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 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.

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.

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

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.