Microfinance is an interesting combination of private enterprise with the idea that actively empowering of women and other disadvantaged groups by giving them access to basic financial services will help lift people out of poverty. Around thirty years ago, charities starting issuing small loans to either individuals or small groups for small projects. As The Economist put it in a recent survey of microfinance. (The other articles are subscription only).
In 1971, Opportunity International, a not-for-profit organisation with Christian roots, began lending in Colombia. ACCION International, also not-for-profit, made the first of what it called “micro” loans in 1973. Grameen Bank started in 1976 and soon became extraordinarily famous for offering “microcredit” to women in small groups.
The belief of Grameen Bank and other lenders was that targeting lending to women would result in greater loan security, greater child welfare and household food security In addition the empowerment of having the credit made available to the women would raising their status in their communities. The majority of microfinance lending is with women.
While many in the first world feel they are being screwed by banks, spare a thought for those in the third world trying to start a small enterprise, or purchase a house.
…financial services for poor people in developing countries…have mostly been awful or absent. With no safe place to store whatever money they have, the poor bury it, or buy livestock that may die, or invest in jewellery that may be stolen and can be hard to sell. Basic life and property insurance is rarely available. Home loans are costly, if indeed they can be found at all. For many people, the only source of credit is a pawnshop or a moneylender who may charge staggeringly high interest and beat up clients who fail to pay on time. In the Philippines, lenders who zip from town to town on motorcycles expect six pesos back for every five they lend. That translates into an annual interest rate of over 1,000% on a loan for a month.
The important issue with microfinance was not to provide cheap loans, but to provide loans with rates that reflected the real level of risk born by the lender, ie, what would be called market rates, if there was a market. Thus while rates might be relatively high by our standards, they are a world away from 1000% pa.
Microfinance has spread and now has literally hundreds of organizations providing services. Typically lenders claim very high repayment rates higher than would be expected in a first world country although there is some doubt as to whether they are counting the same thing — many microfinance lenders appear to be generous as to what counts as a defaulted loan.
While it can be difficult to assess, the general effect of these efforts seems to be positive, with many of the household who have been involved lifting themselves out of poverty and with the extra authority and responsibility women status in many of these communities has risen. Some view that the profitability of microfinance is a proof of success itself.
The vast majority of providers of microfinance currently are not-for profit, however many first world banks are now showing an interest. If this proves to be a profitable exercise for them, it will this will mean a vastly increased source of funds for third world economies.
It also raises the question is that if profitable opportunities exist why didn’t microfinance occur without the intervention of charities to prove the model? As The Economist says:
Why are the poor so badly served? The easy answer, that people who have little money do not make suitable clients for sophisticated financial services, is at most a half-truth. A better explanation, … is that the poor have been hurt by massive market and regulatory failure.
Many seem to herald microfinance as the solution to alleviating third world poverty, keeping money away from corrupt governments and into the hands of individual entrepreneurs. To some extent I think this is right. Microfinance avoids the situation that many countries find themselves in with large foreign debt, an inability to pay or borrow more money and the money already spent squandered either through failed projects or corruption. With large development programs an entire nation can be left penniless and begging for debt relief, being held to account for the failures of previous administrations.
Of course the ability of individuals to help themselves depends on governments being keen to foster private development. It is all very well to be able to get the capital to start a business, but if the infrastructure in terms of roads, water supplies etc are not constructed or left to ruin then it will ultimately still fail. In many cases loans are not extended to the very poorest either, with the belief that better results are achieved from those with some more financial experience, thus the poorest people are left behind. Thus it seems that microfinance is an important additional tool to fighting poverty but not a solution in itself.
Probably the most important precondition is a decent and enforceable regime of property rights, so that the fruits of the investment can be held securely and used for security against further (and usually much cheaper)credit. This is, I think, a higher priority than massive infrastructure spending.
World-changing called microfinance P2P Loans which is an interesting take on internet language.
And compare the market exchange version.
https://www.zopa.com/
“Zopa is
aiming to offer banking products on a human scale, offering an alternative to a world characterised by automated systems and mega profits.”
The Independent 1.10.05
Gina Neff published a sharp critique of microcredit, particularly of Grameen, in Left Business Observer back in 1996: http://www.leftbusinessobserver.com/Micro.html
Sharp Critique indeed. From my reading of a variety of articles its certainly true its not all that its main sprukers claim, but their appears to be a fair bit of solid research backing the claim it provides real benefits in the right situations.
Thanks for the article and your critique Steve.
I’ve been a long time supporter of microfinance projects in developing countries. It provides such a terrific opportunity for economic self-determination.
I understand that a great many of the projects, particularly in Asia and Africa finance projects helmed by women, and I also know of another in India, in particular, a rickshaw ‘taxi’ service which, attracts a lot of men.
The opportunity to be free of the shackles of government and welfare dependence through capitalism is aboslutely wonderful and, in my opinion offers the best opportunity to rise out of poverty for the individual to fulfil their potential.
– Nora
PS - As an aside, I suppose we see a form of microfinance projects in Australia too.
Direct marketing companies like Avon and Tupperware allow people, particularly women on very little income to start a business.
I might very well be responsible for one Tupperware rep making her first million. Hmmmmm must have plastic things…
Do Avon and Tupperware lend money to people who want to start selling? I thought you had to have your capital up front and purchase product samples to get started.
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I didn’t mean to infer that was exactly like the true microfinance projects overseas.
The girlfriends of mine who rep Avon and Tupperware don’t make a capital investment (such as a licence or franchise fee), they just purchase products.
::Shrugs:: Just an observation that there are very few businesses that one can start in the West with a very small capital outlay.
– Nora
“There are very few businesses that one can start in the West with a very small capital outlay”. I reckon there are oodles of them. I started a couple myself. People are starting them all the time.
I agree with Nicholas. I run a small business which I began with an outlay of about $3000.
Google, Microsoft, Apple.
Some businesses which started out without much cash.
They’ve got a bit more cash now.
Businesses with small capital outlay. I’d reckon eBay would provide a large many of these stories.
I started mine on $2000 severence from the little .com that couldn’t. That was four years ago.
To reiterate, the reason why I mentioned Avon and Tupperware is you’re talking about less than $1000 to buy in. Amanda, you’re right about eBay, I’ve heard some great success stories, but I haven’t had much luck selling stuff - anyone want some original 1973 Ford Mustang parts?
Nice to see so many business owners here - may I ask what your businesses are?
– Nora
I survived for a year on an eBay business started with no capital outlay at all. Wouldn’t call it the best year of my life, but it can be done.
There’s lots of opportunity for ambitious capital-poor youngsters in the pharmaceutical retail, wholesale and logistics industry: just don’t try working in Singapore.
Thank you for a great summary of the Economist’s Survey on Microfinance. Our blog http://www.microcapital.org promotes investment in microfinance with candid information. Stable capital markets for microfinance have yet to emerge due to the very mixed track record of “development aid” (public and charitable spending).
Nicholas, Google raised $1 Million from family and friends to get going.
There’s lots of opportunity for ambitious capital-poor youngsters in the pharmaceutical retail, wholesale and logistics industry: just don’t try working in Singapore.
LOL Liam - sorry I only just got the joke.
No, I wouldn’t recommend that - there’s nine people in Bali who have perhaps hit the ‘glass ceiling’ of their profession.
– Nora
Theirs is also the model of modern capitalism in action.
A tarriff-free, taxless industry with guaranteed consumers unable to boycott or reasonably ’shop around’, with profits inflated artificially by ruthless State regulation at every link of the chain, from the tenant-farming and sharecropping at the supply end to the strictly-policed high turnover of end-retailers ensuring a low price of labour relative to supply.
The next step, I assume, will be the establishment of OPEC-like price cartels.
A friend of mine got taken to the Fed Court recently for, among other things, comparing (on his website) multi level marketing operations to the heroin trade in their business structure.
Microfinance projects can be incredibly successful and beneficial to the poorest and most vulnerable sections of society when they are well targeted and include programs like business training or other skills development, as well as carefully developed peer support networks. Sometimes, however, the targetting of women as “safe loan recipients” can backfire dramatically for the women themselves.
In some cultures there is a strong tradition of everyone in the community pooling all of their resources together and everyone having the right to spend that money as they see fit. In PNG, for example, this is quite a common practice and in many areas the men have the first right of access to the money too. This has meant in some programs that the women have been left indebted for loans that their husbands or other men in their community have spent.
I don’t mean this as criticism of microfinance per say. I just mean that the most successful programs are ones that have been developed locally with a strong understanding of the culture and needs of the local people - and with a real community development focus.
Now that microfinance programs have become such a popular concept, some organisations are rushing to set up their own programs without really doing the necessary background work. Sometimes this approach can leave people worse off in the end, particularly if the whole thing is done with a profit motive rather than with a community development ethos.
On another note entirely. I admire those of you who have started your own businesses. I think that I would be far too terrified too work for myself. I salute your courage.