More than 1000 farmers protested outside of Government House in Bangkok today with demands about restructuring their debt.  As seen in most cases, government microfinance programs are very succeptible to political pressure and influences.  
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by Ryan T. Young at Common Interest Foundation

Short-term microfinance Projects cause more problems than they purport to solve. This posting addresses the issues that occur when foundations or NGOs decide to implement a short-term project involving microfinance. While the goal of short-term projects may seem noble, their negative side needs to be addressed.

In 2002, there was an organization in Northern Thailand which ran a program that set up “Village Health Banks.” The goal was to integrate health education and economic development in rural villages. Quite a number of villages signed up for the program. Women borrowed money from the program and everything seemed to be going well. However; after approximately two years, the organization informed all the villages that they were cancelling the program. Villages were sent letters from a legal firm instructing them to repay their loans by the end of the month or face legal action.

As expected, the rural villagers panicked. Even though their loan contracts stated that they have several more months before final payment, the villagers were terrified of legal action. As a result, many of them were forced to borrow from moneylenders at high interest rates in order to repay the loan so quickly. Villagers said that the unexpected cancellation significantly destroyed any progress that they were making. When asked why they cancelled their program, the organization stated that the project was only meant to be short-term and they completed their goals.

One has to wonder what goals were really achieved. This program gave “hope” to the villages but left them in a worse financial situation. Is it fair that the rural villagers should suffer the consequences for bad planning on the organization’s part? Why did the program have to end so quickly? Donors gave over 25 million baht for this program - where did it all go?

Many problems arise when microfinance projects are not properly planned. Long-term planning must be considered so that the impact on the poor is positive. If you are considering getting involved in microfinance in Thailand, look at the ones who are taking a long-term approach in their work. Besides our own organization, Common Interest Foundation, I would like to personally suggest that you look at the excellent work being performed by Step Ahead MED and SED.
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By Tamsin Harriman at the Common Interest Foundation

One important way to combat poverty is to ensure that the children of poor people are able to educate themselves, and thus have the opportunity of a better future for themselves and their families. With this in mind, many MFIs ask their borrowers to promise to send all of their school age children to school as a condition of receiving MFI services. Some are taking it even further and providing services especially for students.

An organization called Qifang in China is providing a peer-to-peer lending service for collateral-free student loans. From the article, "A good education is a stepping stone to a better life. That's just as true in China as it is anywhere else, but attending university requires financial resources that many Chinese students, especially those coming from poorer rural areas, don't have." In order to attend university, students usually borrow from family members, since bank loans for education are difficult to apply for and hard to get. Thus the founders of Qifang decided to create this service to allow students easier access to needed funds for school. Loans through the site can be quite small, and can cover anything from a new laptop to tuition to an extra class.

Grameen Bank in Bangladesh has also started to provide services for its members' children. Grameen, realizing the importance of a university education, now offers scholarships for the best students among its borrowers' children to go to university.

This is an interesting new area of microfinance and, I believe, a very promising one. Microfinance helps poor people to provide for their children, but microfinance education loans help those children to provide for themselves, and create a better future for themselves and their own children.

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This year's Microfinance Forum to take place in Vienna on 19-20 March

Following the success of last year's Microfinance Forum, the second Microfinance Forum will take place this year in Vienna on March 19 and 20. This event is an opportunity for industry leaders in microfinance, including many mainstream financial institutions, to discuss trends, strategies, and other issues pertaining to microfinance. From the article: "Banks have started to consider a closer link between their micro-finance-oriented products and their 'normal' business. There is increasing commitment to microfinance, greater variety in microfinance products and a closer focus on the market. The upcoming premier World Private Banking conference in Vienna organized by Uniglobal Research will bring together top representatives of the microfinance and banking environment as well as microfinance networks from all around the world. This is the place to learn from and share strategies with other professionals as well as to extend your network."

This year's conference will include contributions from organizations as diverse as Deutsche Bank, Finca International, Habitat for Humanity and Zurich Insurance, among many others.

This is just another indication that mainstream financial institutions are beginning to focus much more on microfinance. The results of this conference should be interesting to see!

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Finally, a quick note to say that I have really enjoyed writing for this blog and working for the Common Interest Foundation. Sadly, my internship is at an end, so I will no longer be a regular contributor to this blog (although you may see a post from me from time to time). I will be handing the blogging reigns to Common Interest's talented managing director, whose posts I'm sure will be excellent. Thank you to all of our readers who have read and commented on my posts!
--Tamsin
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By Tamsin Harriman at the Common Interest Foundation

Microfinance initiatives (MFIs) have largely been very successful in helping the poor around the world. However, there are occasionally some problems. One especially serious problem that MFIs can face is corruption. Since their clients are poor and often uneducated, it is easy for staff to take advantage of them. In fact, this is one of the reasons people get involved in microfinance to begin with - to stop poor people from being taken advantage of by moneylenders. Unfortunately, there are all too many possibilities for MFIs or their staff to engage in corrupt behavior themselves.

In Benin, West Africa, NGOs subcontracted by a large MFI have reportedly been taking bribes from borrowers and engaging in other corrupt activities. Due to rapid growth, the MFI has not been particularly scrupulous about the NGOs it subcontracts to. According to the above article, the MFI's director Komi Koutche says that "subcontracted local community associations are benefiting from borrowers’ desperation. 'Instead of taking US$2 in processing fees, they are charging [borrowers] up to $7. As long as the borrowers pay this willingly, we cannot stop it. It is only when they protest that we can intervene.'” They are also keeping funds that should be remitted to the MFI: "[According to] Benin’s Minister of Microfinance Reckya Madougou [...] recent studies revealed that loan intermediaries 'collect loan payments from borrowers promising to remit them to the fund’s partners [banks], but then do not do so.'”

Another form of corruption sometimes seen in MFIs is the use of extreme methods to coerce defaulting borrowers into repaying their loans. As detailed in the book What's Wrong With Microfinance? by Thomas Dichter and Malcolm Harper, pressure tactics can become so bad they could be considered bullying. In extreme cases, staff use tactics such as sitting outside defaulting borrowers' homes and refusing to let anyone in or out until the borrower repays her loan. Of course a high repayment rate is important for an MFI to be sustainable, and thus to continue helping the poor, but this is no excuse for such harrassment.

If commercial banks treated borrowers in these ways, it would be a major issue, covered by newspapers worldwide, and the bank would quickly lose all of its customers and quite likely be taken to court. Unfortunately, as in the Benin case above, corruption in MFIs goes largely unreported, as the poor people they serve depend on them and have no other options - if they need access to financial services, it's the MFI or nothing (except perhaps a moneylender who charges exorbitantly high interest rates).

Corruption in any organization is bad, but in an MFI it is especially so, since it perpetuates the helplessness that comes with being poor. MFIs should seek to alleviate poor people's helplessness, not to exacerbate it. Thankfully, corrupt practices are fairly rare in microfinance. Even so, MFIs should encourage their clients to speak up if an MFI staff member is doing something wrong. Hopefully if borrowers understand that it is okay, and even good, to speak up in such cases, then those who wish to take advantage of them will no longer be able to do so.
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By Tamsin Harriman at the Common Interest Foundation

The regulatory environment for microfinance in Thailand is among the strictest in the world, yet the country has a great need for microfinance, and the MFIs that do operate here are successful. Microfinance has an important role to play in Thailand's development and eradication of poverty.

Many households in Thailand have moved out of poverty, and when one thinks of Thailand, one doesn't think of a destitute country. However, there are still many people who live in extreme poverty. In fact, the Microfinance Gateway found that fully 33% of Thailand's population live on less than US$2 per day. The poorest people in Thailand are mostly ethnic minorities, immigrants and Hill Tribe people, who are marginalized in society and do not have the same economic opportunities as the rest of the population.

Poor immigrants, usually from Myanmar, do not speak the language and do not have formal identification and thus cannot access any formal sector services, such as banking. These people often work as day laborers, for very low rates. Women often end up as "Mae Baan", live-in housekeepers, usually worked very hard for low wages and with very little time off. They also send a large proportion of their income home to their families, where it gets used for consumption.

Hill Tribes also have their own languages, and many live in the forests, the mountains and some of the worst areas of the country. Thus farming is difficult, as is travel outside their villages, so Hill Tribe people have very few income-generating opportunities.

In addition, there are many ethnic Thai villages that are still very poor, living in run-down houses without sanitary facilities and unable to send their children to school.

The Thai government has implemented some microfinance programs itself, and those have become quite widespread. The Thai government's commitment to microfinance is commendable. However, the government programs seem to mainly target the urban poor - for example, having branches only in the city centers - and may not be able to do enough for those outside the cities, where the poorest people often are.

This is where NGOs come in. MFIs such as SED, based in Surin (Northeast Thailand), and Common Interest, based in Chiang Mai (Northern Thailand), are proving to be very successful in assisting Thailand's poor. Both organizations use the Village Banking method, in which villagers own and run their own village bank (like a single-village MFI). This method is good for several reasons. Not only does it give borrowers a sense of independence and self-confidence, as well as training in business skills, it also gets around the regulations that apply to organizations owned by foreigners, making operation much easier, since the village bank's owners are Thai.

Nongovernmental microfinance institutions are very important and much needed in Thailand, as they can (and are willing to) reach the very poorest people, including ethnic minorities and immigrants. At the moment, there are few MFIs in Thailand, largely because of the strict government regulations of microfinance in this country. However, hopefully the Village Banking method - already proven successful in Thailand - or simply the fact that there are so many people here living in extreme poverty, can tempt more MFIs into coming to Thailand to expand upon the great work of those already here.
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By Tamsin Harriman at the Common Interest Foundation

Reflecting the increasing diversity of MFIs, there are a number of different funding options and organizational structures for microfinance. Some MFIs operate as NGOs (foundations, etc), while others operate as commercial banks. There is no standard definition of commercialization in microfinance, as different people understand it differently. According to Stephanie Charitonenko, Anita Campion and Nimal A. Fernando in their report on commercialization of microfinance in South and Southeast Asia, "Commercialization means different things to different people but international microfinance professionals are increasingly considering commercialization to be 'the application of market-based principles to microfinance' or 'the expansion of profit-driven microfinance operations'".

NGO MFIs are run and owned by a single person or a board of directors, often as a foundation. Commercial MFIs are private companies, owned or partially owned by shareholders. Many NGO MFIs become profitable, but they almost always put their profits back into their businesses, whereas commercial MFIs must always be profitable as they pay out a portion of their profits as dividends to their shareholders. Some commercial MFIs, such as the Grameen Bank, have only members as shareholders, thus ensuring that the poor reap all the rewards from the MFI's work.

Donations or grants from foundations and private donors have been and continue to be the most common source of funds for MFIs, and a very important one, especially in the start-up stage. However, as MFIs grow and want to expand their outreach, they sometimes find that grants and donations are not sufficient and are difficult to come by, with the grant application process being a little like the job application process - send out 100 applications and you might hear back from only one or two of the places you applied to. Thus many MFIs, especially commercial ones, are beginning to seek alternative sources of funding.

A relatively new source of funding for microfinance (previously mentioned on this blog) is investment, rather than donation, by companies, banks and individuals. This form of funding for microfinance has emerged with the evolution of profitable commercial microfinance institutions. In recent years, banks such as Citibank and Morgan Stanley, seeing the remarkable growth and profitability of MFIs, have started microfinance funds specifically for investing in MFIs. In addition, a few venture capital firms are starting to become involved in microfinance. Sequoia Capital recently invested in SKS Microfinance in India.

The amounts of these investments are often significantly larger than most donations or grants. However, since this money is a loan rather than a grant, the MFI is expected to pay it back, with interest, within a specified time period. Thus in order to take an investment, an MFI has to be sure it can grow enough and earn enough profit in order to pay that loan back.

This pressure to be highly profitable can, unfortunately, sometimes lead to higher interest rates and aggressive pressure tactics as the MFI struggles to recoup all its money and earn enough interest on its loans. This of course does the opposite of what the investment was intended to do, which is to help the poor. This pitfall can happen for non-commercial MFIs, too, and has less to do with the source of funding than with the culture and operating procedures of the MFI. All MFIs must be careful not to raise interest rates too high and not to be aggressive or intimidating in their collection tactics.

Commercial MFIs also sometimes drift away from lending to the poorest in favor of lending to the less poor or even to the middle class, as those loans (usually for small enterprises) are more profitable. This is not necessarily a problem. As long as there are MFIs that are diligent about lending to the poorest (whether they become profitable from it, as some do, or not) then other MFIs lending to the less poor is good, as it helps people out of poverty and often helps create jobs for the poorest when the small enterprises need employees.

Overall, the more sources of funding for MFIs, the better. It is encouraging that mainstream financial institutions are starting to become involved in microfinance, as there is a tremendous amount of money there that could be used for microfinance. The more money put into microfinance, either by donors or investors, the more poor people MFIs can help.
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