Sunday, October 18, 2009

WHY does commercial microfinance work?

Poor people around the world produce very high marginal returns on capital, and need financial services to exploit these opportunities.
The high cost of capital in the developing world (20-100% APR), the high demand for credit, and the low cost of labor, make transaction-intensive microfinance quite profitable if done right. Moreover, due to the low delinquency and default rates on micro-loans, the (elite few) high-performing microlenders’ earnings are stable and strong (ROA of 3-8%). There are numerous other factors that also make the industry attractive, including low systematic risk, low volatility, and strong diversification of micro-loan portfolios (Source: Blue Orchard). Of course, there are many significant risks as demonstrated by the fact that only 3% of microlenders around the world actually turn a profit.

Thursday, October 15, 2009

Grameen Bank- A Role Model in Microfinance

Yet another monsoon season was approaching; but Joshuna Begum (Begum) unlike her neighbours was not worried about her house getting damaged during the monsoon. Her house now had a tin roof, mud walls and wooden windows, a luxury in rural Bangladesh. Earlier, Begum’s house had a straw roof and bamboo walls, which used to get damaged in the monsoon season, forcing the whole family to live in the kitchen. She got her hut repaired with a loan from the Bangladesh Grameen4 Bank (Grameen Bank).

Begum wasn’t the only one; there were thousands of people in rural Bangladesh who had improved their living conditions with the help of the microfinance programs of Grameen Bank, a pioneer in microfinance (Refer Exhibit I for more about microfinance). Grameen Bank helped thousands of poor Bangladeshi women to improve their lives by extending loans to them to start. their own enterprises. By 2003, it was reported that between 33-48% of Grameen Bank borrowers had moved above the poverty line5. By 2003, with 1,170 branches across Bangladesh, Grameen Bank was seen as a role model for microfinance all over the world.


The Grameen Bank model was replicated across the world -- not only in developing countries like India, Pakistan, and Vietnam, but even in developed countries such as Australia and the USA, where similar schemes were set up to improve the lives of the urban poor (Refer Exhibit II).

An effective poverty reduction strategy

Microfinance is often considered one of the most effective and flexible strategies in the fight against global poverty. It is sustainable and can be implemented on the massive scale necessary to respond to the urgent needs of those living on less than $1 a day, the World’s poorest.

Microfinance consists of making small loans, usually less than $200, to individuals, usually women, to establish or expand a small, self-sustaining business. For example, a woman may borrow $50 to buy chickens so she can sell eggs. As the chickens multiply, she will have more eggs to sell. Soon she can sell the chicks. Each expansion pulls her further from the devastation of poverty.

Microfinance, the Grameen way, includes several support systems that contribute greatly to its success. Microfinance institutions offer business advice and counseling, while clients provide peer support for each other through solidarity circles. For example, if a client falls ill, her circle helps with her business until she is well. If a client gets discouraged, the support group pulls her through. This contributes substantially to the extremely high repayment rate of loans made to microfinance entrepreneurs.

An equally important part of microfinance is the recycling of funds. As loans are repaid, usually in six months to a year, they are re-loaned. This continual reinvestment multiplies the impact of each dollar loaned.

Microfinance has a positive impact far beyond the individual client. The vast majority of the loans go to women because studies have shown that women are more likely to reinvest their earnings in the business and in their families. As families cross the poverty line and micro-businesses expand, their communities benefit. Jobs are created, knowledge is shared, civic participation increases, and women are recognized as valuable members of their families and communities.

Thursday, October 8, 2009

A Sustainable Microfinance Model

ASA –SUSTAINABILITY

ASA has been widely recognized one of the world's largest sustainable, cost-effective and fully grants free Micro Finance Institutions (MFI).

Over the last 16 years, ASA has achieved highest Operational Self Sufficiency (OSS) and Financial Self Sufficiency (FSS) within a short period of time.

ASA cost effective model also proven itself in different countries in Asia and Africa. ASA branches have proved its capacity to reach a break even point within a year.

ASA has maintained high self sufficiency from the beginning of operations and it continue to date.



ASA has been rated to have the highest OSS and FSS compare with Global MFIs and Asian Largest FIs.

How does ASA achieve these numbers?

By having:

* Lean structure
* Faster recruitment and costless informal training
* Simplification and Standardization
* Less over head cost and standard costs structure
* Maximum utilizations of fund
* Guided operation based on Manual
* Cost control steps
* Innovative management

Highest productivity and portfolio quality (data as of June 2008)


Highest productivity and portfolio quality (data as of June 2008)
# Indicators Results
1 Staffs ratio: head office versus / field
(total staffs 27142 and head office 257 only ) 1:106
2 Rate of recovery 99.48%
3 Portfolio at risk > 30 days 5.17%
4 Portfolio in arrears 2.90%
5 Cost per money lent 0.046
6 Cost per loan made $5.80
7 Loan loss ratio 0.20%
8 Reserve ratio 2.97%
9 Average clients per loan officer 461
10 Average borrower per staff 206
11 Average member per branch 2,146
12 Average outstanding loan per Loan Officer $31,382
13 Operational Self-Sustainability 179.14%
14 Financial Self-Sustainability 122.41%


How does an ASA Branch break-even so quickly?
ASA’s microfinance model, known as the 'ASA Sustainable and Cost-effective Microfinance Model' is different from other models and has already been proven as one of the best in the world.

This model is simple as well as cost-effective. This cost effective method, from Branch Office to the Central Office ensures ASA’s dedication towards its mission for reducing poverty.

Each Branch is managed by a Branch Manager (BM), One Assistant Branch Manager (ABM), 4 Loan Officers (LO) and a Peon who are responsible to conduct all activities of the branch smoothly.

On an average a mature ASA branch caters to around 2,000 group members and every new branch demands Bangladeshi Taka 6 (six) million (USD 88,000) to start its activities.

Once a branch starts operations, it takes (9-12) months for it to break even and become self-sustainable:

The key assumptions in this model are:

* there are 4 Loan Officers per branch, each with a 500 client target achieving a total of 2,000 clients within a year for the branch
* each client receives BDT 10,000 (USD 147) as their initial loan
* Loan loss Provisioning is at 0.5%
* Service Charge (interest rate) is 12.5% flat, calculated for a 45 installment loan spread over 12 months
* each member deposits BDT 20 per week as savings and pays BDT 20 as membership fees when joining ASA

Friday, October 2, 2009

Microinsurance Overview

Few poor households have access to formal insurance that protects against risks such as the death of a family breadwinner, severe or chronic illness, or loss of an asset including livestock and housing. These shocks are particularly damaging for poor households that are more vulnerable and less able to absorb the financial consequences of such an event.

Definitions of microinsurance vary in their emphasis on process, product characteristics, price and the target population. The Churchill definition (2006) states microinsurance is “the protection of low-income people against specific perils in exchange for regular monetary payments (premiums) proportionate to the likelihood and cost of the risk involved.” As with all insurance, risk pooling under microinsurance attempts to allow many individuals or groups to pool risks and redistribute the costs of the risky events within the pool.

Although life microinsurance products are becoming increasingly available, microinsurance is a new field and still in the experimental stage. As MFIs expand beyond credit to a broader array of financial products, there is increasing interest to offer their clients access to microinsurance products in partnership with insurance companies. While commercial insurers provide the majority of the world’s products, mutual, cooperative and other community-based or community-led insurance organizations are emerging as providers of microinsurance. The greatest challenge for microinsurance schemes is providing real-value for poor households: finding the right balance between adequate protection and affordability.

Wednesday, September 30, 2009

Management Weakness is the Greatest Risk Facing Microfinance, Says New 'Banana Skins' Survey

The current flood of investment into the microfinance industry could overwhelm those microfinance institutions (MFIs) that are not equipped to meet the pressures of rapid growth and rising competition. The high expectations that people have of microfinance both as a social movement and a financial investment could be disappointed as a result, says a new survey of the risks facing the industry.

Microfinance Banana Skins 2008, published at a time when the sector is undergoing dramatic changes, reveals strong doubts among microfinance practitioners, investors and observers about the ability of many MFIs to adapt to new demands while still retaining their social objectives. Current levels of management experience and financial skills are seen as a challenge for the industry, though these deficiencies are not universal, and are being addressed in many parts of the world.

The Banana Skins report reflects the views of more than 300 respondents from 74 countries, and is the most comprehensive survey undertaken of the risk outlook for microfinance. The survey focuses on MFIs with more than US$5m in assets which are profitable and capable of commercial growth. These number about 350 and account for the bulk of microfinance assets globally.

The survey was sponsored by Citi Foundation and CGAP (the Consultative Group to Assist the Poor) with support from the Council of Microfinance Equity Funds (CMEF) and the Microfinance Information eXchange (MIX).

"The views of the field come together in this report to highlight the most urgent need facing the industry," said Xavier Reille of CGAP. "And that is the need to strengthen institutions at the local level -- management, boards, as well as government regulation."


Microfinance Banana Skins
2008
Biggest risks Fastest risers
1 Management quality 1 Competition
2 Corporate governance 2 Staffing
3 Inappropriate regulation 3 Political interference
4 Cost control 4 Too much funding
5 Staffing 5 Credit risk
6 Interest rates 6 Strategy
7 Competition 7 Mission drift
8 Managing technology 8 Ownership
9 Political interference 9 Interest rates
10 Credit risk 10 Unrealisable expectations
11 Transparency 11 Reputation
12 Foreign exchange 12 Corporate governance
13 Unrealisable expectations 13 Managing technology
14 Mission drift 14 Fraud
15 Fraud 15 Natural catastrophes
16 Strategy 16 Cost control
17 Ownership 17 Management quality
18 Back office operations 18 Foreign exchange
19 Reputation 19 Product development
20 Liquidity 20 Profitability
21 Too much funding 21 Inappropriate regulation
22 Profitability 22 Distribution channels
23 Macro-economic trends 23 Liquidity
24 Product development 24 Macro-economic trends
25 Capital availability 25 Back office operations
26 Distribution channels 26 Transparency
27 Natural catastrophes 27 Refinancing
28 Refinancing 28 Capital availability
29 Too little funding 29 Too little funding

"Risks can only be understood with hindsight," said Philip Brown, Risk Director of Citi-Microfinance. "By pooling the different views of hundreds of sector participants, this report offers a broad overview of sector risk issues. We hope that it will inject a dose of realism by heightening awareness of current risks, raise debate and provide a view out of the windscreen of the perceived risks on the road ahead."

Of the 29 risks -- or "Banana Skins" -- identified by the survey, many of the top ones are linked to factors directly under MFIs' own control, such as the quality of management and corporate governance, rising costs, staffing, managing technology, and credit risk.

The main risks in the operating environment are bad regulation and political interference, though market risks such as interest rates and foreign exchange are growing as MFIs become more integrated with mainstream markets.

The fastest rising risk is identified as the growth of competition, driven by the appeal of microfinance to outside investors and commercial banks. Competitive pressures are seen to be undermining standards, cutting into profitability and aggravating staffing problems, though they are also spurring innovation and forcing down prices. Unless MFIs can manage these pressures, some could fail and damage the reputation of microfinance more widely.

The survey was carried out by the Centre for the Study of Financial Innovation, an independent not-for-profit think tank based in London which explores the future of financial services. The CSFI has been running regular "Banana Skins" surveys of the banking and insurance industries for more than ten years, and has taken a close interest in the prospects for microfinance.

David Lascelles, the survey editor, said: "The Banana Skins report paints a vivid picture of the risks faced by microfinance in its rapid evolution from NGO to commercial status. The scale and the speed of change are enormous and will need to be carefully managed."

The 40-page report provides a commentary on each of the 29 risks, and breaks down responses by type and region, providing a detailed view of the concerns by geography and different classes of respondent.

Microfinance Banana Skins 2008 is available from CSFI: info@csfi.org.uk.

Microfinance and Risk Management: A Client Perspective

As the micro finance industry matures, service providers are increasingly concerned with developing new and better products. This focus on new product development is a response to growing competition in the micro finance market, the search for more defined market niches, and some anxiety about dropout rates.

To design successful products, the first step entails understanding the financial needs of clients (and potential clients) and how financial services fit into their money management strategies. Understanding clients requires an awareness of the economic goals of poor households, how people manage resources and activities, and how they deal with risk in their day-to-day lives. Such a framework can be a useful starting point to better understand financial service preferences of poor households.

Recent research commissioned as a contribution for the forthcoming World Development Report 2000/1(WDR) on poverty highlights the importance of focusing on risk and vulnerability as a way of understanding the possibilities and limitations of the interface between poverty and micro finance. The research focused on selected non-income dimensions of poverty, specifically how people use micro finance services to build physical, financial, human and social assets, mitigate risk, and reduce vulnerability.

Microfinance and Information Systems (MIS)

There is strong government interest in expanding financial services, an active microfinance sector, and fast-evolving business and technology sectors.

When it comes to microfinance, information systems are critical to stronger internal controls (over cash flow, financial reporting, portfolio quality, etc.). You can see this in action at Equitas, a new MFI which has more than 200,000 borrowers and follows the Grameen style of group-based lending model.

Efficiency is driven by innovations which combine the use of several simple technologies at various stages of the credit process. Here are two examples:

E-Docs. Membership and loan applications are completed manually by branches but are couriered to a central processing center. The documents are then scanned and from there on out, remain paperless. Forms use a series of check boxes which can be read by scanners and coded automatically. Remaining manual entries (e.g. names) are entered by a dedicated back office processing unit.

Real Time Meeting Monitoring. Within 15 minutes of the end of a group meeting, loan officers send a text message (SMS) by cell phone with three pieces of information: meeting attendance, loan collections, and when the meeting ended. This information is picked up by Equitas’s system which then compares it with what is expected, and creates a branch-by-branch report.

In this way, in real time, Equitas can see attendance rates, collections problems, and if meetings are running late.

There is also truly tight cash management. Relying on the real time recovery data provided by SMS, a courier picks up - and deposits - closing cash balances at the end of each day into the company’s bank account. The courier also delivers fresh cash at the beginning of each business day. No cash is left in branches overnight and it is all fully banked and tallied at the end of each day.

Combined, these systems enable a more efficient operation. Overall, it means stronger internal controls. There is much less room for fraud or abuse of cash or group meetings at the field. Equitas is one example of how good MIS is essential to well-managed microfinance.

Tuesday, September 29, 2009

Unlocking capacity for microfinance

The ability to successfully operate in the microfinance sector brings a bank two key benefits. It can boost the bank’s credentials as a socially responsible institution, with the bank providing small loans, unsupported with any form of collateral, to help lift people out of poverty in the developing world.

However, microfinance is more than just a means of generating positive publicity.

“Microfinance also presents the bank with a real commercial opportunity,” Vibhuti Sharma, managing director, financial institutions, at Standard Chartered tells GTR.

Microfinance has moved out of the outer edges of the financial world, and has come to be recognised as a socially responsible and profitable commercial opportunity.

Arguing in a piece for The Japan Times, Christopher Domitter, head of corporate affairs at Japan Standard Chartered Bank, says it is imperative that microfinance be more that just an exercise in corporate responsibility for banks. “To ensure the long-term viability of the industry, microfinance should be a sustainable business,” he says.

“The risk-return equation must add up in the same way it does for any other business the banks get involved in. Moreover, social returns have to be brought into the equation while calculating the returns on investment,” he adds.

From a banking perspective, microfinance borrowers have in fact been viewed as a low credit risk. Money is often lent to a small group of borrowers, with all members knowing when and to whom payments are made and collected. Often borrowers will act as co guarantors for each other. This, in theory, creates a collective sense of responsibility and high level of transparency, therefore reducing the likelihood that people will default on loans.

Microfinance initiatives can also increase access to financial services, with the theory being that bringing in more people or smaller companies into the financial sector will ultimately drive growth and new financing opportunities.

There is preliminary research being done with banks and think-tanks into how effective microfinance can be as a stepping stone for micro-enterprises to gain access to other financial services.

For instance, it could be argued that eventually such companies may move on from micro-loans, looking to use part of their business as a form of collateral to fund expansion. Receivable financing or forms of trade finance could then be introduced to help micro-businesses become small or mid-cap businesses.


The business of solving poverty
Standard Chartered has made a very public commitment to the microfinance industry, having pledged at the Clinton Global initiative in 2006 to channel US$500mn into the microfinance sector within a five-year period. In 2007, it delivered US$170mn of this commitment via various means.

Through working with microfinance institutions (MFIs), Standard Chartered has provided a variety of microfinancing based on different business models, including individual lending, the Grameen model, lending to self-help groups and micro-enterprise financing.

The bank also provides technical assistance to MFIs and is in the process of formalising a technical assistance programme. It also works with governments and regulators to look at means of strengthening regulatory frameworks.

Sharma adds: “The key focus for 2008 is to expand to new markets and increase our product offering to our MFI partners, and formalise a technical assistance programme for the microfinance.”

The bank’s fourth arm of its microfinance strategy involves its efforts to create an asset class from microfinance to better manage its risks, and encourage more investors into the sector. It is by disbursing microfinance assets to investors, that it can free up liquidity to meet these goals, and expand its business.


Managing the risks
In 2007 the bank set itself a goal to distribute US$125mn of microfinance assets to investors, and as of May this year it has so far disbursed US$45mn to the World Bank’s IFC, though it is keen to seek further investment potentially from other multilaterals and interested investors.

The credit-linked notes which the IFC has invested in have been issued by a special purpose vehicle (SPV) known as Microfinance Institutional Loans for Asia and Africa (MILAA).

The notes are linked to a portfolio of loans that the bank has made specifically to microfinance institutions in Sub-Saharan Africa and South Asia. This is unusual from other earlier securitisations of microfinance loans completed by other banks which often featured transactions in Latin America and Eastern Europe or Central Asia.

The facility is also unique in that all the underlying loans are in local currency versus a combination of hard and local currency as in previous deals. The underlying portfolio is also replenishable with multiple loan types, and the issuance platform will allow other qualified investors to participate in the future.


Deal structure
Standard Chartered’s Sharma further explains to GTR how the microfinance securitisation vehicle works.

“The SPV MILLA will enter into a credit default swap with Standard Chartered whereby the bank buys protection on a portfolio of MFI loans extended through its subsidiaries and branches.”

SPV’s obligations will be funded by issuing a single class of unrated credit-linked notes, proceeds of which will be placed on deposit with Standard Chartered. The deposit will be used by the issuer to pay any cash settlement amounts due to Standard Chartered under the credit default swap.

“Investors will receive a pro-rata share of income received by the issuer, less SPV expenses, that will include the swap premium and interest received under the deposit account. This will equate to a Libor plus yield. The portfolio risks will be equally borne by all investors, through the vertical slicing of the notes,” he adds.

Standard Chartered will maintain its role as the servicer of the loans, and the reference portfolio will replenish over a three-year period when pre or repayments occur. This means that although the IFC is the anchor investor in the deal, the transaction structure allows for other qualified investors to come on board in the future.


Appeal to investor
According to Sharma, the deal has a dual appeal to investors. “Microfinance investments provide a double bottom line return – financial and social returns.”

“Some investors have a focus on supporting the microfinance sector. Given the high social impact of microfinance investment, it appeals to the socially responsible investors.”

The investment vehicle also provides investors with a high degree of transparency. The investor is fully aware of the underlying assets, and as the transaction allows for replenishment, the investors will also be updated every quarter what the underlying loans are.


Wider concerns
However despite the ethical and commercial appeal of this new asset class and the microfinance sector in general, there have also been some concerns raised about the rapid growth of the industry, poor management standards and governance, and the potential this all has to cause lending standards to decline.

In a survey published by the London-based think-tank the Centre for the Study of Financial Innovation in March, one of the main concerns among microfinance practitioners was the growing level of competition in the market, and the potentially negative impact this could have on the industry and its reputation.

Some of those questioned feared that a market flooded by global commercial banks could end up cutting off supplies of finance to the neediest, and encourage overdebtedness in the more creditworthy.

However, others questioned by the think tank saw rising competition as a good development as it would bring down loan costs as well as encourage innovation.

It was not just the presence of global banks that have started to worry practitioners, there was also concerns with a lack of adequate management within MFIs themselves, and poor governance with regulations and government interference hindering the development of the industry.

The likelihood of increased credit risk was also raised by the report. Not usually seen as a major threat to this industry, some practitioners have been worried that heightened competition will encourage banks to take greater risks by extending into unfamiliar markets. The report cites a comment made by a bank regulator from Central Africa who notes: “the high rate of non-performing loans to several MFIs” in her territory.

Standard Chartered’s Domitter also reflects on the various risks and pitfalls of microfinance. Writing for The Japan Times, he cites poor and varying regulatory frameworks, increasing political risks and lack of transparency among MFIs as potential obstacles for those venturing into this relatively nascent market.

He remarks that to date only a selection of MFIs follow internationally recognised standards, and that there is a huge need for education and training.

Yet, these problems should not, he argues, necessarily bar commercial banks from taking part in the market. Indeed, banks should apply the same risk mitigating strategies to their microfinance activities as they do to any other area of finance. Furthermore, there is also a role for the global players to provide some of the much-needed financial and management training.


Vulnerability to the credit squeeze
There were also concerns about the impact of wider economic trends, such as the global tightening of liquidity. Typically the localised nature of microfinance means it has avoided some of the major blows of macroeconomic events.

However, as microfinance becomes more mainstream, some respondents to the think-tank’s report see the sector becoming more vulnerable to these wider developments. Being more integrated into mainstream banking means the sector will be more open to ‘contagion’. Yet, others cited in the report still believe that any impact will only be short-term.

Standard Chartered’s Sharma reflects on the extent of the sector’s resilience, commenting: “The market will remain attractive simply because of the huge demand-supply gap. Uncertain times have an impact on every industry and sector, and so it will on the microfinance sector, but this does not mean that its viability or attractiveness will disappear.”


Microfinance: here to stay
Despite the fact that microfinance has become ‘mainstream’, there are still some that express persistent doubts over its effectiveness. Most generally agree with the argument that microfinance as a ‘bottom-up’ form of development financing can be a more effective method than a more traditional ‘top-down’ approach, but that still hasn’t convinced everyone. In an article published in the Financial Times last year, professor Aneel Karnani of the University of Michagan was quoted as saying: “If societies are serious about helping the poorest of the poor, they should stop investing in microfinance and start supporting large, labour-intensive industries.”

Talking to GTR, Sharma explains that a bottom-up or a top-down approach do not have to be mutually exclusive. “Standard Chartered has a large SME business in developing and emerging markets. However, it also supports MFIs and the loans to the individual micro-entrepreneur. The market is intelligent enough to take care of this.”

As of June 2008, Standard Chartered has provided finance or financial instruments of US$277mn since September 2006.

Presently the bank provides credit to 48 MFI partners across 13 markets with a portfolio outstanding of US$183mn.

Monday, September 28, 2009

Three C's of Credit

Character: means how a person has handled past debt obligations: From credit history and personal background, honesty and reliability of the borrower to pay credit debts is determined.

Capacity: means how much debt a borrower can comfortably handle. Income streams are analyzed and any legal obligations looked into, which could interfere in repayment.

Capital: means current available assets of the borrower, such as real estate , savings or investment that could be used to repay debt if income should be unavailable.

Source : The Virtual Library on Microcredit

Create a World Without Poverty

We need 'social business' to couple the human heart to the capitalist system. By Muhammad Yunus
Christian Science Monitor from the February 15, 2008 edition - http://www.csmonitor.com/2008/0215/p09s01-coop.html

Bill Gates caused a stir in Davos last month with his call for "creative capitalism." He pointed out that while capitalism is "responsible for the great innovations that have improved the lives of billions ... to harness this power so it benefits everyone, we need to refine the system."
I see traditional capitalism as a half-developed structure. It ignores the humanity within all of us.
Moneymaking is an important part of humanity, but it is not the only part. Caring, concern, sharing, empathy – all of these aspects also must be considered when developing an economic framework that takes the whole person into account.
Enter the missing piece of the global development puzzle: social business. Social business – not a charity

A social business is not a charity. It is a nonloss, nondividend company with a social objective. It aims to maximize the positive impact on society while earning enough to cover its costs, and, if possible, generate a surplus to help the business grow. The owner never intends to take any profit for himself.

As evidenced every day by religious ministers and practitioners, social activists, and philanthropists, making money is not always the only driving force. They may be a special group of people who makes it visible, but the desire to help others exists in various degrees in every human being.

Capitalism's limits

Traditional capitalism doesn't tap into that universal desire. Capitalism delivers limited results because it takes too narrow a view of human nature, assuming people are one-dimensional, concerned only with maximizing profits.

Capitalism has long been a source of prosperity, spurring industrial, technological, and social progress in North America and Western Europe. But even as standards of living rise, large numbers of people are still left behind.

While free markets have ushered in many benefits, these gains have bypassed too many of the world's people, especially the poor.

And yet, in recent decades, powerful tools have been developed that leverage capitalism's strengths to enrich the lives of those who get left behind.

Take microcredit. It has been a powerful tool in combating poverty, enabling the poorest of the poor to change their lives and provide for their families. Through these small, collateral-free loans with a nearly 100 percent return rate, borrowers – mostly women – have been able to harness entrepreneurial abilities inherent in them.

Microcredit is just one example of how a business approach can help alleviate poverty when we move beyond the idea that business by definition has to mean making financial profit for the owner.

We need social businesses to couple the human heart to the capitalist system. This is a sure way of meeting needs that either remain unmet or are met extremely inadequately through the efforts of philanthropy, charity, or welfare.

Traditional philanthropy and nonprofits generate a social gain, but they do not design their programs as self-sustaining business models. A charitable dollar can be used only once. A dollar invested in a self-sustaining social business is recycled endlessly.

A social business is designed to be both self-sustaining and to maximize social returns like patients treated, houses built, or health insurance extended to people who never had this coverage. An investor in a social business retains an ownership interest to hold management accountable and to get the investment back over time, but no dividends are expected, and any profits should be reinvested in the business or used to start new similar businesses.

Social businesses could be viewed akin to investment accounts, where the money is returned over time but the interest is paid in social dividends, rather than in economic profit.

Bottom line: affect on society

While both personal entrepreneurship and social businesses need to be profitable, the bottom line for a social business is how much impact it makes on society, not how much money it returns to the investors. This represents an opportunity for the extension of capitalism to meet the social needs that are not currently met.

As an investor in a social business, I expect my investment money to come back to me, but the real reason for my investment is to see that it benefits society, as opposed to my pocketbook.

A profit-maximizing business owned by the poor can be considered a social business. The Grameen Bank is an example of a social business that is both owned by its poor borrowers and that seeks to maximize the benefits for those borrowers.

Another well-known example of social business is Grameen Danone Foods (known as Dannon in the US). It was inaugurated in 2006 as a partnership between Grameen Bank and Groupe Danone of France.

Groupe Danone produces and distributes Danone yogurt and Evian bottled water throughout the world. The mission of Grameen Danone Foods is to manufacture nutrient-rich, fortified yogurt in small local plants that minimize the need for expensive refrigeration and to sell it at a low price to improve the diets of rural children in Bangladesh.

By investing in this joint venture with Grameen Group, Groupe Danone can help to eradicate malnutrition in Bangladesh, one of the least developed countries in the world, by doing business, not by simply donating the money.

The experiment is a win-win situation and the first of many multinational social businesses that Grameen would like to partner.

The current capitalist framework does not allow us to fully mobilize mankind's will to do good.

Tap into the urge to do good

Because we are creatures who are motivated to solve the problems of the world, we need to add a new component. Capitalism has the capacity to do good in the world, provided we recognize that the motivation for the entrepreneur need not be exclusively economic and personal.

The urge to do good exists in all of us – right along with self-interest. We can harness that urge to do good in addition to human ingenuity to help the world's poor become self-sustaining with dignity and self-respect.

Thirty-one years ago, when I launched the Grameen microcredit program, no one in the banking world thought low-cost loans for poor people would be viable on a large scale. I was not sure myself how large it could grow.

Just as microcredit has proved to be a success, so, too, can social business. Working together, we can expand the predominant view of capitalism and enterprise to include social business.

This new perspective will move us one step closer to bringing all people into prosperity, and one step closer to a world without poverty.

• Muhammad Yunus is the founder and managing director of Grameen Bank and the author of "Creating a World Without Poverty: Social Business and the Future of Capitalism." He won the Nobel Peace Prize in 2006 for his work on microcredit.

Source: csmonitor.com

Breaking the vicious cycle of proverty through microcredit

The the microfinance of Bangladesh is based on the voluntary formation of small groups to provide mutual, morally binding group guarantees in lieu of the collateral required by conventional banks. At first only two members of a group are allowed to apply for a loan. Depending on their performance in repayment the next two borrowers can then apply and, subsequently, the fifth member as well.

The assumption is that if individual borrowers are given access to credit, they will be able to identify and engage in viable income-generating activities - simple processing such as paddy husking, lime-making, manufacturing such as pottery, weaving, and garment sewing, storage and marketing and transport services. Women were initially given equal access to the schemes, and proved not only reliable borrowers but astute enterpreneurs. As a result, they have raised their status, lessened their dependency on their husbands and improved their homes and the nutritional standards of their children. Today over 90 percent of borrowers are women.

Intensive discipline, supervision, and servicing characterize the operations of the Grameen Bank, which are carried out by "Bicycle bankers" in branch units with considerable delegated authority. The rigorous selection of borrowers and their projects by these bank workers, the powerful peer pressure exerted on these individuals by the groups, and the repayment scheme based on 50 weekly installments, contribute to operational viability to the rural banking system designed for the poor. Savings have also been encouraged. Under the scheme, there is provision for 5 percent of loans to be credited to a group find and Tk 5 is credited every week to the fund.

The success of this approach shows that a number of objections to lending to the poor can be overcome if careful supervision and management are provided. For example, it had earlier been thought that the poor would not be able to find renumerative occupations. In fact, Grameen borrowers have successfully done so. It was thought that the poor would not be able to repay; in fact, repayment rates reached 97 percent. It was thought that poor rural women in particular were not bankable; in fact, they accounted for 94 percent of borrowers in early 1992. It was also thought that the poor cannot save; in fact, group savings have proven as successful as group lending. It was thought that rural power structures would make sure that such a bank failed; but the Grameen Bank has been able to expand rapidly. Indeed, from fewer than 15,000 borrowers in 1980, the membership had grown to nearly 100,000 by mid-1984. By the end of 1998, the number of branches in operation was 1128, with 2.34 million members (2.24 million of them women) in 38,957 villages. There are 66,581 centres of groups, of which 33,126 are women. Group savings have reached 7,853 million taka (approximately USD 162 million), out of which 7300 million taka (approximately USD 152 million) are saved by women.

It is estimated that the average household income of Grameen Bank members is about 50 percent higher than the target group in the control village, and 25 percent higher than the target group non-members in Grameen Bank villages. The landless have benefited most, followed by marginal landowners. This has resulted in a sharp reduction in the number of Grameen Bank members living below the poverty line, 20 percent compared to 56 percent for comparable non-Grameen Bank members. There has also been a shift from agricultural wage labour (considered to be socially inferior) to self-employment in petty trading. Such a shift in occupational patterns has an indirect positive effect on the employment and wages of other agricultural waged labourers. What started as an innovative local initiative, "a small bubble of hope", has thus grown to the point where it has made an impact on poverty alleviation at the national level "

Credit Delivery System Of Grameen Bank

Grameen Bank Credit Delivary means taking credit to the very poor in their villages by means of the essential elements of the Grameen credit delivery system.

Grameen Bank credit delivery system has the following features:
1 There is an exclusive focus on the poorest of the poor.
Exclusivity is ensured by:
i) establishing clearly the eligibility criteria for selection of targeted clientele and adopting practical measures to screen out those who do not meet them
ii) in delivering credit, priority has been increasingly assigned to women
iii) the delivery system is geared to meet the diverse socio-economic development needs of the poor

2 Borrowers are organized into small homogeneous groups.
Such characteristics facilitate group solidarity as well as participatory interaction. Organizing the primary groups of five members and federating them into centres has been the foundation of Grameen Bank's system. The emphasis from the very outset is to organisationally strengthen the Grameen clientele, so that they can acquire the capacity for planning and implementing micro level development decisions. The Centres are functionally linked to the Grameen Bank, whose field workers have to attend Centre meetings every week.
3 Special loan conditionalities which are particularly suitable for the poor.
These include:
i) very small loans given without any collateral
ii) loans repayable in weekly instalments spread over a year
iii) eligibility for a subsequent loan depends upon repayment of first loan
iv) individual, self chosen, quick income generating activities which employ the skills that borrowers already posses
v) close supervision of credit by the group as well as the bank staff
vi) stress on credit discipline and collective borrower responsibility or peer pressure
vii) special safegaurds through compulsory and voluntary savings to minimise the risks that the poor confront
viii) transparency in all bank transactions most of which take place at centre meetings.
4 Simultaneous undertaking of a social development agenda addressing basic needs of the clientele.
This is reflected in the "sixteen decisions" adopted by Grameen borrowers. This helps to:
i) raise the social and political consciousness of the newly organized groups
ii) focus increasingly on women from the poorest households, whose urge for survival has a far greater bearing on the development of the family
iii) encourage their monitoring of social and physical infrastructure projects - housing, sanitation, drinking water, education, family planning, etc.
5 Design and development of organization and management systems capable of delivering programme resources to targeted clientele.
The system has evolved gradually through a structured learning process, that involves trials, errors and continuous adjustments. A major requirement to operationalize the system is the special training needed for development of a highly motivated staff, so that the decision making and operational authority is gradually decentralized and administrative functions are delegated at the zonal levels downwards.
6 Expansion of loan portfolio to meet diverse development needs of the poor.
As the general credit programme gathers momentum and the borrowers become familiar with credit discipline, other loan programmes are introduced to meet growing social and economic development needs of the clientele. Besides housing, such programmes include:
i) credit for building sanitary laterines
ii) credit for installation of tubewells that supply drinking water and irrigation for kitchen gardens
iii) credit for seasonal cultivation to buy agricultural inputs
iv) loan for leasing equipment / machinery, ie., cell phones purchased by Grameen Bank members
v) finance projects undertaken by the entire family of a seasoned borrower.

The underlying premise of Grameen is that, in order to emerge from poverty and remove themselves from the clutches of usurers and middlemen, landless peasants need access to credit, without which they cannot be expected to launch their own enterprises, however small these may be. In defiance of the traditional rural banking postulate whereby "no collateral (in this case, land) means no credit", the Grameen Bank experiment set out to prove - successfully - that lending to the poor is not an impossible proposition; on the contrary, it gives landless peasants the opportunity to purchase their own tools, equipment, or other necessary means of production and embark on income-generating ventures which will allow them escape from the vicious cycle of "low income, low savings, low investment, low income". In other words, the banker's confidence rests upon the will and capacity of the borrowers to succeed in their undertakings.

The mode of operation of Grameen Bank is as follows. A bank branch is set up with a branch manager and a number of center managers and covers an area of about 15 to 22 villages. The manager and the workers start by visiting villages to familiarise themeselves with the local milieu in which they will be operating and identify the prospective clientele, as well as explain the purpose, the functions, and the mode of operation of the bank to the local population. Groups of five prospective borrowers are formed; in the first stage, only two of them are eligible for, and receive, a loan. The group is observed for a month to see if the members are conforming to the rules of the bank. Only if the first two borrowers begin to repay the principal plus interest over a period of six weeks, do the other members of the group become eligible themselves for a loan. Because of these restrictions, there is substantial group pressure to keep individual records clear. In this sense, the collective responsibility of the group serves as the collateral on the loan.

Loans are small, but sufficient to finance the micro-enterprises undertaken by borrowers: rice-husking, machine repairing, purchase of rickshaws, buying of milk cows, goats, cloth, pottery etc. The interest rate on all loans is 16 percent. The repayment rate on loans is currently - 95 per cent - due to group pressure and self-interest, as well as the motivation of borrowers.

Although mobilization of savings is also being pursued alongside the lending activities of the Grameen Bank, most of the latter's loanable funds are increasingly obtained on commercial terms from the central bank, other financial institutions, the money market, and from bilateral and multilateral aid organizations.

Saturday, September 26, 2009

How do borrowers use microcredit loans?

Most microcredit borrowers have microenterprises—unsalaried, informal income-generating activities. However, microloans may not predominantly be used to start or finance microenterprises. Scattered research suggests that only half or less of loan proceeds are used for business purposes. The remainder supports a wide range of household cash management needs, including stabilizing consumption and spreading out large, lumpy cash needs like education fees, medical expenses, or lifecycle events such as weddings and funerals.

Who are microfinance clients?

Typical microfinance clients are poor and low-income people that do not have access to other formal financial institutions. Microfinance clients are usually self-employed, household-based entrepreneurs. Their diverse “microenterprises” include small retail shops, street vending, artisanal manufacture, and service provision. In rural areas, microentrepreneurs often have small income-generating activities such as food processing and trade; some but far from all are farmers.

Hard data on the poverty status of clients is limited, but tends to suggest that most microfinance clients fall near the poverty line, both above and below. Households in the poorest 10% of the population, including the destitute, are not traditional microcredit clients because they lack stable cash flows to repay loans. Most clients below the poverty line are in the upper half of the poor. It is clear, however, that some MFIs can serve clients at the higher end of the bottom half. Women often comprise the majority of clients.

Over the past decade, a few MFIs have started developing a range of products to meet the needs of other clients, including pensioners and salaried workers. Although little is known about the universe of potential clients, the number of households without effective access to financial services is enormous.

Why does the microfinance industry place so much emphasis on sustainability?

From a development perspective, financial sustainability is not an end in itself. Rather, it is a tool for reaching the maximum number of clients. MFIs may only operate for a limited time, reach a limited number of clients, or be driven more by political goals than by client needs if services are not priced at sustainable levels.

Donors and governments cannot likely provide enough subsidized funds to meet the huge demand for microfinance. Even if there were enough donor and government money, it would be better spent on other development priorities that, unlike microfinance, cannot be delivered without continuing subsidies. Sustainable MFIs have the potential to attract non-subsidized resources to finance expansion of outreach. Experience has even shown that borrowers are more likely to repay lenders who operate without subsidies at they are more confident the institution will be around to give them future loans.

The trade-off between financial viability and reaching very poor people is much less acute than many once thought. A number of financial providers have managed to offer high-quality financial services to very poor people while also covering their costs. Moreover, correlation between MFI profitability and client poverty level has proven to be a statistically weak one. This may be more driven by the vision of particular MFIs than by any inherent unprofitability of low-end microcredit.

How do savings services help poor people?

Savings has been called the “forgotten half of microfinance.” Most poor people now use informal mechanisms to save because they lack access to good formal deposit services,. They may tuck cash under the mattress, buy animals or jewelry that can be sold off later, or stockpile inventory or building materials. These savings methods tend to be risky—cash can be stolen, animals can get sick, and neighbors can run off. Often they are illiquid as well – one cannot sell just the cow’s leg when one needs a small amount of cash. Poor people want secure, convenient deposit services that allow for small balances and easy access to funds. MFIs that offer good savings services usually attract far more savers than borrowers.

Working method for microfinance institutions

The Grameen Bank of Bangladesh has developed a joint liability model that its MFIs are using suited for local conditions.
When choosing a village the MFI conduct a comprehensive survey to brief the potential for operations and the local conditions in a village. The MFI are evaluating some key factors like village population, degree of poverty, road accessibility, political stability and safety. When a village has been selected, the MFI introduces its mission, methodology and the services they are offering.
After the informational presentation interested women are gathered in group formations. They have to be in the age between 18 and 59. The women put them self together in groups of five to serve as guarantors for each other. Earlier experience has shown that a group of five persons is small enough to create group pressure between the members, enforcing them to be loyal to each other. In case someone of the group members are not able to repay the loan the group is big enough to help with the payments. The company does not influence the selection of group members nor the decision regarding the income generation activity nor the loan amount they intend to take. Group members must live close to each other and cannot be related to each other.

If a borrower defaults on her loan, the entire group typically is penalized and sometimes barred altogether from taking further loans. This peer pressure encourages borrowers to be very selective about their peer group members and to repay loans in full and on time.
Then the group training begins, usually as a five day program. The purpose is to educate the members in the procedures of the financial products, delivery methods, calculation of interest rates, business development skills and how to sign their names. The members are also taught in quality management, to identify an income generation activity, how to set prices and how to market. They field staff also build a culture of credit discipline and collective responsibility. The field staff makes sure the members qualifies for the program and collect data for future analysis. Within the village, a center is created collecting the groups. The center is responsible for the payments of all groups, enabling a dual liability system. When the villagecenter is created the financial transactions can begin.
The groups meet weekly in the villagecenter where they can discuss new loan applications, loan utilization, and community issues. The field staff of the MFIs conduct the meetings with rigid discipline in order to sustain the credit discipline of the group. All financial transactions are conducted during the meetings.
Microfinance is a relatively new segment of the market economy that is why institutions created in this segment have short experience in their activities, and their personnel is not sufficiently experienced and qualified. Taking this into consideration, staff of these institutes is recommended to follow the internationally recognized principles of microfinance:
• thorough examination of potential clients of the microfinance institution;
• thorough estimation of business viability and also factors which can positively or negatively affect the results of work in specific conditions;
• thorough registration of documents and contracts related to loan issuance and microfinance services providing;
• keep in touch with client in combination with monitoring of the terms of paying a credit, interests payments and with the aim to find out potential and real problems;
• setting of interest rates for microfinance services compatible with market ones;
• quick reaction to any problems which can complicate the perspectives of getting of issued credit payed back.

Microcredit: a tool for peace

PARIS AFP — Microcredit has become an increasingly powerful tool to free the world's poorest people, particularly women, from the prison of poverty and the power of loan sharks. By making loans available to the world's 1.2 billion poor people, the "barefoot bankers" enable them to rebuild their homes, pay...

Wednesday, September 16, 2009

Is microfinance the solution to poverty?

No. Microfinance is but one strategy battling an immense problem.
"In the last two decades, substantial progress has been made in developing techniques to deliver financial services to the poor on a sustainable basis. Most donor interventions have concentrated on one of these services, microcredit. For microcredit to be appropriate however, the clients must have the capacity to repay the loan under the terms by which it is provided. Otherwise, clients may not be able to benefit from credit and risk being pushed into debt problems. This sounds obvious, but microcredit is viewed by some as "one size fits all." Instead, microcredit should be carefully evaluated against the alternatives when choosing the most appropriate intervention tool for a specific situation.
Microcredit may be inappropriate where conditions pose severe challenges to standard microcredit methodologies. Populations that are geographically dispersed or nomadic may not be suitable microfinance candidates. Microfinance may not be appropriate for populations with a high incidence of debilitating illnesses (e.g., HIV/AIDS). Dependence on a single economic activity or single agricultural crop, or reliance on barter rather than cash transactions may pose problems. The presence of hyperinflation, or absence of law and order may stress the ability of microfinance to operate. Microcredit is also much more difficult when laws and regulations create significant barriers to the sustainability of microfinance providers (for example, by mandating interest-rate caps

Can microfinance be profitable?

Yes.
"The November 2001 issue of the MicroBanking Bulletin includes data from 62 self-sufficient MFIs. The average return on assets for this group is 5.5%, which compares favorably to commercial-bank returns. Indeed, there are grounds for hope that microfinance can become attractive to mainstream retail bankers.
At the same time, some worry that an excessive concern for profit in microfinance will lead MFIs away from poor clients to serve better-off clients who want larger loans. It is true that programs serving very poor clients are somewhat less profitable than those reaching better-off clients, but this may say more about managers' objectives than an inherent conflict between serving the very poor and profitability. MFIs serving the very poor are showing rapid financial improvement. Microfinance programs like Bangladesh Rural Advancement Committee and ASA in Bangladesh have already demonstrated that very poor clients can be reached profitably: both institutions had profits of more than 4% of assets in 2000.
There are cases where microfinance can not be made profitable, for example, where potential clients are extremely poor and risk-averse or live in remote areas with very low population density. In such settings, microfinance may require continuing subsidies. Whether microfinance is the best use of these subsidies will depend on evidence about its impact on the lives of these clients." (CGAP)

What are the effects of microfinance?

"Comprehensive impact studies have demonstrated that:
• Microfinance helps very poor households meet basic needs and protect against risks;
• The use of financial services by low-income households is associated with improvements in household economic welfare and enterprise stability or growth;
• By supporting women's economic participation, microfinance helps to empower women, thus promoting gender-equity and improving household well-being;
• For almost all significant impacts, the magnitude of impact is positively related to the length of time that clients have been in the programme." (UNCDF Microfinance)
"Poor people, with access to savings, credit, insurance, and other financial services, are more resilient and better able to cope with the everyday crises they face. Even the most rigorous econometric studies have proven that microfinance can smooth consumption levels and significantly reduce the need to sell assets to meet basic needs. With access to microinsurance, poor people can cope with sudden increased expenses associated with death, serious illness, and loss of assets.
Access to credit allows poor people to take advantage of economic opportunities. While increased earnings are by no means automatic, clients have overwhelmingly demonstrated that reliable sources of credit provide a fundamental basis for planning and expanding business activities. Many studies show that clients who join and stay in programs have better economic conditions than non-clients, suggesting that programs contribute to these improvements. A few studies have also shown that over a long period of time many clients do actually graduate out of poverty.
By reducing vulnerability and increasing earnings and savings, financial services allow poor households to make the transformation from "every-day survival" to "planning for the future." Households are able to send more children to school for longer periods and to make greater investments in their children's education. Increased earnings from financial services lead to better nutrition and better living conditions, which translates into a lower incidence of illness. Increased earnings also mean that clients may seek out and pay for health care services when needed, rather than go without or wait until their health seriously deteriorates." (CGAP)
"Empirical evidence shows that, among the poor, those participating in microfinance programs who had access to financial services were able to improve their well-being—both at the individual and household level—much more than those who did not have access to financial services.
• In Bangladesh, Bangladesh Rural Advancement Committee (BRAC) clients increased household expenditures by 28% and assets by 112%. The incomes of Grameen members were 43% higher than incomes in non-program villages.
• In El Salvador, the weekly income of FINCA clients increased on average by 145%.

Why don't banks accommodate poor people?

Some do. Grameen Bank in Bangladesh was formed out of a project providing small loans to women in the village of Jobra. Bancosol, a commercial bank in Bolivia, is also a bank which provides microfinance services for the poor of Bolivia.
However, the majority of formal banks do not provide microfinance products as microfinance is an expensive enterprise – you can make a lot more money on a large loan than a small loan, and you won't make much money holding savings accounts with very little funds in them. Banks can make more money if they only provide financial services to those who already have money.

. Why would poor people need financial services?

they are using these services already, although they might look a little different. "Poor people save all the time, although mostly in informal ways. They invest in assets such as It's easy to imagine poor people don't need financial services, but when you think about it gold, jewelry, domestic animals, building materials, and things that can be easily exchanged for cash. They may set aside corn from their harvest to sell at a later date. They bury cash in the garden or stash it under the mattress. They participate in informal savings groups where everyone contributes a small amount of cash each day, week, or month, and is successively awarded the pot on a rotating basis. Some of these groups allow members to borrow from the pot as well. The poor also give their money to neighbors to hold or pay local cash collectors to keep it safe.
However widely used, informal savings mechanisms have serious limitations. It is not possible, for example, to cut a leg off a goat when the family suddenly needs a small amount of cash. In-kind savings are subject to fluctuations in commodity prices, destruction by insects, fire, thieves, or illness (in the case of livestock). Informal rotating savings groups tend to be small and rotate limited amounts of money. Moreover, these groups often require rigid amounts of money at set intervals and do not react to changes in their members' ability to save. Perhaps most importantly, the poor are more likely to lose their money through fraud or mismanagement in informal savings arrangements than are depositors in formal financial institutions

Tuesday, September 15, 2009

When is micro credit not appropriate?

"Micro credit may be inappropriate where conditions pose severe challenges to loan repayment. For example, populations that are geographically dispersed or have a high incidence of disease may not be suitable microfinance clients. In these cases, grants, infrastructure improvements or education and training programmes are more effective. For micro credit to be appropriate, the clients must have the capacity to repay the loan under the terms by which it is provided

Monday, September 14, 2009

Why are of Micro credit interest rates so high?

The nature of micro credit is such that interest rates need to be high to return the cost of the loan.
"There are three kinds of costs the MFI has to cover when it makes micro loans. The first two, the cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the cost paid by the MFI for the money it lends is 10%, and it experiences defaults of 1% of the amount lent, then these two costs will total $11 for a loan of $100, and $55 for a loan of $500. An interest rate of 11% of the loan amount thus covers both these costs for either loan.

Sunday, September 13, 2009

9. Why do so many MFIs focus on women?

"Microfinance programs have generally targeted poor women. By providing access to financial services only through women—making women responsible for loans, ensuring repayment through women, maintaining savings accounts for women, providing insurance coverage through women—microfinance programs send a strong message to households as well as to communities.
Many qualitative and quantitative studies have documented how access to financial services has improved the status of women within the family and the community. Women have become more assertive and confident. In regions where women's mobility is strictly regulated, women have become more visible and are better able to negotiate the public sphere. Women own assets, including land and housing, and play a stronger role in decision making.
In some programs that have been active over many years, there are even reports of declining levels of violence against women.

Friday, September 11, 2009

Islamic Microfinance on Horizon

An estimated 72 percent of people living in Muslim-majority countries do not use formal financial services (Honohon 2007). Even when financial services are available, some people view conventional products as incompatible with the financial principles set forth in Islamic law. In recent years, some microfinance institutions (MFIs) have stepped in to service low-income Muslim clients who demand products consistent with Islamic financial principles—leading to the emergence of Islamic microfinance as a new market niche.

The Islamic development Bank(IDB) ,Jedda, Saudi Arabia is carrying out feasibilities in Bangladesh to promote Islamic microfinance on Sharia .There are some small MFIs in the country that are implementing program based on Sharia Rural Development Scheme of Islami Bank Bangladesh limited is carrying on Islamic microfinance .There is a considerable potential of Islamic Microfinance of Bangladesh

Thursday, September 10, 2009

Microfinance in Bangladesh: Challenges and prospects

Bangladesh micro-finance sector is regarded as the largest and most efficient in the world. We still lead the global microfinance industry both in terms of its sheer size and productivity. Several efficiency indicators are quite in favor of Bangladeshi Microfinance Institutions (MFIs). From being development partner-supported entities, increasingly the Bangladeshi MFIs are moving towards self-sufficiency through commercialization of financing sources and improving internal control mechanism. Having said that, in terms of accessing the commercial market, we are still way behind our comparables in other part of the world. It is learnt that in 2005 median MFIs sourced more than half of its financing from commercial funds, while Bangladeshi MFIs reached only one-third of the global average. The primary sources of financing for local MFIs are member's deposit and Palli-Karma Sahayak Foundation(PKSF) financing. MFIs in Bangladesh cannot offer regular deposit/savings services, hence, they have to depend primarily on forced savings which are collected as a condition for membership or for access to loan. The donor-backed PKSF financing is attractive for smaller MFIs with limited requirements and because they are yet to be able to establish their credibility for commercial borrowings. However, few analysts argue whether any kind of development support is a barrier for microfinance sector to integrate into the mainstream financial sector since MFIs are more like "working banks".

The reporting standards attract attention. Except for the larger few, most MFIs in Bangladesh do not follow international standard reporting. Calculation of delinquent loans by few MFIs remains obscure. MIS system is of utmost importance, since the granular level of operation and numbers/types of products/accounts must be accurately reconciled and reported in international standards to standardize the local MFIs with the rest of the world. Since Bangladesh is yet to have a national common identification system for its populace, possible misrepresentation in borrowers information remains a problem.

The Microfinance Information Exchange (MIX) survey (2005) reveals that eight leading Bangladeshi MFIs show the industry's strength in huge client coverage. Keeping aside big names such as Grameen Bank, BRAC and ASA, leading local MFIs serve over three times more clients as compared to the Indian MFIs. Market leaders such as Grameen Bank and ASA each added 1.3 million new borrowers in 2005. The growth rate was in line with other Asian markets, adding about 40% in new borrowers. The trends in Asia and Bangladesh are strong as compared to global growth.

As for financing sources locally, in 2005 only 20% of the loan portfolio of MFIs were funded through commercial sources; encouragingly it is 45% higher than that of 2004 numbers. BRAC has completed the World's first AAA-rated Micro-Credit Receivables Securitization; the transaction has attracted coverage from all leading international press and established a model to be replicated around the world. In the immediate past, MFIs raised financing through syndicated finance from the local market at commercial rates and terms. Talking about cost of operation, the median cost per borrower in 2005 was US$9 leading to record efficiency level for Bangladeshi MFIs, and strong productivity further leverages these low costs. And, the two Bangladeshi MFIs in the global top 10 most efficient institutions spent just over USD5 per borrower. Interestingly, the group-lending model has achieved employee productivity level 75% higher than global norms, and 50% higher than Asian norms with each employee serving over 200 borrowers in Bangladesh.

Combining the above factors, in 2005 leading local MFIs posted median return on assets of 2.6% and on equity of 10.6% after adjustments for any subsidy and provisioning. Reasons for the impressive returns being lower composition of commercial borrowing, and the group-lending model that reduces cost per borrower as compared to MFIs globally. However, as MFIs reach out for wider coverage and require more fund for their operations, they will be forced to source financing from commercial markets and the level of return will eventually come down to the level of several other countries where MFIs are more commercial market driven.

In Bangladesh, the total number of borrowers is roughly 18 million, with Grameen Bank leading the way with 6 million, and BRAC and ASA each having 5 million borrowers. The average size of the loan stands at BDT8,000, making the Bangladesh micro-finance segment a vibrant US$2.1 billion industry. The weekly village meetings and massive establishments to monitor borrowers who do not have any identification number or track record or any credible address is an enormous task. In the absence of any database, such as Credit Information Bureau (CIB) for the commercial banking sector, MFIs are to maintain their own database of micro-borrowers and the customer credit as well as social history responsibly they not only maintain credit information but also social information due to their development angle of operation. As compared to commercial banks, the operational and monitoring cost of MFIs, operating in areas where commercial banks will never provide coverage, is far greater. Despite these hard facts, the rates charged by MFIs are lower than the interest rates charged from unsecured credit cardholders by commercial banks despite their clients being "well-to-do" high-income consumer group. The myth about higher interest rate will also replenish overtime as competition increases and dependency on development-fund reduces this is inevitable.

Most convincingly, the repayment rates are above 90% for most MFIs, and for larger MFIs with proper MIS system the recovery rates are even higher. The strong process that MFIs follow in terms of Credit & collections policies, Credit underwriting process & collections process, Backend systems, Branch operations, HR systems and policies, Audit & controls, and MIS reporting are commendable and contribute significantly to the recovery of loans. If we draw comparison with banks, credit rating of few MFIs are likely to be as good as banks'. The median capital/asset ratio is over 20%, which is higher than Asian peer group figure but close to the world median. As compared to commercial banks, this is a high standard required to provide adequate capital coverage to the micro-loans extended to so-called "high risk" segment in conventional sense.

Now that Bangladesh has a Microfinance Regulatory Act 2006, we would expect uniform reporting requirements and performance assessment procedure, proper policy guidelines that would help micro-credit flourish, a central database of micro-borrowers, and active support for MFIs to become more vibrant for the greater interest of social and economic development.

Through Professor Yunus, Bangladesh has achieved its highest recognition for its pioneering role and contribution to the global micro-finance industry. Our confidence level has increased, however we have an urge to take the MFI industry to its next trajectory through comparing the local norms against international benchmarks. This is high time to increase our standards of reporting as well as processing, ensuring far wider coverage with timely recoveries, and looking into the possibility of integrating micro-finance into the mainstream financial system, and again leave footprints for others to follow.


What is Micro credit?

Prof. Dr. Muhammad Yunus
September, 2004


The word "micro credit" did not exist before the seventies. Now it has become a buzz-word among the development practitioners. In the process, the word has been imputed to mean everything to everybody. No one now gets shocked if somebody uses the term "micro credit" to mean agricultural credit, or rural credit, or cooperative credit, or consumer credit, credit from the savings and loan associations, or from credit unions, or from money lenders. When someone claims micro credit has a thousand year history, or a hundred year history, nobody finds it as an exciting piece of historical information.

I think this is creating a lot of misunderstanding and confusion in the discussion about microcredit. We really don't know who is talking about what. I am proposing that we put labels to various types of microcredit so that we can clarify at the beginning of our discussion which microcredit we are talking about. This is very important for arriving at clear conclusions, formulating right policies, designing appropriate institutions and methodologies. Instead of just saying "microcredit" we should specify which category of microcredit.

Let me suggest a broad classification of microcredit:

A) Traditional informal microcredit (such as, moneylender's credit, pawn shops, loans from friends and relatives, consumer credit in informal market, etc.)
B) Microcredit based on traditional informal groups (such as, tontin, su su, ROSCA, etc.)
C) Activity-based microcredit through conventional or specialised banks (such as, agricultural credit, livestock credit, fisheries credit, handloom credit, etc.)
D) Rural credit through specialised banks.
E) Cooperative microcredit (cooperative credit, credit union, savings and loan associations, savings banks, etc.)
F) Consumer microcredit.
G) Bank-NGO partnership based microcredit.
H) Grameen type microcredit or Grameencredit.
I) Other types of NGO microcredit.
J) Other types of non-NGO non-collateralized microcredit.

This is a very quick attempt at classification of microcredit just to make a point. The point is? Every time we use the word "microcredit" we should make it clear which type (or cluster of types) of microcredit we are talking about. Otherwise we'll continue to create endless confusion in our discussion. Needless to say that the classification I have suggested is only tentative. We can refine this to allow better understanding and better policy decisions. Classification can also be made in the context of the issue under discussion. I am arguing that we must discontinue using the term "microcredit" or "microfinance" without identifying its category.

Microcredit data are compiled and published by different organizations. We find them useful. I propose that while publishing these data we identify the category or categories of microcredit each organization provides. Then we can prepare another set of important information? number of poor borrowers, and their gender composition, loan disbursed, loan outstanding, balance of savings, etc. under each of these categories, country-wise, region-wise, and globally.

These sets of information will tell us which category of microcredit is serving how many poor borrowers, their gender break-up, their growth during a year or a period, loans disbursed, loans outstanding, savings, etc. The categories which are doing better, more support can go in their direction. The categories which are doing poorly may be helped to improve their performance. For policy-maters this will be enormously helpful. For analysis purpose this will make a world of difference.

I urge Microcredit Summit Campaign secretariat to present the information that they already collect on number of clients, number of the poorest among them, number of poorest clients that are women, number of clients that have crossed the poverty line? broken down for each of the categories of microcredit. This will help donors to select the categories they would like to support. This sorting out is very important for the donors, as well as the policymakers.

Grameen credit

Whenever I use the word "microcredit" I actually have in mind Grameen type microcredit or Grameencredit. But if the person I am talking to understands it as some other category of microcredit my arguments will not make any sense to him. Let me list below the distinguishing features of Grameencredit. This is an exhaustive list of such features. Not every Grameen type programme has all these features present in the programme. Some programmes are strong in some of the features, while others are strong in some other features. But on the whole they display a general convergence to some basic features on the basis of which they introduce themselves as Grameen replication programmes or Grameen type programmes.

General features of Grameencredit are:

a) It promotes credit as a human right.
b) Its mission is to help the poor families to help themselves to overcome poverty. It is targeted to the poor, particularly poor women.
c) Most distinctive feature of Grameencredit is that it is not based on any collateral or legally enforceable contracts. It is based on "trust", not on legal procedures and system.
d) It is offered for creating self-employment for income-generating activities and housing for the poor, as opposed to consumption.
e) It was initiated as a challenge to the conventional banking which rejected the poor by classifying them to be "not creditworthy". As a result it rejected the basic methodology of the conventional banking and created its own methodology.
f) It provides service at the door-step of the poor based on the principle that the people should not go to the bank, bank should go to the people.
g) In order to obtain loans a borrower must join a group of borrowers.
h) Loans can be received in a continuous sequence. New loan becomes available to a borrower if her previous loan is repaid.
i) All loans are to be paid back in installments (weekly, or bi-weekly).
j) Simultaneously more than one loan can be received by a borrower.
k) It comes with both obligatory and voluntary savings programmes for the borrowers.
l) Generally these loans are given through non-profit organizations or through institutions owned primarily by the borrowers. If it is done through for-profit institutions not owned by the borrowers, efforts are made to keep the interest rate at a level which is close to a level commensurate with sustainability of the programme rather than bringing attractive return for the investors. Grameen credit's thumb-rule is to keep the interest rate as close to the market rate, prevailing in the commercial banking sector, as possible, without sacrificing sustain-ability. In fixing the interest rate market interest rate is taken as the reference rate, rather than the moneylenders' rate. Reaching the poor is its non-negotiable mission. Reaching sustainability is a directional goal. It must reach sustainability as soon as possible, so that it can expand its outreach without fund constraints.
m) Grameencredit gives high priority on building social capital. It is promoted through formation of groups and centres, developing leadership quality through annual election of group and centre leaders, electing board members when the institution is owned by the borrowers. To develop a social agenda owned by the borrowers, something similar to the "sixteen decisions", it undertakes a process of intensive discussion among the borrowers, and encourage them to take these decisions seriously and implement them. It gives special emphasis on the formation of human capital and concern for protecting environment. It monitors children's education, provides scholarships and student loans for higher education. For formation of human capital it makes efforts to bring technology, like mobile phones, solar power, and promote mechanical power to replace manual power.

Grameencredit is based on the premise that the poor have skills which remain unutilised or under-utilised. It is definitely not the lack of skills which make poor people poor. Grameen believes that the poverty is not created by the poor; it is created by the institutions and policies which surround them. In order to eliminate poverty all we need to do is to make appropriate changes in the institutions and policies, and/or create new ones. Grameen believes that charity is not an answer to poverty. It only helps poverty to continue. It creates dependency and takes away individual's initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty.

Grameen brought credit to the poor, women, the illiterate, the people who pleaded that they did not know how to invest money and earn an income. Grameen created a methodology and an institution around the financial needs of the poor, and created access to credit on reasonable term enabling the poor to build on their existing skill to earn a better income in each cycle of loans.

If donors can frame category-wise microcredit policies they may overcome some of their discomforts. General policy for microcredit in its wider sense is bound to be devoid of focus and sharpness.

Prof. Dr. Muhammad Yunus
September, 2004


The word "micro credit" did not exist before the seventies. Now it has become a buzz-word among the development practitioners. In the process, the word has been imputed to mean everything to everybody. No one now gets shocked if somebody uses the term "micro credit" to mean agricultural credit, or rural credit, or cooperative credit, or consumer credit, credit from the savings and loan associations, or from credit unions, or from money lenders. When someone claims micro credit has a thousand year history, or a hundred year history, nobody finds it as an exciting piece of historical information.

I think this is creating a lot of misunderstanding and confusion in the discussion about microcredit. We really don't know who is talking about what. I am proposing that we put labels to various types of microcredit so that we can clarify at the beginning of our discussion which microcredit we are talking about. This is very important for arriving at clear conclusions, formulating right policies, designing appropriate institutions and methodologies. Instead of just saying "microcredit" we should specify which category of microcredit.

Let me suggest a broad classification of microcredit:

A) Traditional informal microcredit (such as, moneylender's credit, pawn shops, loans from friends and relatives, consumer credit in informal market, etc.)
B) Microcredit based on traditional informal groups (such as, tontin, su su, ROSCA, etc.)
C) Activity-based microcredit through conventional or specialised banks (such as, agricultural credit, livestock credit, fisheries credit, handloom credit, etc.)
D) Rural credit through specialised banks.
E) Cooperative microcredit (cooperative credit, credit union, savings and loan associations, savings banks, etc.)
F) Consumer microcredit.
G) Bank-NGO partnership based microcredit.
H) Grameen type microcredit or Grameencredit.
I) Other types of NGO microcredit.
J) Other types of non-NGO non-collateralized microcredit.

This is a very quick attempt at classification of microcredit just to make a point. The point is? Every time we use the word "microcredit" we should make it clear which type (or cluster of types) of microcredit we are talking about. Otherwise we'll continue to create endless confusion in our discussion. Needless to say that the classification I have suggested is only tentative. We can refine this to allow better understanding and better policy decisions. Classification can also be made in the context of the issue under discussion. I am arguing that we must discontinue using the term "microcredit" or "microfinance" without identifying its category.

Microcredit data are compiled and published by different organizations. We find them useful. I propose that while publishing these data we identify the category or categories of microcredit each organization provides. Then we can prepare another set of important information? number of poor borrowers, and their gender composition, loan disbursed, loan outstanding, balance of savings, etc. under each of these categories, country-wise, region-wise, and globally.

These sets of information will tell us which category of microcredit is serving how many poor borrowers, their gender break-up, their growth during a year or a period, loans disbursed, loans outstanding, savings, etc. The categories which are doing better, more support can go in their direction. The categories which are doing poorly may be helped to improve their performance. For policy-maters this will be enormously helpful. For analysis purpose this will make a world of difference.

I urge Microcredit Summit Campaign secretariat to present the information that they already collect on number of clients, number of the poorest among them, number of poorest clients that are women, number of clients that have crossed the poverty line? broken down for each of the categories of microcredit. This will help donors to select the categories they would like to support. This sorting out is very important for the donors, as well as the policymakers.

Grameen credit

Whenever I use the word "microcredit" I actually have in mind Grameen type microcredit or Grameencredit. But if the person I am talking to understands it as some other category of microcredit my arguments will not make any sense to him. Let me list below the distinguishing features of Grameencredit. This is an exhaustive list of such features. Not every Grameen type programme has all these features present in the programme. Some programmes are strong in some of the features, while others are strong in some other features. But on the whole they display a general convergence to some basic features on the basis of which they introduce themselves as Grameen replication programmes or Grameen type programmes.

General features of Grameencredit are:

a) It promotes credit as a human right.
b) Its mission is to help the poor families to help themselves to overcome poverty. It is targeted to the poor, particularly poor women.
c) Most distinctive feature of Grameencredit is that it is not based on any collateral or legally enforceable contracts. It is based on "trust", not on legal procedures and system.
d) It is offered for creating self-employment for income-generating activities and housing for the poor, as opposed to consumption.
e) It was initiated as a challenge to the conventional banking which rejected the poor by classifying them to be "not creditworthy". As a result it rejected the basic methodology of the conventional banking and created its own methodology.
f) It provides service at the door-step of the poor based on the principle that the people should not go to the bank, bank should go to the people.
g) In order to obtain loans a borrower must join a group of borrowers.
h) Loans can be received in a continuous sequence. New loan becomes available to a borrower if her previous loan is repaid.
i) All loans are to be paid back in installments (weekly, or bi-weekly).
j) Simultaneously more than one loan can be received by a borrower.
k) It comes with both obligatory and voluntary savings programmes for the borrowers.
l) Generally these loans are given through non-profit organizations or through institutions owned primarily by the borrowers. If it is done through for-profit institutions not owned by the borrowers, efforts are made to keep the interest rate at a level which is close to a level commensurate with sustainability of the programme rather than bringing attractive return for the investors. Grameen credit's thumb-rule is to keep the interest rate as close to the market rate, prevailing in the commercial banking sector, as possible, without sacrificing sustain-ability. In fixing the interest rate market interest rate is taken as the reference rate, rather than the moneylenders' rate. Reaching the poor is its non-negotiable mission. Reaching sustainability is a directional goal. It must reach sustainability as soon as possible, so that it can expand its outreach without fund constraints.
m) Grameencredit gives high priority on building social capital. It is promoted through formation of groups and centres, developing leadership quality through annual election of group and centre leaders, electing board members when the institution is owned by the borrowers. To develop a social agenda owned by the borrowers, something similar to the "sixteen decisions", it undertakes a process of intensive discussion among the borrowers, and encourage them to take these decisions seriously and implement them. It gives special emphasis on the formation of human capital and concern for protecting environment. It monitors children's education, provides scholarships and student loans for higher education. For formation of human capital it makes efforts to bring technology, like mobile phones, solar power, and promote mechanical power to replace manual power.

Grameencredit is based on the premise that the poor have skills which remain unutilised or under-utilised. It is definitely not the lack of skills which make poor people poor. Grameen believes that the poverty is not created by the poor; it is created by the institutions and policies which surround them. In order to eliminate poverty all we need to do is to make appropriate changes in the institutions and policies, and/or create new ones. Grameen believes that charity is not an answer to poverty. It only helps poverty to continue. It creates dependency and takes away individual's initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty.

Grameen brought credit to the poor, women, the illiterate, the people who pleaded that they did not know how to invest money and earn an income. Grameen created a methodology and an institution around the financial needs of the poor, and created access to credit on reasonable term enabling the poor to build on their existing skill to earn a better income in each cycle of loans.

If donors can frame category-wise microcredit policies they may overcome some of their discomforts. General policy for microcredit in its wider sense is bound to be devoid of focus and sharpness.