Microfinance

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Microfinance refers to the provision of financial services to poor or low-income clients, including consumers and the self-employed. The term also refers to the practice of sustainably delivering those services. Microcredit (or loans to poor microenterprises) should not be confused with microfinance, which addresses a full range of banking needs for poor people.

More broadly, it refers to a movement that envisions “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.” Those who promote microfinance generally believe that such access will help poor people out of poverty.

The Challenge

Traditionally, banks have not provided financial services to clients with little or no cash income. Banks must incur substantial costs to manage a client account, regardless of how small the sums of money involved. For example, the total 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. But the fixed cost of processing loans -- of any size -- is considerable: assessment of potential borrowers, their repayment prospects and security; administration of outstanding loans, collecting from delinquent borrowers and so on. 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 it.

In addition, most poor people have few assets that can be secured by a bank as collateral. Even if they happen to own land in the developing world, they may not have effective title to it This means that the bank will have little recourse against defaulting borrowers.

Seen from a broader perspective, it has long been accepted that the development of a healthy national financial system is an important goal and catalyst for the broader goal of national economic development However, the efforts of national planners and experts to develop financial services for their nations' majorities have often failed since World War II, for reasons summarized well by Adams, Graham & Von Pischke in their classic analysis 'Undermining Rural Development with Cheap Credit'.

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 fourteen countries in Asia, Latin America and Africa concluded that 76% of moneylender rates exceed 10% per month, including 22% that exceed 100% per month. Moneylenders usually charge higher rates to poorer borrowers than to less poor ones. 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 very active.

Over the past centuries practical visionaries from the Franciscan monks who founded the community-oriented pawnshops of the fifteenth century, to the founders of the European credit union movement in the nineteenth 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 livelihood opportunities and risk management tools that financial services provide to the doorsteps of poor people. While the success of Grameen Bank (which now serves over seven million poor Bangladeshi women) has inspired the world, it has proved difficult to replicate this success in practice. In nations with lower population densities, meeting the operating costs of a retail branch by serving nearby customers has proven considerably more challenging.

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 $25B currently at work in microfinance loans. It is estimated that the industry needs $250 billion to get capital to all the poor people who need it. The industry has been growing rapidly and there have been concerns that the rate of capital flowing into microfinance is a potential risk unless managed well.[1][2]

Bibliography

Following is a selected 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.
  • 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.

Notes

  1. Ledgerwood, Joanna. Microfinance Handbook: an Institutional and Financial Perspective. Washington DC: The World Bank, 2000. 1.
  2. See for example the official position of the sector's trade association. Consultative Group to Assist the Poor. Savings Services Are As Important As Credit: Deposit Services for the Poor. CGAP Donor Brief #4, June, 2002.
  3. 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.
  4. Hernando de Soto. The Other Path: The Invisible Revolution in the Third World. Harper & Row Publishers, New York, 1989, p. 162.
  5. Adams, Dale W., Douglas H. Graham & J. D. Von Pischke (eds.). Undermining Rural Development with Cheap Credit. Westview Press, Boulder & London, 1984.
  6. Marguerite Robinson. The Microfinance Revolution: Sustainable Finance for the Poor World Bank, Washington, 2001, pp. 199-215.
  7. Helms, Brigit (2006). Access for All: Building Inclusive Financial Systems. Washington, D.C.: The World Bank. ISBN 0821363603.
  8. Microfinance: An emerging investment opportunity. Deutsche Bank Dec 2007
  9. https://www.citigroup.com/citigroup/microfinance/data/news080303b.pdf
  10. Helms (2006), p. xi
  11. Helms (2006), p. xii
  12. Robert Peck Christen. What microenterprise credit programs can learn the moneylenders, Accion International, 1989
  13. See for example Adrian Gonzalez & Richard Rosenberg. The state of microfinance: outreach, profitability and poverty, Consultative Group to Assist the Poor, 2006.
  14. The Microfinance Information Exchange. MicroBanking Bulletin Issue #15, Autumn, 2007, pp. 46,49
  15. McKenzie, David (2008-10-17). "Comments Made at IPA/FAI Microfinance Conference Oct. 17 2008". Philanthropy Action. https://www.philanthropyaction.com/nc/what_is_it_about_women/. Retrieved on 2008-10-17.
  16. See for example Cheryl Frankiewicz Calmeadow Metrofund: a Canadian experiment in sustainable microfinance, Calmeadow Foundation, 2001.
  17. Stuart Rutherford. The Poor and Their Money. Oxford University Press, New Delhi, 2000, p. 4. isbn =019565790X
  18. Khandker, Shahidur R. Fighting Poverty with Microcredit, Bangladesh edition, The University Press Ltd, Dhaka, 1999, p. 78.
  19. Graham A.N. Wright and Leonard Mutesasira. The relative risks to the savings of poor people, Micro-Save Africa, January, 2001.
  20. 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.
  21. Christen, Rosenberg & Jayadeva. Financial institutions with a double-bottom line, pp. 5-6

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