Microfinance: The Fight Against Global Poverty, Part 1

Rural women in their richly coloured saris meeting as members of self-help groups. Source: mckaysavage/Flickr)

And Introduction to Microfinance

There is a notable absence of research assessing the global impact of the microfinance movement. It has gained more negative attention in the past year (particularly given the allegations lodged against Nobel Prize winner Muhammed Yunus earlier this year). That said, there is no question that the services provided by Microfinance Institutions (MFIs) across the globe have irrevocably transformed and enriched the lives of people struggling with poverty worldwide. Over the course of the next few weeks, we will seek to promote a more thorough understanding of this movement by reviewing its history, interviewing key figures, and exploring its effects through first-hand accounts from those who depend on MFIs to support themselves. But first, a brief introduction.

What is Microfinance?

According to CGAP, an independent policy and research center dedicated to advancing financial access for the world’s poor,

“Microfinance is the supply of loans, savings, and other basic financial services to the poor.”

“The poor rarely access services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal.”

Formal financial institutions are, by their designed, not made to help people who don’t already have financial assets – they were designed to help those who do. A poor person will be unable to take out a large loan of say $10,000 or be able to open a savings account with an opening balance of even $1,000. Microfinance services usually involve small amounts of money, differentiating them from those provided by formal banks.

You may imagine that very poor people don’t need financial services. But if you think about it, they are using these services already. They just look a little different from what you may be used to. The CGAP explains this financial exchange very well:

“Poor people save all the time, although mostly in informal ways. They invest in assets such as gold, jewelry, domestic animals, building materials, and things that can be easily exchanged for cash. They may set aside corn from their harvest to sell at a later date. They bury cash in the garden or stash it under the mattress. They participate in informal savings groups where everyone contributes a small amount of cash each day, week, or month, and is successively awarded the pot on a rotating basis. Some of these groups allow members to borrow from the pot as well. The poor also give their money to neighbors to hold or pay local cash collectors to keep it safe.

“However widely used, informal savings mechanisms have serious limitations. It is not possible, for example, to cut a leg off a goat when the family suddenly needs a small amount of cash. In-kind savings are subject to fluctuations in commodity prices, destruction by insects, fire, thieves, or illness (in the case of livestock). Informal rotating savings groups tend to be small and rotate limited amounts of money. Moreover, these groups often require rigid amounts of money at set intervals and do not react to changes in their members’ ability to save. Perhaps most importantly, the poor are more likely to lose their money through fraud or mismanagement in informal savings arrangements than are depositors in formal financial institutions.”

So, what do we mean by “poor”?

Poverty is typically defined in two ways. As “Absolute”, where a person is unable to afford basic human needs, such as clean and fresh water, nutrition, health care, education, clothing and shelter, or as “Relative”, where a person lacks the typical or socially acceptable level of resources and income in comparison to others within their society or country. 1.7 billion people are estimated to live in absolute poverty, and a further (Wikipedia). Microfinance stands to benefit all those in absolute poverty as well as those in relative poverty in LEDC‘s. To give you an idea of how many people stand to benefit from microfinance, below is a map of the world which shows the percentage of population living on below $1 per day in between 2007 and 2008.

Source: Wikipedia

Types of MFI

There are MFIs that are in only one country (we’ll call them Country MFIs or CMFIs) and there are Microfinance networks, like FINCA, that are in several countries.

To make it a little more complicated, the Microfinance networks come in two basic types: wholly owned, where the network owns all its “affiliates”, and “loosely affiliated”, where the network really has no control or ownership of the country MFIs, but takes credit for them when they are successful and shuns or even disaffiliates them when they are flops or embarrass them.

Recently, some Country MFIs have tried to branch out into networks. Examples of this include Grameen Bank and BRAC (Bangladesh Rural Advancement Committee).

Another important “fault line” to understand is that there are MFIs that are non-profits or Non Governmental Organizations (NGOs), and others that are “commercial” or for-profit banks and finance companies.   A lot of the current controversy centers around a number of large, for-profit MFIs in India allegedly making huge profits off their poor clients.

Finally, some MFI networks, like FINCA, while the mother ship remains a non-profit, many of the affiliates “transform” from non-profits (NGOs) to for profits.   Why do they do this?  So they can legally offer savings accounts to their clients, and also so they can take investments of capital to grow and reach more poor clients.

Confused? Let’s look at the landscape.

1.    MFI Networks

Who are the leaders:

• FINCA International – CEO Rupert Scofield. Founder John Hatch. 800,000 clients in 21 countries on five continents.

• ACCION – Michael Schlein.  Historically based in Latin America.  Their early affiliates did microfinance before Yunus in Bangladesh. Rocked the MF world when their Mexican affiliate,

• Compartamos – “Went Public” and the two founders made over $50 million each.

• Procredit – Claus Peter Von Zeitinger. An “up market” Germany based MFI network

• Opportunity International - Bill Morgenstern. Christian based, religious MFI network that has both NGOs and for profit banks

• Women’s World Banking – Mary Ellen Iskanderian. Doesn’t own any of its affiliates.

• Grameen (the network, not the bank in Bangladesh) – Alex Counts.  Alex did a Fullbright scholarship with Grameen bank and learned the business from the ground up.

• BRAC – Faisal Abed.  After years of building a massive, multi service MFI in Bangladesh with donor money, BRAC has branched out to Africa and Afghanistan.  But rumor has it their roll out is not going well and they may be withdrawing from Afghanistan and maybe Africa when the donor money runs out.

Of these networks, the ones that have wholly owned subsidiaries are FINCA, BRAC and Procredit.  The others have a mix of wholly owned and independent.

2.   Country MFIs

Most of the big ones are in South Asia.  Let’s call them the “Asian Giants”:

a.  Bangladesh

• Grameen Bank – 5 million clients, led by Muhammad Yunus, Nobel prize winner.  Yunus under attack by the government for supposedly diverting a $100 million grant from Sweden from the Grameen Bank to one of its non profit subsidiaries in order to avoid taxes.

• BRAC – probably 3-5 million clients, led by Faisal Abed

B.  India

• SKS- 9 million clients, led by Vikran Akula.   Akula studied at Yunus’ knee, but then “betrayed” him by scaling up SKS via a straight up venture capital model, driving growth at an insane pace in order to “pump and dump” the stock during the Initial Public Offering (IPO).   Purportedly he and the early investors made 95 x their investment.

• Spandara – another big Indian MFI

C.   Indonesia

• Bank Rayat Indonesia (BRI) – This used to be a behemoth but my impression is it is shrinking as a player

But this information only covers the beginning. What are the major pitfalls of microfinance? How has the global economy affected MFIs? What lies ahead for MFIs and their leaders? More to follow next week.

About Michelle Scofield

Michelle was born in Washington, DC and lives in London. You can read more at her blog at www.hexpat.wordpress.com...

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EcoAngel

This is a phenomenal way to tweak the capitalist system for good. It does not need to be rapidly overthrown, just re-assessed and adjusted. Curing Poverty... what a task. And by putting the cure into the hands of the poor you really can make change.

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