Weaving an Entrepreneurial Future – the Role of Microcredit
“When combined with information and communication technologies, microcredit can unleash new opportunities for the world’s poorest entrepreneurs and thereby revitalize the village economies they serve.”
– Madeleine K. Albright, U.S. Secretary of State (1997-2001)
By Donna Shaver
The poor, like everyone else, need a diverse range of financial services to run their businesses, build assets, smooth consumption, and manage risk. Farmers need cash to buy seed or chicks or a cow with the expectation they will be able to repay when they sell their crops, eggs or milk. But the poor do not have the collateral required to qualify for a conventional loan. As a result, they have often fallen victim to loan sharks, with usurious interest rates.
Many non-profit organizations have adopted microfinance as a part of their program to enable their recipients to become economically self-sufficient.
Our Dining for Women recipient this month is MayaWorks in Guatemala, one of the poorest countries in the Western Hemisphere. MayaWorks operates a program in the regions of Chimaltenango and Solola to empower indigenous women to end their cycle of poverty, achieve economic security, and create a brighter future for themselves and their families.
MayaWorks provides markets for their handcrafted products, access to microcredit loans and expanded educational opportunities.
MayaWorks is an excellent example of a coordinated program in which microcredit is part of a larger program of education and support. Women learn how to develop business plans, which they must submit to get micro-loans. They are trained in basic financial management and business administration, and receive new skills training.
Millenium Development Goals addressed by MayaWorks
Status in South America and the Caribbean
Goal 1: Eradicate extreme poverty and hunger
Target: Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day. This has been reached in the region where the percentage dropped from 12 in 1990 to 6 in 2008.
Target: Achieve full and productive employment and decent work for all, including women and young people. Developing regions continue to lag. The region has achieved very limited gains over the last decade.
Target: Halve, between 1990 and 2015, the proportion of people who suffer from hunger. The proportion of people in the region who are undernourished was 12 percent in 1990-92 and eight percent in 2006-08. But significant progress has been made on the proportion of children who are underweight. , the proportion of children under five who are moderately or severely underweight was eight percent in 1990 and three percent in 2010, well below their target. But there remains a significant difference between rural and urban children. Three percent of urban children are underweight.
Goal 2: Achieve universal primary education
Target: Ensure that, by 2015, children everywhere will be able to complete primary education.
In 2010, the global primary completion rate reached 90 percent, compared with 81 percent in 1999. Guatemala falls behind the rest of the region with a primary education rate of 86 percent in 2010.
Microfinance was the brainchild of Muhammad Yunus, head of the Economics Department at Chittagong University in Bangladesh, in 1976. He discovered that very small loans to the poor could enable them to leverage themselves out of extreme poverty. This revelation led him to found the Grameen Bank in 1983, specifically to make loans to the poor. Even the name embodies that intent -“Grameen” means “rural” or “village” in Bengali. Yunus and the Grameen Bank won the Nobel Peace Prize in 2006.
Microfinance is the supply of low value loans, savings and other basic financial services to the poor, a market generally not served by traditional banks which demand collateral. Microfinance Institutions originally were non-traditional organizations which made small loans ($20 – $300) to the poor with the intent to help them improve their economic situation and escape poverty. Interest rates were relatively high. Microfinance was their model, and the intent was to make enough money to continually expand the program to serve more people.
In time, microcredit came to be viewed as a magic bullet to end poverty. Well-run programs have certainly had success in their mission. Early adopters of the microfinance model were non-profits. Their aim was indeed the alleviation of poverty, and many of their efforts were directed toward empowering women economically.
The Grameen Bank was based on that principle, and embodied it by hiring many women to manage local offices and visit women in the villages throughout Bangladesh. In 2011, rural women accounted for 97 percent of microfinance loans in India.
Freedom from Hunger (a DFW funded program in July 2007) was a very early adopter of microfinance best known for its proven self-help service, Credit with Education (CWE), now operating in 17 of the world’s poorest countries. CWE provides microfinance and education for women, enabling them to launch and manage home-based businesses and empowering them with information to make the most of their new income.
Freedom from Hunger also developed an integrated microcredit program in which women borrow and repay as a group, providing mutual support. These credit associations are provided with education on running businesses, investing and a broad range of topics such as nutrition, contraception, hygiene and more. Variations on this model are widespread among non-profits.
Microfinance by the numbers
The Latin American and Caribbean region is served by a large number of microfinance institutions. The following data were reported for the Latin American and Caribbean sector for the Inter-American Development Bank (IDB) in 2013.
|$12.3 billion||The total loan portfolio of the Latin American and Caribbean microfinance industry rose to $12.3 billion at the end of 2009. The regional average microloan was $1,200 bearing a 29 percent interest rate.|
|10.5 million||Latin American and Caribbean microfinance institutions had 10.5 million borrowers at the end of 2009.|
|1 in 6||Despite its strong growth over the past decades, microfinance is only available to about 1 in 6 potential clients in Latin America and the Caribbean. However, penetration rates vary from country to country. In countries where industry is less developed, less than 1 in 20 potential clients have been reached.|
Source: Inter-American Development Bank, 2013
The Future of Microfinance
Microfinance is in the process of evolving with the addition of new services—such as microsavings, cash transfer, and insurance.
Equity Bank Group in Kenya has a thriving microloan program in which non-performing loans account for only 2.7 percent of their total portfolio. They even help small businesses through their agency model, in which they pay commissions to storefront operators who act as remote bank tellers in rural areas. And they use the successful non-profit model of shared responsibility: They require that borrowers be part of a loan group of at least a dozen people willing to be co-signers.
There are many questions that remain to be answered about microfinance regarding its effectiveness in helping people out of poverty and its long-term viability.
Innovations in Finance and Money Management
In addition to the classic microfinance model of microloans, there are a growing number of innovations in finance and money-management for the poor—often utilizing newly available digital technologies.
A classic problem for the poor is how to manage savings. Banks charge high fees for managing small accounts, so it is difficult to keep savings safe. Mobile banking could change the face of banking in the same way it changed communication. New ventures that may expand the role of mobile banking include a program run by Mercy Corps in Haiti, in which villagers can receive payments into a cell phone savings account, redeemable at local merchants for rice, corn, flour, beans and cooking oil. Another venture allows relatives in the US to transfer unlimited funds to family members in Haiti. Such programs are in the early stages of experimenting with mobile savings, but they look promising.
In India’s Andhra Pradesh, the debt crisis raised the question of how to help the ultra poor who live below the poverty line. Bandhan, India’s largest microfinance institution, now offers cash-free grants to selected participants in poor villages for 24 months. Part of a worldwide pilot of ultra-poor initiatives led by the Consultative Group to Assist the Poor and funded by the Ford Foundation, the program offers “grants” – everything a borrower may need to start and ply a sustainable trade – everything except cash. The borrower is taught to manage money, made aware of the need to drink clean water and eat two meals a day, and schooled in basic education skills. The borrower does not have to pay back the cost of the goods. If she graduates from the program, makes a profit from her business and adopts the recommended lifestyle changes, she will be considered for a microfinance loan.
The door-to-door Avon cosmetics business serves as the model for a venture in Uganda, where Living Goods operates a door-to-door business. Micro-franchisees buy a business in a bag – containing sanitary pads, soap, de-worming pills, iodized salt, condoms, nutritionally fortified foods, kits for clean delivery of babies, malaria treatments, bed nets, high-efficiency cook stoves, solar lamps and cell phone chargers – which they sell door to door in villages. More at www.LivingGoods.org
Other franchise operations include Grameenphone in Bangladesh which franchises village cell phone posts; VisionSpring franchises the sale of reading glasses; Solar Sister gives women a business selling solar lamps; HealthStore Foundation franchises pharmacies and clinics in Kenyan villages; and HoneyCare Africa trains and buys from beekeepers.
In the hills of rural Guatemala where many villagers do not earn enough money to qualify for a microloan, Soluciones Comunitarias is selling products that improve the health and prosperity of villagers using a consignment model. Salespeople receive stock from the supplier on consignment (reading glasses, eye drops, water-purifying buckets, a solar panel that charges cell phones and a lamp, energy-efficient light bulbs and vegetable seed packets), which they sell door-to-door. After goods are sold, the salesperson pays the supplier and keeps a commission.
Financial Education and Youth Savings Programs
Several programs throughout the developing world focus on the education of youth in money management through youth savings programs. Freedom from Hunger, an expert in integrated financial and non-financial services for the chronically hungry poor, launched the AIM Youth (Advancing Integrated Microfinance for Youth) initiative in partnership with the Mastercard Foundation to meet the financial education needs of underprivileged youth ages 13-24 in Mali and Ecuador.
More at www.FreedomFromHunger.org/aim-youth
The Go Girl! Savings program is part of the Binti Pamoja Center (‘Binti Pamoja’ is ‘Daughters United’ in Swahili), with support from the Population Council in partnership with several NGOs and MFIs, the GlobalFinancial Education Program (GFEP), and Nike Foundation. The center set out to increase safe spaces and skills opportunities for adolescent girls from the slums of Kibera, Kenya. The center runs a program for adolescent girls, providing reproductive health and financial education as well as leadership and personal skills training.
In 2011, they piloted a program that adapted micro-credit services for adolescent girls using trained graduates of the center as leaders. The Go Girl! Program began mobilizing girls’ savings groups and a financial education program to train the girls to save and manage money.
The three-part model of safe spaces, financial education, and savings has the potential when properly implemented, to change the trajectory of vulnerable adolescent girls’ lives. With the success of the pilot, MFIs are eager to roll the product out to many branches as long as the support for non-financial services is possible.
Healthcare and Microfinance Programs
The poorest people seldom have insurance and must pay out of pocket when injury or illness occurs. Unless they have savings, the cost may prevent them from receiving service when they need it. Experimental partnership programs between MFIs and health providers in Peru, Bolivia and Ecuador combine health education, health products and services and microfinance savings and loans to the poor. The integration of microfinance and health shows enormous potential for reducing the vulnerability of the poor.
• Austrian, Karen. “Expanding Safe Spaces, Financial Education, and Savings for Adolescent Girls in Kenya.” The Population Council, Jan. 2011. http://www.popcouncil.org/publications/serialsbriefs/TABriefs.asp
• Bornstein, David. “The Barefoot Bank With Cheek.” The Atlantic, Dec. 1995. http://www.theatlantic.com/magazine/archive/1995/12/the‐barefoot‐bank‐with‐cheek/305324/
• Bowers, Emily. “Ghana Market Women Pay the Daily Micro Man.” We‐News, 26 Feb. 2007. http://womensenews.org/story/theworld/
• “Expanding Safe Spaces, Financial Education, and Savings for Adolescent Girls in Kenya.” Jan. 2011. http://www.popcouncil.org/pdfs/TABriefs/29_KenyaGirlsSavings.pdf
• “In West Bengal, Cashless Microfinance Opens Doors for Women.” The New York Times, 25 Sept. 2012.
• “Global Microscope on the Microfinance Business Environment 2012.” The Economist, 2012.
• “Increasing Education Access, Quality and Equity in Guatemala.” USAID, 2005. http://www.beps.net/publications/lac
• “Integrated Health and Microfinance.” The Microcredit Summit Campaign and the Center for Health Market Innovations, 23
Jan. 2013. https://www.freedomfromhunger.org/new‐report‐health‐and‐microfinance‐andes
• “Kenya’s Mobile Revolution and the Promise of Mobile Savings.” The World Bank ‐ Africa Region, Mar. 2012.
• Kristof, Nicholas D. “I’ve Seen The Future (In Haiti).” The New York Times, 05 Dec. 2010.
• “Microfinance Frequently Asked Questions.” Consultative Group to Assist the Poorest (CGAP). http://www.cgap.org/about/faq
• “Microscope 2012.” Rural and Marginal Urban Areas. Inter‐American Development Bank.
• “Millennium Development Goals Report 2012.” UN News Center. UN, June 2012.
• “Primary Completion Rate Data. The World Bank, 2013. http://data.worldbank.org/indicator/SE.PRM.CMPT.ZS
• Rosenberg, Tina. “The ‘Avon Ladies’ of Africa.” New York Times, 10 Oct. 2012.
• Rosenberg, Tina. “When Microcredit Won’t Do.” New York Times, 31 Jan. 2011.
• “The Microfinance Revolution: An Overview” Economics Research. Federal Reserve Bank of St. Louis, Jan. 2008.
• “Targeting the Hard‐Core Poor: An Impact Assessment. Center for Microfinance http://www.centre‐formicrofinance.