; 1990). For all the many positive developmental outcomes that doubtless can be attributed to participation in microfinance programs, there are nonetheless several methodological weaknesses in the literature documenting their impact and replication that should give pause to uncritical, wholesale endorsement. These weaknesses give rise to, among other things, the kinds of projections and expectations generated by the Microcredit Summit(3), while simultaneously distracting attention from the crucial issue of how the institutional and human resources are to be assembled to meet those projections and expectations. Of the many methodological flaws in the microfinance literature, among the most serious is the systematic failure by enthusiasts and scholars alike to control for factors other than program participation itself that may be responsible for the observed outcomes (i.e., selection bias issues): how do we know these results wouldn't have occurred anyway? to what extent are outcomes attributable to noncredit and/or nonprogram variables? does it matter that villages and borrowers are nonrandomly selected? While it is highly unlikely that more sophisticated studies will show the actual impacts to be minimal - indeed, the work of Pitt and Khandker (1998) and McKernan (1996) suggest the impacts are positive and significant when attempts are made to correct for selection bias - precise answers to these questions are crucial for documenting the true impact of microfinance programs, and for policy analysts weighing the merits of alternative approaches to poverty alleviation. …

Determinants of household access to and participation in formal and informal credit markets in malawi

Abstract: The paper uses the concept of credit limit to analyze the determinants of household access to and participation in informal and formal credit markets in Malawi. Households are found to be credit constrained, on average, both in the formal and informal sectors; they borrow, on average, less than half of any increase in their credit lines. Furthermore, they are not discouraged in their participation and borrowing decisions by further increases in the formal interest rate and/or the transaction costs associated with getting formal credit. This suggests that getting access to credit is much more important than its cost for these households. Hence, credit policies should focus on making access easier rather than providing credit with subsidized interest rates. The composition of household assets is found to be much more important as a determinant of household access to formal credit than the total value of household assets or landholding size. In particular, a higher share of land and livestock in the total value of household assets is negatively correlated with access to formal credit. However, land remains a significant determinant of access to informal credit. Therefore, poor households whose assets consist mostly of land and livestock but who want to diversify into nonfarm income generation activities may be constrained by lack of capital. As informal loans are usually too small to help poor households start a viable nonfarm business, these households may be forced to rely on farming as the sole source of income, despite its unreliability because of the frequency of drought in Malawi. Finally, formal and informal credit are found to be imperfect substitutes. In particular, formal credit, whenever available, reduces but does not completely eliminate informal borrowing. This suggests that the two forms of credit fulfill different functions in the household's intertemporal transfer of resources.

A framework for regulating microfinance institutions

Abstract: The continuum of institutions providing microfinance cannot develop fully without a regulatory environment conducive to their growth. Without such an environment, fragmentation and segmentation will continue to inhibit the institutional transformation of microfinance institutions. The authors recommend a tiered approach to external regulations, one that takes into account the different types of microfinance institutions, the products they offer, and the markets they service. A tiered approach can be useful in designing regulatory standards that recognize the basic differences in structure of capital, funding, and risks faced by different kinds of microfinance institutions. The model they develop for a regulatory framework identifies thresholds of financial intermediation activities, thresholds that trigger the requirement that an institution satisfy external or mandatory regulatory guidelines. It focuses on risk-taking activities that must be managed and regulated. They illustrate the usefulness of the model by practically applying prudential considerations to various categories and values of financial risk for each of three broad categories of microfinance institution: 1) Those that depend on other peoples' money (such as donor or public sector funding). 2) Those that depend on members' money. 3) Those that leverage the general public's money to fund microfinance loans. For each category, the model highlights: 1) The observed value ranges for selected indicators of financial risk. 2) Recommended ranges of value suitable for consideration under internal governance. 3) Suggested threshold values that indicate the need for external regulation. A transparent, inclusive framework for regulation will preserve the market specialties of different types of microfinance institutions - and will promote their ultimate integration into the formal financial system. One example of the kind of regulation the authors recommend: Require standard registration documents and procedures - no different from those required of regular corporations - including the designation of a central government agency with which they should register as corporate entities.

The Microcredit Summit's Challenge: Working Toward Institutional Financial Self-Sufficiency While Maintaining a Commitment to Serving the Poorest Families

Abstract: Institutional financial self-sufficiency (IFS) is necessary for a microfinance institution (MFI) to obtain the large amount of funds required to reach and benefit truly large numbers of the poor and poorest households. There is no necessary trade-off between serving large numbers of the poorest households and the attainment of IFS by an MFI, as proven by the case studies in this paper. Cost-effective identification of the poor and the poorest women is essential to maximizing the effectiveness and efficiency of providing microfinance services to them. If the service is not exclusively for the poor and the poorest, it should be operated separately for them to minimize leakage to the nonpoor. The total cost of efficient microcredit to the poor, i.e., the appropriate interest rate, will vary between 35% and 51% of their average loans outstanding, depending on the conditions under which it is provided, and on the quality of the loan portfolio. The poorest women in Asia, Africa, and Latin America are proving that they can and will pay the required cost of this opportunity to reduce their poverty and to provide a better future for their children. This is made possible by the impressive returns to their microenterprises, averaging normally more than 100%.

Measuring Transformation: Assessing and Improving the Impact of Microcredit

Abstract: The question of impact assessment is one that continues to plague microcredit practitioners. Some contend that existing impact assessment studies are meaningless, while others maintain they are absolutely necessary. The authors of this paper advocate a renewed focus on the transformation of clients and their communities, as well as a new impact assessment model to support and document this focus. They outline the key principles for conducting impact audits that include measurement of transformation among clients. They also review a series of practitioner-oriented impact assessment tools and outline future challenges for practitioners, donors, and academics in improving performance through impact assessment.

Social Finance Working Paper #21: Migrant worker remittances, micro-finance and the informal economy

Abstract: Reviews data on unrecorded remittance flows, identifies the determinants of remittance flows and analyses their uses. Explores policy measures to attract remittances and to influence their domestic uses, highlighting the role of microfinance in linking unrecorded remittances to development. Focuses on the Asia-Pacific region, Sudan and Egypt.

The impact of microfinance services - increasing income or reducing poverty?

Abstract: When examining the income impacts of Microfinance programmes, it is important to recognise that there is a significant difference between “increasing income” and “reducing poverty”. Despite the prevalent emphasis on raising incomes as the central objective of development programmes, the two are not synonymous. Clearly, the use to which income is put is as important in determining poverty and welfare as the level of income itself increased income can be (and often is) gambled away. It is also important to recognise that poverty is neither linear nor static, and that today’s not-so-poor may well be tomorrow’s poorest and vice versa. It is for this reason that the poor place so much emphasis on diversifying their sources of income it reduces their exposure to catastrophic income loss. Finally, in the context of the drive to create businesses that provide jobs, the differences between the quality of formal and informal sector employment must be noted. These differences also explain why, for many, having diversified sources of home-based income is preferable to depending on exploitative employment. It is clear that, given the right economic conditions, (reasonable levels of inflation, access to markets etc.), well designed Microfinance services can reduce poverty 2 . 1 Graham A.N. Wright is a Microfinance practitioner who worked for nearly a decade in Bangladesh, has just completed two years designing and implementing a rural finance system in the Philippines, and is now Senior Regional Microfinance Adviser for the UNDP/DfID MicroSave initiative. 2 All correspondence relating to this article should be addressed to:Graham A.N. Wright, MicroSave, c/o Centre for Microfinance, PO Box 24204, Kampala, Uganda. Email: presto@imul.com Tel. 256 41 347481-3 Fax. 256 41 347635 The Impact of Microfinance Services: Increasing Income or Reducing Poverty? Wright MicroSave Market-led solutions for financial services 2 Examining The Impact of Microfinance Services: Increasing Income or Reducing Poverty?

An application of Islamic banking principles to microfinance : technical note

Abstract: Many elements of microfinance could be considered consistent with the broader goals of Islamic banking. Both systems advocate entrepreneurship and risk sharing and believe that the poor should take part in such activities. At a very basic level, the disbursement of collateral-free loans in certain instances is an example of how Islamic banking and microfinance share common aims. Thus Islamic banking and microcredit programs may complement one another in both ideological and practical terms. This close relationship would not only provide obvious benefits for poor entrepreneurs who would otherwise be left out of credit markets, but investing in microenterprises would also give investors in Islamic banks an opportunity to diversify and earn solid returns.

Are Grameen Replications Sustainable, and Do They Reach the Poor?: The Case of CARD Rural Bank in the Philippines

Abstract: The Grameen Bank in Bangladesh is known worldwide for its success in providing credit to the poor. However, subsequent replications of its methodology in other parts of the world have been less successful. Is there really an infallible solution that works everywhere, and is outreach to the poor compatible with sustainability? A Grameen replicator in the Philippines, the Center for Agriculture and Rural Development (CARD), has recently set itself firmly on the path to sustainability by becoming a formal sector, rural bank"€”the first credit NGO in the country to do so. During the period, from 1993 to June 1999, CARD's all-female outreach soared from 1,711 to 26,369. Its operational self-sufficiency ratio increased from 0.46 to 1.09. At the end of June 1999, CARD's loan portfolio stood at US$2.7 million, its repayment rate was 99.9%, and its financial self-sufficiency ratio was 0.85. The principal lesson to be learned from the CARD's success is that Grameen-type microfinance institutions (MFIs) can be sustainable and can substantially increase their outreach. CARD's social capital comprises (a) a core of good Grameen practices, such as high moral commitment on the part of the leaders, based on values instilled through training, peer control, to preclude adverse selection and moral hazard, and a strict credit discipline, (b) innovative adaptations to suit the Philippine context, such as the adoption of rural bank status under central bank supervision, vigorous mobilization of voluntary savings, the provision of differentiated, profit-making loan and insurance products; and a broadening of the clientele to include poor and nonpoor depositors, while adhering to its mission of lending to poor women only.

Microfinance and poverty reduction - evidence from Latin America

Abstract: Are all entrepreneurs poor? Do all entrepreneurs see a lack of credit as their main constraint? Is poverty reduction the main objective of all microfinance institutions? Does lending methodology affect outreach? Can financially sustainable microfinance institutions (MFIs) reach the poorest of the poor? Do MFIs only reach petty traders? Do MFIs reach poor and remote areas? This article is structured around a discussion of common beliefs and assumptions regarding poor people and microfinance programmes. It reveals that many microentrepreneurs in Latin America are not poor, and many microfinance institutions lend mainly to non-poor clients. The microfinance industry consists of various market niches, with different services and varied objectives, and this diversity is necessary for achieving poverty reduction overall.

Microfinance, wage employment and housework: A gender analysis

Abstract: Microfinance programmes are increasingly popular in Bangladesh, and are especially renowned for the excellent repayment performance of women borrowers. This article examines the loan-use pattern of women involved in wage employment and the benefits they gain from such loans. It also explores the effects of wage employment on gender relations. Women wage-earners are found to value paid work more than they value credit. It is thus argued that more employment opportunities should be created for women as these would help to promote economic and social empowerment.

Microcredit: An Institutional Development Opportunity

Abstract: The development of microcredit programs provides an opportunity to strengthen local institutions. Research has focused on the design and management of microcredit programs without enough attention to the institutional environment in which microcredit programs operate. Theory offers a framework for understanding the importance of linkages between microcredit programs and local institutions. These linkages lead to sustainability. Broadly defined, sustainability refers to a net positive flow of benefits to the local community. Microcredit programs embedded in local institutions have the best hope of becoming sustainable. Introduction Microcredit programs provide an opportunity to build sustainable local institutions. While much has been written about the design of microcredit programs and their impact on people's lives, little has been done to place the role of microcredit in an institutional perspective. But there is a body of institutional development theory that can be applied to microcredit (Leonard, 1982; Uphoff, 1986; Esman and Uphoff, 1988; Cernea, 1993; Ostrom, 1993; Howes, 1997). Two theorists, Elinor Ostrom and Norman Uphoff, among others, have contributed substantially to what we know about the role of institutions in effective economic development. Drawing from both economic theory and practical experience, these writers established development policy frameworks useful in designing programs to help the poor. Uphoff examines the advantages of various institutional arrangements in the design of development programs, while Ostrom uses economic concepts to explain the benefits of developing local institutions. While much of the theory has evolved from the study of developing countries, lessons learned apply to microcredit programs in the United States as well. The conventional wisdom holds that programs to help the poor should be sustainable. But achieving sustainability is a particularly difficult problem in crafting economic development strategies. Microcredit programs can only evolve into sustainable institutions if they are linked, or partnered with local institutions: churches, postsecondary schools, local governments, credit unions, banks, established nonprofit organizations, service organizations, and job training programs. Microcredit programs operating without linkages to local institutions are less likely to be sustainable. Just how "sustainability" is to be defined is a knotty problem. Broadly defined, sustainability is in direct opposition to quick fix or ad hoc options addressing a particular problem for a short period of time. All too often, quick fix solutions end up embedded in the lengthy catalog of government programs. Most of us have a pretty good idea of what sustainability is not. Sustainability is not achieved if programs do not meet the needs of the people that they are designed to help. Programs are not sustainable if their costs cannot be met over a long period of time. Without a commitment to maintaining, evaluating, and improving programs, sustainability cannot be achieved. Sustainable programs are well-designed, in terms of operations and institutional relationships, and allowed sufficient time to demonstrate a positive effect. A great deal of research has focused on the design of microcredit programs. The size of the loan, the interest rate, the term, the use of peer group v. individual loans, to name the most prominent issues, occupy a sizeable portion of the literature (Snow and Buss, Forthcoming). The relationship of microcredit programs to existing institutions as an important variable in achieving sustainability has been neglected. Sustainable Microcredit Microcredit programs become sustainable institutions when net benefits to the community exceed total costs. Benefits accrue to the community when new businesses are successful and incomes increase. Microcredit fills a niche that banks do not always fill. …

Defying the Odds: Banking for the Poor

Abstract: This book sets itself apart from other microfinance literature by focusing on the context of social and economic change in developing countries and claiming poverty is not created by the poor. The book's focus on grassroots developmental entrepreneurship and alternative poverty-reduction strategies is of interest to policymakers. Students will learn how microfinance has grown worldwide and become central to socially-oriented and sustainable development.

The Effect of Nonagricultural Self-Employment Credit on Contractual Relations and Employment in Agriculture: The Case of Microcredit Programs in Bangladesh

Abstract: Microfinance provides an alternative source of finance to the poor and women, who, if without access to formal banks, have access to a variety of informal lenders. As microfinance is relatively cheaper than informal finance, access to microfinance is expected to reduce household borrowing from informal sources. Microfinance is also expected to increase household savings by providing an alternative facility for savings mobilization from the poor. An econometric analysis of household survey data from Bangladesh shows that micro-borrowing has indeed reduced borrowing from informal sources, thereby demonstrating microfinance as an effective alternative source of finance to the poor. Micro-borrowing is also found to increase voluntary savings, thus assuring that an appropriate facility can raise household savings even in a poor country such as Bangladesh. Of course, impacts of microfinance vary by the gender of borrowers. The savings impact of micro-borrowing is more pronounced for women than for men. In contrast, the informal finance impact is more pronounced for men than for women.

Searching for sustainable microfinance : a review of five Indonesian initiatives

Abstract: Expanding the microfinance market can promote economic growth and reduce poverty in many countries. But expanding this market is advantageous only if the increased activity is sustainable. The author draws lessons from five Indonesian microfinance initiatives in rural areas and proposes ways for governments and donors to support the microfinance sector. Those programs demonstrate that microfinance initiatives can provide a valuable service to low-income people at a temporary, affordable cost to governments of donors. Incentives for customers and staff are key features of successful microfinance operations that enable them to operate with low subsidies or on a self-sustaining basis. Programs should also charge adequate real interest rates, aggressively pursue repayment, and achieve a significant volume of business. To accelerate progress toward self-sustainability, programs can track the subsidies they receive, and their supporters can impose hard budget constraints and declining subvention support. Government-owned microfinance initiatives are vulnerable to political pressures that undermine their commitment to sound banking practices. Granting these institutions autonomous status, imposing hard budget constraints, and privatizing them when they are financially sustainable, can reduce their susceptibility to political influences. Alternatively, governments and donors could support the sector through temporary subsidies to private sector initiatives to help them defray start-up costs. Supervision can be improved if a country's microfinance industry, assisted by its central bank, establishes industrywide standards. Microfinance institutions could contract for supervision services from commercial banks. The central bank could monitor supervisors to ensure that they exercise due diligence. This study finds that institutions can efficiently reach clients in remote areas through subdistrict-based units and field staff. They need not rely on group lending techniques, savings requirements, or intermediary organizations between banks and borrowers to boost efficiency. Initiatives can serve female borrowers without targeted marketing if loan products meet women's needs and are accessible to them. Governments could increase the usefulness of microfinance to agriculture by encouraging state-owned microfinance institutions to develop and pilot-test loan products that meet smallholders' needs.

Globalization and gender - dilemmas for microfinance organizations

Abstract: The microfinance industry is itself becoming a global phenomenon. The proliferation of microfinance programmes - and in particular of a single loan product - has been accelerated by a global publicity campaign, the MicroCredit Summit. Women were to be targeted, but it is clear that women do not always benefit from credit for microenterprise. This article examines the circumstances of women microentrepreneurs - and finds that some of them are powerless home workers. It also examines the financial products aimed at them - and calls for more products, such as savings accounts, money transfers, or loans for domestic equipment. Also, as microfinance organizations (MFOs) develop and as the sector moves to embrace mainstream financial institutions, it is increasingly difficult to ignore the role of international capital markets. There is a need for 'patient capital' which will be rooted in and respond to local concerns. Financial services should be delivered as effectively and efficiently as possible, but subsid...

Leasing to support small businesses and microenterprises

Abstract: In most developing countries, capital markets are relatively undeveloped and banks are often unable or unwilling to undertake term lending. And banks prefer to lend to larger, established business with well-developed balance sheets and credit histories. Operations in microenterprises and small businesses are cash-flow-oriented but rarely have organized historical financial records or the assets needed for collateral for conventional bank financing. The author explores the potential of leasing as an option to expand small businesses' access to medium-term financing for capital equipment and new technology. In a lease-financing contract, the lessor-financier retains ownership of the asset, lease payments can be tailored to fit the cash-flow generation patterns of the lessee-borrower's business, and the security deposit is smaller than the equity stake required in conventional bank financing. Different types of small businesses require different financial services. It would be worthwhile to encourage development of a range of institutions using special methods to service particular market niches. Most small businesses that generate extra income for a household or employ nonfamily members need simple access to financing to augment their working capital needs. Microfinance appropriate to their needs will feature short cycles of repayment and borrowing. Other small businesses require medium-term financing to acquire the tools and equipment needed to support production growth and expansion. For these businesses, leasing is an attractive new financing option. The author examines and compares the Bank's experience: 1) Lease financing was used to promote the development of small businesses in Pakistan, as part of a microenterprise development loan project. 2) For a Bank-supported alternative-energy project in Indonesia, a variant of lease financing -- the hire-purchase contract -- is being used in marketing and distribution by private distributors of photovoltaic solar home systems. 3) Lease financing was used by Grameen Trust in Bangladesh to finance the purchase of small tools and equipment and in other countries to promote the growth of alternative energy systems.

An Assessment of Clients of Microfinance Programs in Uganda

Abstract: This paper looks at three microfinance programs in Uganda, representing best practices, to determine how they impacted households and entrepreneurs, particularly in reducing poverty and empowering borrowers. Evaluation results showed the programs positively and significantly improved the quality of life of participants, both economically and socially. Introduction Microenterprises are a vibrant part of the Ugandan economy, providing a wide range of goods and services. In 1995 an estimated 22% of all households were engaged in some kind of business activity (Impact Associates, 1995). These households were usually micro in scale and home-based. Twenty-nine percent of the working age population in 1995 were estimated to be employed in micro and small enterprises. These statistics underscore the prevalence of microenterprises, but mask the importance of microenterprises as a vital source of income for the urban and rural poor. Microenterprise business activities are often the major source of household revenue. These poor microentrepreneurs, especially women, have had limited access to financial services offered by the commercial banks (Duval, 1991; Morris et al., 1995; Mugyenyi, 1992). Widespread recognition of this lower accessibility to formal credit has led to recent endeavors to target the poor, especially women entrepreneurs, through development programs that provide financial services. In addition to the provision of credit, these programs also facilitate the establishment of savings accounts. Thus, these semi-formal financial institutions provide low-income clients (particularly women) with financial services not previously provided by commercial banks. Since the mid-1990s, as part of its strategy to alleviate bottlenecks to private sector development, USAID/Uganda has provided financial and technical support to a number of organizations providing microfinance services for poor microentrepreneurs. These organizations vary in terms of target clientele, maximum size of loans, program strategies, geographic coverage, size of the loan portfolio, and financial security. The objective of the Uganda assessment is to provide data on the impact of USAID-supported microfinance programs on clients, their households and enterprises. The assessment will also provide information on the linkages between microentrepreneurs and the agricultural sector. It should be noted that no attempt is being made to distinguish between use of USAID funds and other funds, as these microfinance programs are normally financed through a mix of sources and funds tend to be fungible. Do programs providing microfinance services make a positive difference in the lives of microentrepreneurs, their households, and enterprises? This problem statement can be framed as a series of questions. What is the nature, extent, and distribution of these impacts? Have microfinance programs helped to reduce proverty in the households of microentrepreneurs? Has support to microentrepreneurs in urban areas increased the flow of transfers and remittances to rural areas? Have programs helped microentrepreneurs, particularly women, to gain more control over the income they generate? The baseline assessment answers the above questions also and an ancillary, but important, question: What are the linkages between microfinance program clients and the agricultural sector? Three microfinance organizations which follow what are considered to be "best practices" were selected for inclusion in this study: FOCCAS (Foundation for Credit and Community Assistance), FINCA (Foundation for International Community Assistance) and PRIDE (Promotion of Rural Initiatives and Development Enterprises) Uganda. The three districts covered by the assessment were purposively selected to provide a range of socioeconomic contexts, since geographic location can influence the impact of a program. The locations selected were: Kampala, a vibrant metropolitan capital center; Masaka, a small urban center in southern Uganda, and rural Mbale, a highly populated, good farming area in the east near the Keyan border. …

Policy and regulation for sustainable microfinance: country experiences in Asia

Abstract: This article considers the policy and regulatory environment for microfinance in Asia. It identifies eleven criteria for ‘good practice’ in policy and regulation, covering the policies of governments and donor agencies to support microfinance; the regulation of non-bank microfinance institutions; and the regulation of banks. It then grades the performance of nine countries in Asia. It concludes that there is scope for improvement in all nine countries. Overall, Philippines and Bangladesh have the policy and regulatory environments that are most conducive to sustainable microfinance, while Pakistan has the one that is least conducive. However, different countries have strengths in different areas, and no country is strong in all areas. Copyright © 1999 John Wiley & Sons, Ltd.

Reputational Risk and impact assessment of Corporate Social Responsibility on Profitability and Growth of Manufacturing Companies in Nigeria

Abstract: This issue of the International Journal of Economic Development is a special symposium on microcredit programs in developing, developed and transitional economies. This introductory paper reviews current issues debated among advocates, critics and policy-makers in the microcredit field and weaves in symposium papers as examples for more detailed study. Even though the symposium covers much material, it cannot do justice to this rich field of endeavor. Introduction Poor people, especially women, could contribute to wealth creation of nations and improve their own quality of life if they could start, maintain or grow a small business. When poor people do not participate in self-employment or seek to employ others, economies waste human capital and governments incur great expense in supporting poor, dependent populations. But poor people often lack capacity necessary to become economically independent and they cannot fully access societal resources to help in attaining this goal. Poor people are often under-educated, inexperienced in business, in poor health, saddled with large families they can barely care for, isolated in rural villages or urban ghettos, or discriminated against because of race, religion, ethnicity or gender. Poor people lack access to capital necessary to drive existing or potential businesses, for want either of personal assets or collateral, or of financing from friends, family or acquaintances willing to invest. As such, credit from banks or other formal financial institutions, the engine of economic growth in every country, eludes poor people, holding them down. Microcredit programs offer loans and/or technical assistance in business development to poor people. Generally, programs have one or more of three goals: (1) improvement of self-sufficiency and welfare of poor entrepreneurs, (2) development of stable sources of income and full-time employment, and (3) expansion of microenterprises to a larger firms (OECD, 1996). Recent microcredit programs owe their development to dissatisfaction with earlier methods of aiding poor populations in developing countries. These were often large infrastructure or public works projects that frequently failed to meet poor people's needs (Cassen, 1993). Microcredit programs of all stripes have exploded in popularity in the 1990s, although they have been in existence since the 1960s. Adams and Von Pischke (1994) note, however, that microcredit programs of today are based on exactly the same rationale as failed programs to help small farmers in the past. In the United States, more than 200 microcredit programs exist, offering targeted groups loans from $200 to $25,000, occasionally more (Sevron, 1997; Edgcomb, Klein and Clark, 1996; Shorebank Advisory Services, 1992; Himes and Servon, 1998). Cumulatively through 1996, U.S. microcredit programs served 200,000 people in 54,000 businesses with loans over $44 million (Edgcomb, Klein and Clark, 1996). Hillary Clinton recently drew national attention to the need for such programs through speeches and news conferences. The U.S. Small Business Administration added microcredit to its portfolio of finance and technical assistance programs for small business. Community Development Agencies (CDCs) have broadened their activities to include microcredit. The U.S. Department of Treasury provides incentives for financial institutions to invest in microenterprise in its Community Development Financial Institution (CDFI) initiative. Banks, feeling pressure from federal legislation--Community Reinvestment Act--requiring them to invest more capital in poor neighborhoods and sensing some untapped market opportunities in microcredit, often fund programs. Charles Mott Foundation and Ford Foundation began to fund microcredit programs, evaluate them, and publicize their successes and best practices (Shorebank Advisory Services, 1992; Community Economics Corporation, 1993; see also, Economic Opportunities Program, 1997). …

Microfinance and the Mechanics of Solidarity Lending: Improving Access to Credit through Innovations in Contract Structures

Abstract: One of the most intractable economic problems for poor countries has been the high price or outright unavailability of credit in rural communities. One of the few concepts that have succeeded in expanding the availability of credit has been "microfinance," a practice that involves the provision of small loans (generally of a few hundred dollars or so) to borrowers without conventional collateral. The success of microlending has been especially striking because its benefits have accrued primarily to groups ignored by traditional development assistance--the poorest segments of poor countries' populations--and to women in particular. This paper explains how a large part of microfinance institutions' success can be traced to their practice of bundling loans together through a system known as "solidarity lending." Under this system, would-be borrowers form groups (usually of between three and six), within which each member agrees to guarantee the loans of the others in the group. If any one individual member defaults on his or her loan, the other members of the group are required to cover the shortfall. This paper reviews insights of the informational economics literature that explain the link between information asymmetries and credit market failure, and then shows why solidarity lending dramatically decreases the costs of information, particularly where institutional infrastructure is weak and borrowers' projects are small. Microfinance has revolutionized the way in which credit is provided to the rural poor; this paper explains why it has succeeded.