NextBillion.net - Development Through Enterprise - Microfinance

Kiva Co-founder: Microfinance Just ‘One Factor’ in Economic Growth

Derek Newberry — Thu, 01 May 2008 09:24:27 -0500

Matt Flannery, cofounder of Kiva.org, a website that partners with microfinance institutions to allow people to loan money to entrepreneurs in the developing world, discusses the microfinance industry and its growing popularity among large financial institutions and the development community. He says the practice of providing financial services to the poor is not necessarily going to increase a country's economic growth rate. Despite the high costs associated with making small loans, large financial institutions have become more interested in microfinance in recent years. Flannery says the combination of large sums of capital and limited opportunities for investment has caused the industry to become "clogged."

Since you started Kiva, microfinance has become quite a buzzword in the development community. People are making very big claims about what microfinance can do in terms of poverty reduction. What do you think microfinance can do and what are its limitations?

Microfinance is the practice of providing financial services to the poor, which is a great thing in and of itself. The poor deserve to have credit. Then again, I've failed to see a study that proves that there's a linkage between macroeconomic growth of a country and the provision of financial services to the poor. So my conclusion at this point is that microfinance is weakly associated with macroeconomic growth. It's just one factor; it's not necessarily going to cause a country's GDP [gross domestic product] to increase. It has to be accompanied by things like good governance, infrastructure, transparency in economics, and all sorts of other things that microfinance cannot in and of itself to bring about.

Unitus Receives Grant from Omidyar Network

Francisco Noguera — Mon, 28 Apr 2008 08:38:37 -0500

Omidyar Network and Unitus are pleased to announce plans to dramatically expand the worldwide availability of financial services to the poor. Omidyar Network, a philanthropic investment firm established by Pierre and Pam Omidyar, will invest $9 million in Unitus. This will represent Omidyar Network's largest grant in microfinance to date. Unitus, an international nonprofit organization dedicated to accelerating access to microfinance, will use this support to increase its network of microfinance partners and expand into several new regions over the next three years. This expansion will enable Unitus microfinance institution (MFI) partners to grow rapidly, strengthen their businesses, and reach millions of individuals currently excluded from the formal economic system with life-changing financial services.

"When Omidyar Network participated in the Unitus Leadership Summit last year in the Philippines, Pierre and I were impressed by the energy and enthusiasm with which Unitus and its partners are extending the reach of microfinance and transforming the lives of the poor," said Matt Bannick, Managing Partner, Omidyar Network. "When we look at the incredible results that Unitus and its partners have achieved over the past six years, we are thrilled to continue to support, scale, and champion these innovative organizations as they seek to maximize social impact."

MicroEnergy Credits Corporation: Catalyzing Clean Energy for the BoP

Grace Augustine — Fri, 18 Apr 2008 14:38:33 -0500

It is impossible to argue against the need for reliable energy at the BoP. Energy drives every facet of society, from nourishment to communication. According to the UNDP, at least 1.2 billion people suffer from energy poverty, which has profound impact on health, education, and livelihoods.

Increasingly, people are calling for the new energy models in developing nations to be "sustainable" and drawn from "clean" and renewable sources. The accepted belief is that if we can get developing nations on a path of adopting clean technologies, they can completely leapfrog the dirty, self-perpetuating system we have created in the west. However, there are barriers to establishing renewable energy projects at the BoP, on both the supply and demand side. One recently-launched for-profit social enterprise that hopes to revolutionize financing in this field is MicroEnergy Credits Corporation (MEC), and I had the wonderful pleasure of conversing with its founders, April Allderdice and James Dailey, last week.

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The Commercialization of Microfinance: The Good, The Bad and The Ugly

Rob Katz — Thu, 17 Apr 2008 17:45:29 -0500

Today in New York, I had the pleasure of attending a round table organized by the Council on Foreign Relations entitled The Commercialization of Microfinance: The Good, The Bad and The Ugly. Moderated by CFR Senior Fellow Isobel Coleman, the discussion featured comments from Mary Ellen Iskenderian (of Women's World Banking) and Roshaneh Zafar (of the Kashf Foundation.)

I arrived early, set up my laptop and grabbed a bite to eat (if you're curious, the CFR building is beautiful and they do a good lunch spread). Before I was through my sandwich, the room had filled to capacity and CFR staffers were scrambling to set up overflow seating – there’s clearly a lot of interest in the recent controversy surrounding microfinance. It was quickly apparent that women outnumbered men in the audience by a ratio of about 2:1 – interesting, though not completely unexpected given the importance of women in microfinance and the fact that the speakers and moderator are all women.

Coleman kicked off the session with brief introductions and quickly segued into the topic at hand – the good, bad and ugly of microfinance. She stated – without dissent – that microfinance now finds itself at an inflection point. On the one hand, there have been calls for microfinance not to profit off the backs of the poor, notably in the New York Times' coverage of Compartamos' IPO. On the other hand, those who know microfinance realize that it can't scale – from 100 million clients today to its potential market of 4 billion – without the capital markets, and the formality capital markets require.

I thought Coleman did a good job setting the stage here. From my perspective as a quasi-insider, there wasn't much new – but it is important to say nonetheless. Microfinance can and will go one of two directions, and it's pretty clear that there are strong arguments being made by advocates on either side.

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Guest Post: Glory and Riches? Unraveling Microfinance's Allure among Young Job-Seekers

Francisco Noguera — Wed, 16 Apr 2008 07:35:06 -0500

Guest blogger Lauren Withey is a research assistant for the World Resources Report at the World Resources Institute, in Washington D.C.

By Lauren Withey

It used to be that most U.S. college graduates, perhaps after spending a few years testing their penchants for various occupations or getting a second degree, would expect to settle into a consistent office job for the rest of their working lives. Attending a Microfinance Research Symposium at Georgetown University last week reminded me why such a smooth career path has become increasingly the exception rather than the rule among young job seekers today.

The Symposium was organized by FINCA International, a non-profit microfinance institution founded in 1984. Its first project was to create a group lending system - a "Village Bank" - in Bolivia. The success of this enterprise led to the growth of an extensive franchise network of these village banks, which now spans 21 countries, and serves over 700,000 clients.

The NGO's annual Research Symposium consists of presentations by the winners of a call for papers. The papers use FINCA's extensive client data, which is collected around the world each summer by Fellows, to advance the microfinance research agenda.

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France 24 Explores the "Dark Side" of Grameen Bank

Francisco Noguera — Tue, 08 Apr 2008 08:45:57 -0500

By FRANCE 24

Microcredit changed Shobi Rani's life. An impoverished yoghurt seller, Rani travels across her region in northern Bangladesh on a cycle rickshaw, selling her dairy produce. She is a beneficiary of microcredit, the much touted development scheme to help eradicate poverty.

Three months ago, Rani received a loan for 500 euros from the Grameen Bank to start her little dairy enterprise. Every week, a bank official carefully checks how her business is going.

The brainchild of Rani's fellow countryman Mohammed Yunus, who won the 2006 Nobel Peace Prize, the Grameen Bank has been hailed for executing the microcredit mantra: giving the poor a helping hand, not a handout.Called "the banker of the poor," Grameen has been attracting big businesses such as Danone, the French food giant, who supplies the yoghurt to Rani and thousands of other women in the area involved in similar projects.

But the situation is far from rosy in Kalihati, one of the first Bangladeshi villages to benefit from Grameen's low interest credit scheme. The villagers here who have taken a loan are unable to reimburse their credit, and claim to be harassed by Grameen Bank representatives. Korshed Alom, a former debt collector, was put into early retirement for having questioned the Grameen Bank's methods: "Their technique is to scare borrowers and insult them. We tell them to sell their clothes, that they have no other choice. I'm not proud of myself, but several times, I had even been obliged to say ‘sell your children.'"

CNN Features Kiva and Microplace

Francisco Noguera — Mon, 07 Apr 2008 15:33:38 -0500

By Jen Haley

Lovisa Asinde is a Ugandan widow who supports herself and her five children selling food. She started the small business eight years ago, and planned to open a larger restaurant in the center of her town.

But when one of her children fell ill she was unable to work, and she lacked the $500 needed to buy saucepans, plates and food staples.

So, strange as it may seem, Asinde went looking for international investors. She found several.

New Yorker Bill Gilroy invested $100 in her business along with eight other investors from as far away as the Netherlands.

Gilroy has never met Asinde. In fact, all he knows about her he found on Kiva.org -- a Web site that connects entrepreneurs in developing nations to investors in the United States and abroad.

This is microfinancing. It allows everyday people to invest as little as $25 to help people in developing countries climb out of poverty. The concept of microfinancing is nothing new. At its essence, it's making small loans to the working poor. The loans are used to establish or expand small businesses to help families earn more money.

Compartamos and the Debate around the Focus on Profits in Microfinance

Francisco Noguera — Sun, 06 Apr 2008 20:33:31 -0500

By Elizabeth Malkin

VILLA DE VÁZQUEZ, Mexico - Carlos Danel and Carlos Labarthe turned a nonprofit that lent money to Mexico's poor into one of the country's most profitable banks.

But not all of their colleagues in the world of microlending - so named for the tiny loans it grants - are heaping praise on the co-executives of Compartamos. Some are vilifying them as "pawnbrokers" and "money lenders."

They are the center of a fractious debate: how far should microfinance go toward becoming big business?

At one end stand traditional microlenders, like the economist Muhammad Yunus, founder of the most famous microlender, the Grameen Bank, and winner of the 2006 Nobel Peace Prize. At the other are the Two Carloses, as they are widely known in this tight-knit world that gave them their start as starry-eyed idealists.

What if Microfinance Flourished in Nigeria?

Francisco Noguera — Tue, 01 Apr 2008 11:00:23 -0500

Microfinance is often considered as one of the most effective and flexible strategies in the fight against global poverty. It is sustainable and can be implemented on a massive scale necessary to respond to the urgent needs of those living on less than N120 ($1) a day, i.e, the world's poorest.

If we close our eyes to the cities for a while and go back to the villages and rural areas, the effect of poverty and the developmental roles of microfinance can be felt in its fullest force.

There are still hundreds of villages in Nigeria where people cannot afford to give their children eggs in many years, where rice is cooked only on Christmas or Ileya days, where children eating food with beef or chicken are still considered greedy or "longer throat," where children manage to get clothes only once a year and where girl child cannot be sent to school but nurtured from birth to be given out in marriage on already agreed bride prices. For such villages, if a woman is given a loan of N5000 (less than $50) she may 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 therefore typically consists of making small loans, usually less than N25,000 , to individuals, mainly women, to establish or expand small, self-sustaining businesses. Microfinance also includes several support systems that contribute greatly to its success. This is why microfinance institutions offer business advice and counseling, while clients provide peer support for each other through solidarity groups and circles. Another aspect of microfinance (particularly in the village banking where every one knows every body) that is equally important is the recycling of funds. As loans are repaid, usually in six months to a year, they are re-loaned to group members. This continual reinvestment multiplies the impact of each naira credit by the microfinance institution.

Microfinance has a positive impact far beyond the individual client. A vast majority of global micro loans go to women. In 2005, a magazine article reported that "of Grameen Bank's 6.39 million borrowers, 96 percent were women." 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 all over the world."

Micro-loans and Macro-expectations

Nitin Rao — Tue, 25 Mar 2008 10:21:44 -0500

Via NextBillion ally Reuben Abraham, I was pointed to James Surowiecki's recent article, What Microloans Miss in The New Yorker.

Surowiecki points out that while microfinance does a tremendous amount of good, there are also real limits to what it can accomplish. With over $25 billions of loans and websites to lend to the poor, microloans are increasingly being viewed as a panacea for all issues of poverty.

An excerpt:

The idealized view of microfinance is that budding entrepreneurs use the loans to start and grow businesses—expanding operations, boosting inventory, and so on. The reality is more complicated. Microloans are often used to “smooth consumption”—tiding a borrower over in times of crisis. They’re also, as Karol Boudreaux and Tyler Cowen point out in a recent paper, often used for non-business expenses, such as a child’s education. It’s less common to find them used to fund major business expansions or to hire new employees. In part, this is because the loans can be very small—frequently as little as fifty or a hundred dollars—and generally come with very high interest rates, often above thirty or forty per cent. But it’s also because most microbusinesses aren’t looking to take on more workers. The vast majority have only one paid employee: the owner.

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