By Tamsin Harriman at the Common Interest Foundation

Microfinance as we know it began, rather famously, with a $27 loan. Dr Muhammad Yunus, then an Economics professor in Bangladesh, noticed that the poor people around him, though they were very hardworking, were trapped in a vicious cycle of dependency on moneylenders and thus remained incredibly poor. They had to borrow from moneylenders to buy supplies for their stool-making businesses, because they could not get loans from traditional banks, who viewed the poor as too risky to lend money to, especially since they have no collateral. However, the amount they needed to borrow to create their wares was minuscule. Determined to end this situation, Dr Yunus lent money out of his own pocket to forty-two poor villagers - the total amount was only $27. When the villagers all repaid their loans on time, and began earning more from their businesses, Dr. Yunus realized his idea worked well and decided to create a bank that lent only to the poor, and with no collateral required. He called it the Grameen Bank (Grameen means "Village" in Bengali). This idea, lending small amounts of money to the very poor for their businesses to help raise them out of poverty, became known as microcredit.

Grameen was highly successful, and grew rapidly throughout the 1970s, becoming an official bank in 1983. Other microcredit organizations, such as ACCION, were also taking off at this time. ACCION was started in Latin America by a law student named Joseph Blatchford, and had already been doing significant development work in the 1960s. Seeing that their development efforts were not doing enough to help people out of poverty, ACCION pioneered its microcredit program in Recife, Brazil in order to address what they saw as the fundamental problem of poverty - lack of resources. This program saw great success, and today ACCION is one of the largest microfinance initiatives (MFIs) in the world.

The success of Grameen, ACCION, and other early microcredit initiatives spurred an explosion of interest in microcredit. In the 1990s, there was an enormous worldwide expansion of microcredit programs. During that decade, as well, some organizations realized that credit alone may not be enough to help the poor. They began to expand beyond loans, offering other services such as savings or insurance. Hence the term "microfinance" was born. This includes microcredit, which is still a large percentage of the services MFIs offer, but also any other financial service provided to the poor (savings, insurance, etc). Microfinance has become the standard term for the provision of financial services to the poor.

Microfinance programs around the world continued to grow with great success - most MFIs have a 98% or higher loan repayment rate, and have helped significant numbers of their clients escape poverty. Because of this, the early 2000's saw increased recognition of microfinance by governments, the media, and international organizations. The United Nations declared 2005 "The Year of Microcredit", and in 2006 Mohammad Yunus, and Grameen Bank, were awarded the Nobel Peace Prize, spurring even greater interest in microfinance. Because of the increased awareness of microfinance, and many MFIs' ability to become profitable while still helping the poor, many banks and other institutions have begun to invest in MFIs, giving them a new source of funding in addition to donations. Now, MFIs are very varied, ranging from small operations to multinational ones, and from credit-only organizations to ones that offer the full range of financial services. This trend of increasing diversity as well as increasing outreach, if it continues (and it looks like it will), will give poor people who want to take out loans or open a savings account a choice of several MFIs, with different products and rules, to do this with - a choice that has been previously nonexistent for the poor. With investment, repayment rates, and outreach all high, as well as demonstrated success in helping the poor, the future of microfinance looks bright and exciting.
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By Tamsin Harriman at the Common Interest Foundation

The use of technology in microfinance is becoming quite prevalent. Especially widespread is mobile banking, which allows borrowers to make payments, deposits, and other transactions using a mobile phone. Cellphones and cellphone access are now so inexpensive and so widespread that many of the poor already have cellphones, and for those who do not, it is not difficult for MFIs to help provide them.

MFIs can take advantage of this easy access to cellphones to make transactions easier and less time consuming for their borrowers, as well as to keep better records and reduce overheads, among other benefits. One exciting recent innovation in this area comes from a computer scientist at the University of California, Berkeley. Tapan Parikh has come up with a way of embedding barcodes into financial documents. According to Esquire's article about this new technology, "Now, rather than having to keep records by hand, a user can take a cell-phone picture of a bar code and the interface automatically prompts the user -- with voice prompts for the illiterate -- to input the numbers." This makes record keeping much easier, and means that MFI staff have to spend much less of their time checking the accounting - time that they could be spending reaching out to new members.

Technology also makes overhead costs much lower, since staff don't have to spend as much time going to villages to handle transactions, thus freeing up more money for loans. There are many other benefits that MFIs can realize from technology. Indeed, UNCDF reports that technology can provide MFIs with "more informed decisions, increased flexibility, lower operating costs, better reporting, increased deposits, improved customer convenience, [and] more rural customers".

Mobile banking and other branchless banking methods make transactions much more convenient for clients. They no longer have to attend meetings, or wait until specific appointed times, to make withdrawals, deposits, or loan repayments. Having to take time away from work to attend meetings can sometimes mean giving up on profit-making opportunities, and having to wait to withdraw from savings can mean not having the ability to pay for an emergency expense, such as a hospital visit or medicine.

As mentioned above, MFIs can help provide the poor with access to cellphones. An example of this is the "phone lady" microbusiness pioneered by Grameen Bank. An MFI client (usually a woman, as most borrowers are women) uses a microloan to buy a cellphone, and then rents use of that cellphone out to villagers at a per-minute rate. This is profitable for the phone lady, and creates an amazing difference in the lives of her fellow villagers. The poorest villages - such as the Hill Tribe villages in Thailand that the Common Interest Foundation serves - are often remote, and as such, largely cut off from the outside world. To learn the price of vegetables at the market in the city, for example, or to talk to a sick relative in another village, means hours of travel time, during which people could instead be earning income. Farmers or craftspeople often have to accept whatever price middlemen offer them for their wares, without being able to do research on the market price beforehand. Cellphone access changes this situation completely, empowering the poor to get a fair price for their goods, to keep in touch with their families, and so forth, without having to sacrifice hours or days of their lives.

Obviously there are many benefits of using technology for loan repayments, savings deposits, etc. Despite those benefits, however, there is one major drawback. The success of microfinance depends in a large way on the sense of community and close relationships that come from having group meetings and regular interactions with MFI staff.

Gaamaa Hishigsuren, in a paper on technology in microfinance, explains, "It was concluded during the virtual conference facilitated by CGAP and Microsave6 that physical presence and the bigger issue of building trust is essential in serving small depositors. This is even more so in rural areas, where formal financial services have been limited, if not absent."

Therefore it is important, when implementing technology solutions in an MFI, to take care to maintain at least some of the personal, trust-building interactions that make microfinance work so well. By reducing meetings to once per month, for example, and also enabling clients to make transactions remotely at any other time, MFIs can attain a happy medium between convenience and cost-saving measures, and personal interactions and attention.
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By Tamsin Harriman

The microfinance movement is beginning to move beyond only offering credit. As previously mentioned on this blog, many MFIs are expanding their range of services to include savings accounts (microsavings), insurance products (microinsurance), and even skills training.

Though these services are new for microfinance, they are not necessarily new services for the poor. Savings groups for the poor, especially, have existed for some time. For example, ROSCAs are savings & loan groups in which poor people pool together their savings and loan them out to each member of the group, one at a time. In a way, these can even offer a form of insurance, as they provide a place to keep savings for relatively easy access in case of emergency. In addition, poor people have long grouped together to share expertise and skills regarding farming, animal husbandry, etc. What MFIs offer is a more formalized version of these services. For example, savings accounts are more secure, borrowers don't have to wait their turn to access loans (like they would with a ROSCA), and they have access to expert support and training. They also have access to training in a wider range of subjects, such as business or computer skills, than they would be able to provide themselves.

Access to secure savings is very important to the poor, as evidenced by self-organized groups like ROSCAs. However, though they may be highly motivated, the poor do not always possess a secure place for their savings, or (if they form a savings group) the skills necessary to, for example, calculate interest on savings or solve complex accounting problems. Therefore, many MFIs are providing savings accounts as well as loans - sometimes even making savings mandatory for borrowers. In the Village Banking methodology, for example, savings are perhaps even more important than loans, much like in ROSCAs. Village Bank members pool their savings and mobilize them to make loans, and the Village Bank only takes out a loan from its parent MFI if necessary. Only those saving with the Village Bank are eligible to take out loans. In addition, the Village Bank pays out a portion of its profits as dividends to savers, depending how much they have saved, and for how long. In addition to providing a secure place to keep savings, MFIs also help with accounting. Common Interest, a Village Banking MFI in Chiang Mai, Thailand, trains each Village Bank's president, vice president, and treasurer so that they can do their work efficiently and correctly. Common Interest also helps with accounting and calculates the yearly dividends payed to the Village Banks' members. All this support makes for a much more efficiently run organization in each village with transparent accounting practices and fewer mistakes, ensuring that members' savings are in good hands.

Although one may not immediately think so, access to insurance is also very important to the poor. As Richard Leftley and Shadreck Mapfumo put it in their paper Effective Micro-Insurance Programs to Reduce Vulnerability, "one only has to imagine the range of risks that an individual with poor nutrition, reduced access to healthcare and informal housing (often located in risky areas) has to face to imagine why the poor may want to have access to insurance as well as other forms of risk mitigation." Some of the most popular microinsurance programs are crop or livestock insurance, as these are very risky sources of income, but many poor people depend on them. Other popular type of microinsurance include life insurance, which helps the borrower's family pay for (often very expensive) funeral costs and cope with the loss of income from the borrower's death, and disability insurance. Insurance payments, which are usually very small, are often collected at the same time as loan repayments or savings deposits. Some MFIs make their microinsurance programs mandatory for borrowers, since it is cheaper and prevents the situation of only sick people taking out health insurance, etc. Some borrowers, of course, do not like having to pay for insurance that they think they will not use. The risks inherent in a poor person's life, however, mean that at some point, he or she is likely to need some form of insurance. Therefore the benefits of having access to microinsurance outweigh the possible cost of such programs being mandatory.

One relatively uncommon, but important, service provided by some MFIs is skills and vocational training for borrowers. This may include business skills, computer skills, or tips for taking good care of livestock, for example. Here in Thailand, the Khom Loy Foundation offers vocational training to Hill Tribe young adults for restaurant work. Training in these or other areas can greatly increase poor people's earning potential, as well as their confidence. This is an important service that complements microcredit very well, as it can help borrowers run their microbusinesses more effectively, and thus to more quickly raise themselves out of poverty. If MFIs add skills & vocational training to their menu of programs, it could greatly improve their effectiveness in helping the poor.

Access to credit is a very important service for the poor. However, it is not a panacea for poverty alleviation. In combination with microsavings, microinsurance, training, and other services that the poor need, microcredit can do far more for the poor than it could alone.
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By Tamsin Harriman

What's Wrong With Microfinance? is a thought-provoking look at the rarely-discussed problems with microfinance. The book's contributors bring up many important questions and issues that have not been examined carefully enough, if at all, by the microfinance community. Most of the contributors are microfinance insiders, and many have spent their entire careers in the microfinance sector. The aim of the book is, as the authors state, "to sound a timely warning to governments, bankers, donors and the general public and to encourage the rethink of expectations and policies." The contributors do not claim that microfinance is wrong and should be discarded - though one or two do seem to imply as much. Mainly, they challenge the commonly accepted idea that microfinance as it is currently practiced is a panacea for poverty alleviation. Below are some of the questions and concerns that the book addresses.

One criticism shared by many of the contributors is that microcredit alone is not enough, and in fact may sometimes do more harm than good. They mention that some studies have found that though many borrowers are wealthier after taking out a microloan, a not insignificant proportion of borrowers become less well off. In addition, studies have found that poor people are usually more interested in a secure way to save their money, or in crop or livestock insurance, than they are in obtaining credit. The authors suggest that a much better way to help the poor is to emphasize savings, insurance, and skills training, rather than credit. This idea is becoming increasingly accepted, as has been discussed on this blog before. Many MFIs, such as SED and Common Interest here in Thailand, now emphasize savings in their programs and are moving away from a focus on credit alone.

Another common thread is the concern that MFIs are not transparent enough about their interest rates and fees. Borrowers often don't understand what the full cost of their loan actually is. There may be hidden fees, or interest may be calculated in a complex way that is hard for borrowers to understand. This can lead to borrowers' discouragement and make them more likely to drop out, and/or less able to pay back their loans if interest is more than they expected.

In addition, two contributors criticize the current standards for "impact evaluations" of microfinance. Understandably, such studies are difficult to conduct, often relying on borrowers' memories of what they earned before getting involved with an MFI, for example, or requiring some groups to wait a year or more for services that nearby villages already receive, so as to have a control group. In addition, many are not as scientifically rigorous as they should be. Thus, results may be overstated, or it may appear that a microfinance program has a large positive impact when in fact that impact is not statistically significant. Thus it is difficult to know which impact analyses to take seriously.

These and other concerns are detailed much more thoroughly in the book, which I would recommend that anyone who is serious about microfinance should read. The concerns that the contributors raise need to be addressed, or at least considered more carefully, if MFIs want to truly do their best to help the poor.

Contributors: Irina Aliaga; Hugh Allen (Boulder Microfinance Training Program and Southern New Hampshire University’s Microenterprise Development Institute); Milford Bateman; Thomas Dichter; David Ellerman (University of California/Riverside); Dr. Prabhu; Malcolm Harper; Mary Houghton and Ronald Grzywinski (both ShoreBank Corporation); David Hulme; Susan Johnson; Vijay Mahajan; Imran Matin and Munshi Sulaiman; M. A. Saleque; Richard L. Meyer (Ohio State University); Paul Mosley; Dr J.D. Von Pischke (Frontier Finance International, Washington, DC); S. M. Rahman; Paul Rippey; Namrata Sharma; Frances Sinha; Kim Wilson (Fletcher School, Tufts University).
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By Tamsin Harriman

Despite the global financial crisis, microfinance is still performing well. Here in Thailand, despite a struggling economy, microfinance institutions (MFIs) are not feeling ill effects. In fact, Common Interest Foundation in Chiang Mai is still seeing a 100% repayment rate on its loans to member Village Banks. Globally, MFIs are still reporting the same 96-98% repayment rates as always, and microfinance is still growing at a good pace.

Microfinance is resilient to financial crises like the current credit crunch in part because of the more intimate relationships MFIs have with borrowers. MFIs have personal interactions with borrowers on a regular basis, so they are less likely to over-lend because - unlike more traditional lenders - they understand borrowers' abilities to repay. According to Mary Ellen Iskenderian, CEO of Women's World Banking, in an interview with Time, "Repayment rates [for microfinance] remain very high, 97% or 98% in many places. That results from good, old-fashioned credit methodology — you know a household's capacity to repay. That's the kind of old-fashioned banking that some people feel was absent in this latest round of banking disasters."

Of course, the poor do feel the effect of rising prices. In Thailand, inflation recently reached a ten-year high of 7.6% (year-on-year). Thus as food and fuel prices rise, borrowers may be less likely to pay back their loans, because they will have to choose between doing so and meeting their basic consumption needs. However, another reason for microfinance's resilience is MFIs' growing ability to combat this problem with an emphasis on savings and risk-management products such as microinsurance. If a client has a hard time repaying her loan due to illness or financial instability, for example, she can tap into her savings or access emergency insurance funds. These products ensure that even in times of crisis, borrowers can still repay their loans without having to sacrifice consumption to do so.

As the credit crunch continues, it is possible that MFIs may raise interest rates so they can meet their costs as funding becomes less readily available. However, it looks as though this will not happen on any large scale. In fact, availability of funds for MFIs looks likely to increase, rather than decrease. As investors are seeking to diversify away from traditional financial markets, many have focused their attention on microfinance. Banks such as CitiBank and venture capital firms such as Sequoia Capital, as well as many other institutions, are eager to invest in microfinance. This is especially true now, with microfinance's high projected growth and profitability in stark contrast to those of the struggling traditional financial institutions. According to a recent article by Sify, "the success of so many microfinance initiatives leads experts to believe that the industry is poised for further accelerated growth. Deutsche Bank estimates that investment will increase from $5 billion to $25 billion by 2015, and that those investment dollars will be seeking adjacencies."

The current financial crisis may slow microfinance down a little, and may perhaps lower some MFIs' repayment rates. However, it looks like despite global financial instability, microfinance has a healthy future ahead.
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By Tamsin Harriman

Earlier this year, the Thai government forgave four billion Baht in overdue loans to 340,000 poor farmers. This may help those farmers now, but may not be the best policy in the long run. Ironically it could end up hurting farmers in the future by creating an environment in which banks and MFIs are even less willing to lend to farmers than they already are.

The Indian government has implemented several loan waivers for farmers in the past, the most recent being in April this year. According to Vijay Mahajan, Chairman and Managing Director of BASIX in India, "As a result of [the Indian government's loan waiver] policy, any lender, whether they are in the public or private sector, will factor in the possibility of a future loan waiver, and therefore would like to keep their exposure to farmers limited. So in a sense, the loan waiver will quite perversely lead to a shortage of formal credit rather than solve the problem of farmer indebtedness" (qtd in IFMR Center for Microfinance's "Eye On Microfinance", June 2008).

The Economic & Political Weekly editorial board, quoted in the India Development blog also foresee this problem: "A socio-political environment that nurtures expectations of a loan waiver is not conducive for building a healthy financial system, particularly in rural areas where borrowers have weak bargaining power and bank officials are known to be reluctant to lend at the smallest sign of a poor recovery."

If governments forgive microloans, they set a bad precedent. Such policies exacerbate borrowers' beliefs that the money is a gift or a grant, rather than a loan. This means that people may not use their loans for productive purposes (so that they can make money and repay the loan, as well as improving their lives), and are far less likely to repay those loans. In her book Access for All, Bridget Helms of CGAP says, "Borrowers view soft government money as grants or gifts and are less likely to repay loans from subsidized programs. This is especially true in countries with a history of forgiveness programs for agricultural or other lending. Default rates of 50 percent and higher in subsidized rural credit programs are typical worldwide" (page 77). This is a bad situation for the government, which loses money, and for the borrowers, who may be refused further loans if they don't repay.

Government loan waivers can have bad results for MFIs as well. MFIs could face a potentially large decrease in their clients' willingness to pay back their loans. When people hear that their friends' loan debts have been forgiven, they may expect that their loans should be forgiven as well. "[A]s far as people’s willingness to repay loans from any source, even though it’s not been a loan waiver for MFI loans, I will be most surprised if the [Indian government's] waiver doesn’t have some negative effects on people’s willingness to repay loans from other sources. I know that the 1989 loan waiver by the BP Singh government [...] had a very negative impact on the credit culture", said Malcolm Harper in IFMR Center for Microfinance's "Eye On Microfinance", June 2008.

Perhaps a better policy for the government to adopt would be including some form of microinsurance with their loans. For a small fee, they could provide access to a pool of emergency money (created by pooling each borrower's insurance fee) that farmers could tap into when their crops failed, their yield was low, or other circumstances prevented them from repaying their loans. Once the borrower was able to repay, he could pay back the loan from the insurance fund and begin repaying his loan again. In this way, the above problems for farmers, MFIs, and the government could be avoided by avoiding the necessity for a debt forgiveness program. There are surely other ways for governments to solve repayment issues as well. Debt forgiveness may be the most obvious and straightforward way, but can have unintended bad consequences. Governments would do well to implement more creative solutions - and consider their long term effects on everyone involved - in the future.
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By Tamsin Harriman

While many microfinance institutions (MFIs) are secular, there are also a significant number of religious MFIs, especially Christian and Catholic. Here in Thailand, Small Enterprise Development (SED) is Catholic and Step Ahead MED is Christian. Worldwide, Opportunity International is the largest Christian MFI, and World Relief, World Vision, and many of the MFIs in the Philippines (among many others) are also Christian. Other religious organizations are also getting involved in microfinance, such as the Jewish Vocational Service in America, and the Aga Khan Foundation, a Muslim organization, in Central Asia and East Africa.

According to the Christian Science Monitor, in its article "New Evangelism: Mini Loans", "These days, Christian and other religious organizations [...] around the world, are lending more than just a hand. Microloans - of as little as $100 - have become as much a part of their ministries as preaching the gospel." This is a good trend, because it indicates that religious organizations are increasingly engaging in microfinance, rather than charity. This shift greatly benefits the poor, because while charity usually has only a temporary effect, microfinance can help a person permanently rise out of poverty. In fact, says the Christian Science Monitor, "religious organizations are increasingly adopting the Talmudic sentiment that the noblest form of charity is helping others to dispense with it."

Some people are concerned that MFIs do not always treat their clients completely ethically (high interest rates, focus on profit rather than poverty reduction, etc). Since religious MFIs are acting upon their religious and moral convictions that it is their duty to help the poor, they are more likely to keep their focus on helping the poor out of poverty (and perhaps giving advice and other forms of assistance) than on making a profit. For example, in 2005, Catholic Relief Services (CRS) massively scaled back its microfinance program, and reorganized its efforts to focus on savings rather than credit, when it saw that its partner MFIs were becoming remote, impersonal, and overly reliant on high interest rates. CRS realized this program was not in line with their mission, as it was not truly helping the poor as much as it could.

One concern is that religious organizations could be using their microfinance programs as a means to convert the poor. In fact - though the article does not actually mention conversion or evangelism - the title of the Christian Science Monitor article quoted above indicates that some do view microfinance as a vehicle for evangelism. While it may be a subconscious belief, and not overtly acted upon, its existence causes some concern.

Most religious MFIs claim that this is not the case. World Relief claims that while it is a Christian organization, its "services are, however, open to non-Christians." In addition World Vision states, "World Vision serves all people, regardless of religion, race, ethnicity, or gender." However, on the same page, they say: "Wherever we work, our prayer is that our efforts will be used by God to heal and strengthen people’s relationships with Him and with one another." That is a wonderful vision, so long as the pursuit of that vision (especially that of strengthening people's relationships with God) does not lead them to try to convert their clients or not to serve those who do not believe in the same God or do not worship him in the same way.

Religious MFIs often work farther from cities and towns than other MFIs, because, since they are less concerned about making a profit, they are less concerned about the higher cost of such outreach. Therefore another benefit of religious organizations practicing microfinance is that more of the poorest people are able to access MFIs' services. However, religious MFIs often hold their meetings in churches or even use churches as a base for their operations. For example, World Relief say, "In community with the local Church, World Relief envisions the most vulnerable people transformed economically, socially, and spiritually." This focus around the church could easily discourage potential clients who are not of the same religion as the MFI, and thus reduce the number of people that they actually reach.

Religion can play, and has played, a very beneficial role in microfinance. Religious MFIs must, however, exercise the utmost caution to ensure they do not force their religion on clients (even if they have good intentions) or discourage potential clients without even realizing it. If they succeed in doing so, then religious MFIs can be instrumental in lifting the poorest out of poverty.
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