Sunday, March 28, 2010

Small Loans, Significant Impact



They are part of a nascent lending program created by Muhammad Yunus, a Bangladeshi economist who won the 2006 Nobel Peace Prize for developing the Grameen Bank, which uses micro-loans to help eradicate poverty in developing nations.

But these women are not in Bangladesh, they are in Queens. They are among the first 100 borrowers of Grameen America, which began disbursing loans in January. This is the first time Grameen has run its program in a developed country.

"I just want to live a little better, and one day own a little house or something," said Socorro Diaz, 54, a borrower who sells women's lingerie and jewelry. "I'm trying to change my life. Bit by bit."

Grameen America, which offers loans from $500 to $3,000, hopes to reach people like her, part of the large segment of poor Americans without access to credit, said Ritu Chattree, the vice president for finance and development.

They are bakers who can only buy enough eggs and milk for a day's work because they cannot afford a restaurant refrigerator to store ingredients. They are vendors who borrow money daily to rent a cart. They are hair salon owners who take out loans every time they need to buy shampoo.

They often use pawn shops, or fall prey to check-cashing stores, loan sharks, and payday lenders, which can charge interest rates of 200 or 300 percent, Chattree said.

"You think this is normal, because you grew up with it," said Yunus of such high-interest lending in a recent interview with the Financial Times. "This is an abnormal situation, because of the problem with the financial system, so we have to adjust the financial system."

His adjustment begins with this experiment in the immigrant neighborhood of Jackson Heights, Queens.

Three groups of five borrowers attend the meeting in the apartment of Jenny Guante, 40, who makes silver and gold jewelry and runs a home day care. Some are making weekly loan payments; the largest payment is $66 on a $3,000 loan. Guante, the group's chairwoman, counts the money carefully before passing it to Alethia Mendez, the Grameen staff member who serves as community banker and center director.

"I've known these people forever," said one borrower in the roomful of immigrants from the Dominican Republic. "We grew up together. We went to school together around the corner."

That bond helps people make payments, said Chattree. If one woman is having trouble repaying a loan because, say, her husband is sick and she has to care for him and the children, another of her group might pitch in to help with child care. Loan disbursements for the whole group are slowed if one person defaults, she said.

After the meeting, as several women drift off into the kitchen with a calculator to discuss their plans, 10 new prospective borrowers stop by the apartment.

The program began in 1974, when Yunus lent $27 to a group of poor villagers and realized that even small amounts could make transformative differences. He set up the Grameen Bank, which has since disbursed about $6 billion in tiny loans to about 7.4 million Bangladeshi micro-entrepreneurs, mostly women in businesses such as street vending and farming.

In Bangladesh, Grameen also functions as a savings bank, makes college and housing loans, and operates projects in areas such as telecommunications, yogurt production and solar energy.

The problem with capitalism, Yunus says, is its distinction between companies pursuing profit and charities pursuing good. His bank model operates with corporate efficiency, but pumps profits back into social objectives.

The borrowers in Queens are following Grameen's self-sufficient model in the developing world.

But Yunus acknowledges that the United States is different from the seven countries where Grameen operates its loan programs, or the dozens of others where Grameen has offered technical advice.

Here, there is more regulation, so a person cannot just set up a cart and sell cakes without a permit.

The welfare system discourages income-generating activities, Yunus says. "If you earn a dollar, that dollar is to be deducted from your welfare check. If you want to quit welfare, then you lose your health benefits," he told the Financial Times.

Rules for setting up a bank are cumbersome for a micro-operation, and Yunus has met with the head of the Federal Reserve and members of Congress to discuss creating more flexible legal frameworks.

Grameen America will break even when it has 20,000 borrowers, Chattree said, a scale she expects to achieve in three to five years.

That is something that no American micro-lender has achieved, said Michael Chu, a specialist in micro-finance at Harvard. "In general, the feeling is that micro-finance doesn't work in the States," said Chattree, even though many groups, including some aided by the Grameen Trust, have followed the Grameen model.

Other micro-lenders and academics say that if anyone can spark discussion on the issue, Grameen can.

Thursday, March 25, 2010

Commercialization of Microfinance in Bangladesh



In view of the foregoing, strategic emphasis should be given on commercialization by the NGO-MFIs . In fact, the article attempts to focus on the issues of microfinance NGOs. The term "commercialization" in the microfinance industry of Bangladesh is relatively a nascent idea and has understandably wide ramifications. This concept is also gradually gaining ground in some other developing countries of the world. Chiefly, it tends to treat the poor as clients rather than as beneficiaries. It conceives the microfinance market not as segmented markets but as the integral of part of the country's total monetary system. It takes into view of healthy competition through product differentiation that encompasses the practice of marketing by launching new products. On the other hand, grant money that has zero cost, is not perceived favorably by many small potential organizations in the country as it distorts market competition. Anyway, microfinance is considered as a business and there is every justification to look at it from commercial angle. Notably, forty percent of a large sample of 533 NGO-MFIs surveyed recently shows that they have received grants from various donors for operating microfinance programs. Of the aforesaid figure, about thirty five percent has also received concessionary loans. There may be a commonality, however, between the grants and soft loans recipients. This advantage of grants and soft loans received by a segment of organizations may put the majority NGOs in a precarious position in pricing their loans. As a result, maximum number of NGOs will enjoy a very thin spread, if the grants and soft loan culture continues. Under the circumstances, the donors should ponder to review their policy of providing grants. The donors may rather come up with alternative ways of financing. This will consequently invigorate commercialization and help expand the microfinance market. This commercial approach also argues for the delivery of services at a scale and cost commensurate with the needs and ability of the market for which it is intended. People are indeed willing to pay full cost for a service they value. This is the universal text of value in market-based economy.

Friday, March 12, 2010

Microfinance, the ultimate solution against poverty?


Microfinance, the concept

The concept of microfinance is to reach a large portion of the poor people who do not have access to regular banks either because such banks do not exist in their territory or even if they did they would not lend money to them as no suitable collateral assets exist.

A suitable collateral has to have a market value but also be easily trappable. Nobody can imagine your next-door banker going around trying to rescue a cow or farming tools to recover their investment, it would just be let die or stolen and then written off.

In absence of finance would be entrepreneurs turn to the family or friends, but often the entourage is poor as well or reluctant to put at risk what they have. Here is why unofficial or, worse, illegal channels, including usury, have so much success and can dictate their terms

Managing microfinance loans is expensive

The interest rate charged by microfinance institutions, usually around 25% above inflation, is higher than regular banks, but still much better than unofficial channels. The reason for that is not the default rate, as one would think – it is in fact quite low -, but because managing the loan is expensive. First of all, the principal is low and therefore the management relative importance is high. Besides, in order to increase the chances of success, the control is quite strict and frequent. Sometimes basic management education courses are involved. For instance, in many uneducated populations the concept of saving for future bad times is rather blur or non-existent. Income volatility has a direct impact on their life. Another concept hard to break is that power and income is directly proportional to the number of children. It is here that microfinance is believed to be more effective than simple donations or subsidies. A principle that could be valid for tackling Western unemployment as well, perhaps?

How microfinance works

The way it is managed is rather interesting: the loan is usually granted to the main female member of the family because she has a stronger motivation to spend the profit of her business to feed the rest of the family and make them survive long-term. Sadly, an uneducated man is more likely to waste principal and revenues onto drinks, playing or betting. More importantly, the loan is organised around a ‘self-help’ group (moderated by a representative of the lender organisation) which shares the responsibility for the loan and its repayment. The group meets regularly and ensures that each one contributes to the success of the ‘venture’ and has a vested interest on it. A strong group usually succeeds more frequently than individuals also in this area. This might remind you some job design concepts like self-autonomous workgroups applied to quite a different environment. Finally, I would like to mention an interested development which tries to address an aspect of the cost of finance in microfinance and that is money raising and transaction cost. An organisation like www.kiva.org collects money directly from lenders on behalf of lending institutions on the field, thus bypassing a number of passages and associated costs. In that ‘marketplace’ the not-for-profit money provider provides funds directly and even chooses the target borrower by analysing profiles, projects and situations; bear in mind that the lender individual shall expect the payback of the principal only, which can then be granted again to another entrepreneur. Involved sums are capped.

Conclusion?

Statistics show that this approach is working better than other instruments in lifting poverty and raising education levels in certain areas of the world, but it cannot be the only mean for such an extremely large problem. I welcome views and experiences that readers might have on microfinance.

Concept of Joint Liability Group in Microfinance


Microfinance sector caters to the need of poor people and the loans given by microfinance institutions are unsecured i.e. they are not backed by any security. Poor people utilise this money by setting up some small business to earn their livelihood and for various other purposes. You must be thinking that it is very risky to give loans to poor as if they don’t repay the loan you can’t do anything about it. To concur this challenge microfinance industry has adopted the concept of Joint Liability Group. Though it doesnt solve all the problems but it reduces them to some extent.

In Joint Liability Group, The borrowers make a group among themselves and the microfinance institutions give loan to that group. One person in that group is appointed as leader of the group and each person is resposible for the loan taken by any member of the group. If any one person in the group defaults then other group members will have to pay for that.

This Group concept is helpful because eveyone is being monitored by other people in the group and the borrower utilise his money properly. If any one defaults, other group members will make all possible efforts to take money back and he will not find any place in any group next time. So, he will not be able to take loan in future. This thing motivates the borrowers to maintain discipline while asking for loan and utilising it appropriately.

Though sometimes the groups also defaults however it is uncommon. The joint liability group concept helps the microfinance institutions in reducing the default risk and at the same time inculcate the habit of disciplined management of finance among the poor.

Celebrating the contributions of MicroLoan Foundation clients on International Women’s Day


To mark International Women’s Day MicroLoan Foundation held a discussion group of four clients from Nkhamenya town to talk about issues that are important to them as businesswomen. The attendees are all on their sixth loan cycle. They are:
• Febbie Chaponda who sells second hand clothes and bakes and sells samosas.
• Magret Msimuko who runs a small restaurant selling rice or nsima with meat and vegetables.
• Witness Banda who runs a grocery selling soap, oil, rice, flour and sugar.
• Sella Mkwewe who is a tailor.

When it comes to the differences that MicroLoan Foundation has made to their lives, the women are clear: the profits from their businesses have helped them pay for their children’s school fees, buy better clothes for their family and make improvements to their homes. In fact, Febbie says that it was through seeing a MicroLoan client’s success in her community that she herself first joined as a client. Now, the women agree, it is up to them as MicroLoan clients to act as mentors to others ‘who don’t know business so that they learn to do business to help their families’. The contributions they have been able to make in their homes and communities give the women great pride. Febbie says she was able to pay for her children’s school books recently as her husband’s salary had not yet come through. Witness adds, ‘although it is the hungry period [i.e. before the harvest, when people struggle the most to feed their families] I have been able to buy maize and a big pot for cooking nsima!’.

Although women in their communities look up to them as MicroLoan clients, the clients also continue to aspire to be like other successful businesswomen in their communities. Sella explains, ‘there is a woman in Nkhamenya who owns a wholesale business. I admire her very much because her business is expanding and she owns a number of houses that she rents out. She is a leader. When there is a funeral she helps people by giving them food and money’.

These are just a snapshot of a few of the women who work hard to run their small businesses in order to improve their lives, and those of their families and communities. We celebrate their contributions and achievements this International Women’s Da

Tuesday, March 9, 2010

Putting the Microsavings in Microfinance




It has become increasingly clear that the most important element of microfinance isn’t lending, but savings. That lesson was taught to me by SEWA in India, Kashf in Pakistan and Grameen in Bangladesh. Only some poor people will benefit from the chance to borrow, but almost all will benefit from the chance to save.

That’s also a lesson of a fascinating new book, “Portfolios of the Poor: How the World’s Poor Live on $2 a Day.” It looks at the financial activities of very poor families, and I was struck in particular from the surveys by how often poor families lost everything from crime. If you don’t have a bank account (because you can’t open one), and all your money is in a coffee can under the bed — well, you can be wiped out in an hour. In South Africa, 11 percent of the sample faced a financial emergency in any one year from theft or violent crime. In Bangladesh, 7 percent were cheated or lost cash, and 19 percent lost their home or property through fire or other means. To be poor truly is to live precariously.

Likewise, the book notes that many poor people must pay to save. That’s right — instead of receiving interest for depositing their savings with someone, they have to pay interest on their own money. One common scheme in West Africa, for example, charges an annual interest of 40 percent for accepting savings. If you struggle to save $100, a year later you have $60. But at least it’s safer than it would be under the bed. If we develop banks that actually serve the poor and accept savings, even if they paid zero interest, that would be a huge step forward and a big incentive to start saving.

How Successful is Microfinance in Africa?




The discussion earlier in this blog about microsavings vs. microlending made me think that I should borrow from the expertise of you readers out there.

I have a general sense that microfinance has been very successful in South Asia, but that in Africa it has had more of a mixed record. Do others share that view? And, if it’s true, why hasn’t it been as successful in Africa as in Asia? I can imagine that lower population density means higher operating costs, and that lower economic growth rates mean fewer opportunities to invest successfully. Or is it, as Muhammad Yunus once told me, that the models in Africa sometimes haven’t been quite right, but that when they are introduced properly they work as well in Africa as in South Asia?