Germany acts to safeguard microcredit lending
The Next Step for Microfinance: Taking Deposits
Barbara Kiviat - Time -
Sunday, Aug. 30, 2009
Some 30 years ago, the field of microfinance was born from a radical concept: poor people, when lent small amounts of money, will pay it back in a timely manner. In the meantime, that money can be put to use in ways that help boost income—goat farming, say, or carpet weaving—and, ostensibly, raise a family's standard of living. Now another radical concept is starting to take hold: that the thing people really need, more than business loans, is a safe place to save their money. It's what development expert Robert Vogel calls the "forgotten half of rural finance."
To be clear, loans aren't going away. A quick look back at last year's credit crunch reminds us how important lent money can be to economic activity. The reason loans came first in microfinance, though, wasn't grand strategy but pragmatism. In most parts of the world anyone can make a loan, including the non-profits that trek into developing countries to reach people traditional financial institutions have ignored. The same isn't true of savings accounts and other banking products, which are typically heavily regulated.
Yet ask people what they want, what's more important for day-to-day living in a Ugandan village or Indian slum, and a safe place to keep their money often trumps business lending. Early adopters of what's sometimes called savings-led microfinance find that the demand for savings accounts far outstrips the demand for loans. Bank Rakyat in Indonesia, for instance, has 10 savers for every one borrower. "Low-income people need a variety of financial services," says Bob Christen, director of the financial services group at the Gates Foundation, which has given tens of millions of dollars in grants to savings initiatives.
This, of course, makes perfect sense. Simply think of your own saving and borrowing habits. In fact, even under the construct of microcredit—which, by definition, lends money for business use—borrowers often spend part of their loan on things that would typically be paid for from a checking or savings account. Survey data from Bank Rakyat shows that micro-borrowers use funds for household needs, like school fees, home repairs and holiday expenses, some 30% of the time. The issue, importantly, is not that poor people don't have savings, but rather that they tend to save in hard-to-tap assets, like livestock and jewelry. To free up cash, the solution is often to pawn possessions—and to pay someone a fee in the process.
The range of work the Gates Foundation has found to fund shows the breadth of organizations interested in creating a better way. Some money is going to help existing savings institutions and credit unions gather more deposits, but a lot is also funding development in technology meant to make savings easier to access and accounts less costly to maintain. "Agent-based banking," in which financial services are delivered though existing institutions—like pharmacies and newsstands—is one key area of research. Another: mobile banking. In Kenya, for example, the telecom M-Pesa has seen smash success with its mobile-phone-based banking, which includes a way to save.
A number of traditional microfinance institutions, many of which have evolved into formal banks, are also assigning renewed importance to gathering deposits. A few years ago, Grameen, one of the industry's largest players, loosened rules around its savings accounts to better accommodate how clients wanted to use them.
But not all microfinance institutions have been quick to drum up savings. While some microfinance institutions, especially well-established players in Latin America, rely heavily on depositor funding, many other organizations find it easier to run their microlending businesses with money from investors. Microcredit is such a hot topic in the realm of finance that even with the credit crunch, many institutions are awash with money from investors drawn to the notion of making a profit while simultaneously furthering a social mission. The idea of gathering deposits seems time-consuming and expensive without much pay-off.
So some development outfits are essentially going back to the beginning and building new organizations with savings at the center. Since 2005 Oxfam America has been creating savings groups in villages in Mali, Cambodia, Senegal and El Salvador. Each group has about 20 members—in the tradition of microfinance, almost all of them are women. The members contribute a small amount of money each week, and then, from this pot of savings, lend out sums to those members who need loans. The program is based on a model that's common throughout the world—such groups are called tandas in India and tontines in West Africa—and designed for Oxfam to eventually bow out.
"What we've done is taken the paradigm of microfinance and flipped it inside out," says Jeffrey Ashe, Oxfam America's director of community finance. "We're creating autonomous groups and defining sustainability in a whole new way." In many ways it's microfinance back to its roots—small, rural, community-based. But it also represents the next step forward.
Froth at the bottom of the pyramid
Is microfinance going the same way as subprime mortgages?
Aug 25th 2009 - Economist.com
The notion, popularised by C.K. Prahalad’s
best-seller, “The Fortune at
the Bottom of the Pyramid”, that poor people should be seen as
potentially profitable customers rather than mere charity cases, has
caught on fast in the past few years. Finding profitable ways to meet
the needs of poor people, the idea goes, would not only empower them by
making them customers rather than supplicants, it would also attract
far more capital than would ever be forthcoming from charity. For the
providers of this capital, catering to the bottom of the pyramid
promised to be good for the soul as well as the wallet.A growing number of investors have taken the chance, investing in bottom-of-the-pyramid businesses, of which by far the most popular to date is microfinance—providing loans and other financial services to people ignored as too poor by the traditional banking system. Yet as this idea has spread, it has become increasingly controversial.
The first line of attack, taken up by such luminaries as Muhammad Yunus, the Nobel Peace prize-winning founder of the non-profit microfinance institution, Grameen Bank, is to accuse for-profit providers of charging their poor customers too much. Compartamos Banco, a Mexican microfinance firm that had a successful initial public offering (IPO) in 2007, has been denounced by Mr Yunus and others for charging interest rates of close to 100% a year.
Now a second line of attack has been launched, in which for-profit microfinance firms are accused of lending recklessly to people too poor to repay the loans. An article in the Wall Street Journal on August 13th, “A Global Surge in Tiny Loans Spurs Credit Bubble in a Slum”, reported on a “repayment revolt” by over-indebted borrowers in the Indian shanty town of Ramanagaram, in the state of Karnataka, which had been “carpet-bombed” with loans from microfinance firms. This, the article continued, was evidence of a “credit crisis brewing” in microfinance. Moreover, it continued, ominously, “many of the problems in Indian microlending might sound familiar to students of the US mortgage crisis.”
Are microfinance loans the new subprime mortgages? The Journal article certainly contains plenty of echoes of the American mortgage-lending binge in the middle of this decade, including loans made without any proof of income from borrowers by loan officers on commission. And, in contrast to the classic image of microfinance as a source of credit for “microentrepreneurs” to expand their small businesses and thus grow their way out of poverty, it also described loans being used to finance shopping sprees, or to pay off loans from other lenders, including loan sharks.
Moreover, claims of a bubble are particularly worrying in India at the moment, as it has recently overtaken Latin America as the world’s most dynamic microfinance market, especially for for-profit microfinance. Some 22m Indians are now served by microfinance institutions, and outstanding credit has been growing at over 50% a year.
In a lengthy response to the article, Vikram Akula, founder of SKS, one of India’s largest microfinance lenders, complained that it was “unbalanced and misleading”, making an “absurd” sweeping generalisation based on anecdotal information from one neighbourhood. Mr Akula would say that, especially as his for-profit firm, backed by venture capital from Silicon Valley, is expected to go public soon in a doubtless lucrative IPO. But he makes a compelling case nonetheless.
Microfinance institutions in India have repayment rates of over 95%, suggesting that only a few borrowers are struggling with the debt they have taken on
First, microfinance institutions in India have repayment rates of over 95% (in SKS’s case, 99%), which suggests that only a small proportion of borrowers are struggling with the debt they have taken on. Second, repayment problems in Ramanagaram may reflect specific local issues, ranging from a cyclical downturn in the silk industry to patriarchal opposition to the financial empowerment of women (who account for a majority of borrowers from microfinance outfits around the world). According to the Journal, there was strong opposition to microfinance from Muslim clerics in the town.
Moreover, the authors of an academic study cited in the article themselves admit that it was “difficult” for them to tell the difference between a rise in credit due to excessive supply or surging demand. And if borrowers are using their loans to pay off other loans that charge higher interest rates, “this is not necessarily a bad thing”. Quite.
As for comparisons with America’s subprime mortgage mess, Mr Akula claims that the majority of Indian microfinance institutions, including SKS, do not incentivise their loan officers to make larger loans. SKS requires all its borrowers to undertake three hours of “financial-literacy training”, and to pass a test showing that they understand interest rates, loan instalments and other product features, before the loan is made. Although Mr Akula concedes that not all microfinance lenders are as thorough in ensuring that their borrowers are capable of repaying, there may be lessons here for lenders in America and other rich countries.
Indeed, contrary to the frothy picture painted in the Journal article, one of the reasons that for-profit investors have become interested in microfinance is the evidence that its performance has been far more predictable than many other sorts of lending (although some international investors have been caught out by ignoring warnings about the exchange-rate risk of foreign microfinance securities).
Weighing up the evidence, Jonathan Morduch of New York University, a co-author of “Portfolios of the Poor”, an excellent new book on the finances of people in the developing world, says that “the problem of a microcredit bubble should not be dismissed”. Lenders operate with very limited information—there is an urgent need for credit bureaus in the developing world—and so do sometimes over-lend. Even Mr Yunus’s non-profit Grameen Bank had a repayment crisis in the late 1990s in part because it was “moving too much money out of the door too quickly—and their clients couldn’t absorb it,” says Mr Morduch.
Moreover, he predicts that “there will likely be a big microfinance failure some place, bigger than what we have seen to date.” Yet, Mr Morduch concludes, although today there may be localised bubbles in microfinance, “I don’t see any evidence at all for something like a global bubble.”
Indeed, the real story of the past year may be of a regrettable slowdown in the growth of microfinance. According to ACCION International, a global network of microfinance schemes, although there are isolated pockets of frothy lending—in Bosnia and Nicaragua, for example—the microfinance industry has not been entirely immune from the credit crisis, and growth has slowed due to weaker demand and funding difficulties.
The bottom line at the bottom of the pyramid is that financial services remain shockingly scarce. “I have a hard time to see how there can be a bubble when the microfinance industry still has not served 90% of its clients,” says Álvaro Rodríguez Arregui, a former chairman of ACCION and now chairman of Compartamos Banco. He estimates that there are currently 100m microfinance clients out of one billion poor people who want access to financial services.
Mr Rodríguez thinks that occasional local bubbles may even be better than bubble-free growth. “It is great to have a gold rush because that is the only way to develop a competitive industry. When entrepreneurs rush into an industry, you get innovation, efficiencies, more product offerings and better pricing, with the ultimate beneficiary being the customers.” As he points out, “before the Compartamos IPO, there were 200 microfinance institutions in Mexico, today there are 800. Which is great!”
Germany acts to safeguard microcredit lending
January 19, 2009
The
German Development Bank – KfW Entwicklungsbank, acting on behalf of the
German Development Ministry (BMZ), is contributing nearly 100 million
euros (130 million USD) to a Fund to be used to ease refinancing
bottlenecks experienced by microfinance institutions (MFIs) in
developing and transition countries.Microfinance institutions are also coming under pressure due to the global financial crisis, because private investors are holding back and savings deposits are down. As a result, some microfinance institutions face the threat of insolvency.
Microcredits for micro-enterprises are of enormous importance when it comes to stimulating economic growth in developing and transition countries and thus creating and securing jobs. A drastic reduction in the volume of microcredit lending would mean the loss of their hard-won livelihoods for countless numbers of people.
The money from the cross-border Fund will provide a rapid remedy against the fall in the volume of lending by microfinance institutions. Speaking about the current situation, German Development Minister Heidemarie Wieczorek-Zeul said, "We must take action to ensure that those who are least responsible for the failure of the financial markets do not bear the brunt of the hardships caused by the crisis. That applies particularly to women."
In India, the Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) supports a linkage banking programme of the National Bank for Agriculture and Rural Development (NABARD) on behalf of the Federal Ministry for Economic Cooperation and Development (BMZ). Under the terms of this programme, individuals–almost exclusively women in practice, get together to set up self-help groups and first save small sums of five to ten cents a day. Having proven their financial discipline through saving, they become eligible for loans. This allows them to fit out a food store, buy animals or produce handicraft products which they can then sell. The average loan totals about 50 euros per person.
The Indian programme is the largest microfinance project in the world, with a total of some three million self-help groups linked to banks with a cumulative credit disbursement of 3 billion euros, reaching out to more than 40 million rural households.
The improved access of self help group members to sustainable financial services as well as the group approach and related capacity building processes are contributing in several direct and indirect ways to achievements of the Millennium Development Goals concerning eradication of poverty, universal primary education, gender equality and improved health care.
Germany is one of the leading donors in the field of microfinance. The German Development Ministry allocates about 130 million euros a year to this sector, supporting some 100 microfinance programmes in 63 countries. KfW’s contribution to the Microfinance Fund is an additional measure in the wake of the financial crisis. This commitment underlines the huge importance of microfinance as a component of German development policy.
It is planned that the Fund, which has been developed in a cooperative effort involving KfW Entwicklungsbank and the International Finance Corporation (IFC), a member of the World Bank Group, will be endowed with a total of 500 million US dollars altogether.
In a second phase, plans call for endowing the facility with further funds from the BMZ and other public donors. Additional funds are also to be mobilised from further development financiers and possibly commercial investors as well.
See also:
NYT Revealed True Cause of Fannie Mae Crisis -- In 1999!
Global stock markets tumble as sub-prime contagion spreads
Microfinance: A Way to Help the Poor Build Assets
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