Post #39 – What Works? Microfinance: Financing Dignity

Back in the 1970s, Muhammad Yunus in Bangladesh had a brilliant idea.  He would found a bank to provide seed money to poor people who otherwise would have no way to obtain a loan and start a small business.  Believing that women, as managers of households, would be more responsible than their husbands in organizing a business and making it successful, Yunus decided that bank loans would go primarily if not exclusively to women.  This practice empowers women, a major benefit in its own right. As most of us know, Muhammad Yunus was awarded the 2006 Nobel Peace Prize for his Grameen Bank, which provides loans from as little as $100 to $1,000, 97 percent of them to women, and claims a 99 percent return rate. The loans are made possible by people’s deposits in savings accounts, and a charge of 20-percent interest.  The bank’s profits are returned annually to depositors in dividends. Around 8.4 million rural villagers have to date been served by Grameen’s 2,500 branches.

The Grameen experiment has spawned a worldwide network of microfinance institutions (MFIs), including Grameen America. Just to get some idea of the numbers, size of fund, and other features, and how they rank, see the charts in Forbes online.  It surveyed 641 MFIs in developing countries, basing the ranking on full disclosure by the institutions of their loan operations (www.forbes.com/2007/12/20/microfinance-philanthropy-credit-biz-cz_ms_1220microfinance_table.html.) The Forbes survey shows that Bangladesh, India, Ecuador, and Colombia seem to have the most highly ranked MFIs.

Separate from the Grameen Bank is the Grameen Foundation (www.grameenfoundation.org), founded by Yunus in 1997, with headquarters in Washington DC.  The foundation operates in many developing countries, offering (among other services) microloans and microsavings programs. The inclusion of savings programs is instructive.  It reflects the finding that, as important as loans are to the poor, encouraging savings at a reasonable interest rate is just as important.

But not all is rosy.  In 2011 Muhammad Yunus was removed as managing director of the bank by the Bangladesh government, which then decreed that it had the power to control both his successor and the board of directors, which up until then was (deliberately) dominated by poor women.  Politics clearly dictated the removal of Yunus: He was a frequent critic of the government, which is usually ranked as one of the world’s most corrupt.  Yunus has also raised an issue detrimental to the growth of all developing-country MFIs: commercialization. In an op-ed for the New York Times, he observed that in India and elsewhere, microfinancing has given way to for-profit banking, resulting in reduced lending to the poor and increased interest rates (“Sacrificing Microcredit for Megaprofits,” January 14, 2011).  This trend, Yunus observes, defeats the purpose of microlending and should not be dignified with that name.

Microlending has evolved in form as well as function.  A notable example is Kiva (www.kiva.org). Founded in 2005, it has quickly become very popular because of its innovative Internet-based donations approach.  People in developing countries advertise their proposed business projects online and their requested loan levels.  You and I, through our credit cards, are invited to send money, typically $25, directly to the person and project we want to support. Kiva inspectors monitor loans on site to ensure faithful business practices.  In its brief existence, amazingly, Kiva reports nearly $600 million in loans,1.2 million lenders, and a 98 percent loan repayment rate.

          Acción (www.accion.org) is active in 32 countries, including the US.  Three of every four borrowers are female, and 97 percent of its loans are reportedly repaid.  Acción works with over sixty partner MFIs, mainly in Latin America but also with some in Asia (India and China) and Africa.  Unlike most other MFIs, Acción focuses on building microfinance institutions rather than lending directly (except in the US, where it is a loan agency).  It describes this service as follows: “We build sustainable, scalable microfinance institutions (MFIs) that share our commitment to the double bottom line – maximizing both financial and social impact – by providing those MFIs with management services, technical assistance, investments and governance. Like a venture capital firm, we combine investment of capital with managerial expertise. Our managers are typically seconded to partner MFIs and use their experience to help build sound, commercial models of microfinance that are scalable, profitable and carefully attuned to protecting clients’ rights. Together, these services help catapult smaller, younger MFIs to the highest level of performance.”  As of 2012, Acción reports average first loans of just under $1,000 and a total loan portfolio of over $7 billion.

FINCA (www.FINCA.org) is another US-based microfinance organization.  Over a 25-year period, FINCA has developed credit programs in 22 countries serving about 1.7 million people.  In Africa, for example, FINCA’s reports indicate it now serves about 636,000 people who seek to start small businesses.  Its loans average $490, and have a 97 percent repayment rate.  FINCA also provides insurance to both businesses and individuals, enabling them to afford such things as health care and solar energy, and in some countries operates subsidiaries that have been accepted as full-fledged banks catering to low-income people.

Ufani Agricultural Organization (UFAGRO) is a microloan organization in the village of Dareda Kati, Tanzania.  Formed in 2012, UFAGRO grew out of the grassroots development work of the Karimu International Help Foundation (www.karimufoundation.org) based in Idyllwild, California.  Don Stoll and Marianne Kent-Stoll visited Dareda Kati in 2007, established the foundation the next year, and have returned regularly to the village ever since. Thanks to them and village leaders, four members of the community every month, mostly women, are voted $70 loans. The money comes from monthly dues that microcredit group members pay into the fund.  Villagers have used the seed money to buy more egg-laying chickens and set up a snack shop, among other projects.  Through Karimu (which means “generous” in Swahili), Don and Marianne recently provided additional seed money, nearly $4,000, to help villagers with larger needs.  As they describe it: “The seed money funded more substantial loans, of about $230 each, to seventeen different members.  Each recipient of a $230 loan was given one year to repay, at five percent interest; each recipient of a smaller, $70 loan was given three months to repay, with an additional five percent also payable at the end of the three months.” Thus, between Karimu and UFAGRO, the people of Dareda Kati have the means to go beyond their traditional subsistence farming.  Don’s periodic Tanzania diary (http://dstoll49.wordpress.com/2014/07/26/tanzania-diary-july-3/) tells of the daily struggles and achievements as these villagers determine how to improve the quality of their lives.

Our last microfinance story is about BRAC (formerly Bangladesh Rural Advancement Committee), headquartered in Dhaka, Bangladesh.  It was founded in 1972 by Dr. Mahabub Hossain, an international development economist. BRAC has branches in twelve Asian, African, and Caribbean countries, and ranks very highly among all microfinance organizations according to various expert analyses. It is a full-scope development nongovernmental organization, with microloans only one component of its anti-poverty agenda.  The organization describes its work (www.brac.net/) as “creating an ecosystem in which the poor have the chance to seize control of their own lives. We do this with a holistic development approach geared toward inclusion, using tools like microfinance, education, healthcare, legal services, community empowerment, social enterprises and BRAC University. Our work now touches the lives of an estimated 135 million people, with staff and BRAC-trained entrepreneurs numbering in the hundreds of thousands . . . ”  (Thanks to Peter Beck for bringing BRAC to my attention.)