A Look at Credit Access in HondurasMicrofinance has become an important tool for increasing credit access in Honduras for low-income people. Microfinance, or microcredit, entails banks lending small amounts of money at low interest rates. It is a great method to get loans to people living in poverty who have no credit history, little to no income, no collateral and often no education. This practice is particularly popular in the developing world.

The Current Situation

Without access to credit, savings or other basic financial services, over two billion people around the world are financially excluded. Increased credit access in Honduras and other developing countries enables poor families to earn a larger income, build their assets and cushion themselves from extra costs from external shocks like natural disasters. Poverty in Honduras is exacerbated by a consistent threat of natural disasters, such as floods, hurricanes and land erosion.

In Honduras, 60 percent of the population lives below the national poverty line and the country has one of the lowest per capita incomes in Latin America. Credit access in Honduras is limited, especially in rural areas due to obstacles including high operating costs because of infrastructural deficiencies, a high level of risk due to the threat of natural disasters and a lack of flexible financial products and financial intermediaries that can cater to specific needs.

Improvements to Credit Access in Honduras

In 1989, a non-banking financial institution called FINCA was established in Honduras to provide banking services to people across the country, including loans, savings deposits, money transfer services and insurance. FINCA now has 21 branches and serves over 47,000 people in rural and urban areas of Honduras. The average loan is less than $800 and the institution’s loan portfolio amounts to over $21 million.

In 2014, the Rural Savings and Credit Union was formed in Honduras to provide these financial services in rural areas and offer flexible financial services based on individual negotiations and a deep knowledge of local communities and the businesses within those communities. Rural Savings and Credit Unions have promoted a more gender-inclusive market system, empowering women to participate in the economy to open small businesses and support their families financially. They are also sustainable and easy to replicate, ensuring a stable source of financial services to rural and poor areas in Honduras.

The Multilateral Investment Fund also approved a $200,000 technical assistance grant and a $3 million loan to the José María Covelo Foundation. The funds will allow the organization to pursue a project to improve the economic conditions of productive and entrepreneurial individuals in rural and peri-urban areas by increasing the microcredit supply in Honduras.

Real Life Results

Microcredit services like FINCA have helped increase poor people’s credit access in Honduras, enabling them to start small businesses and increase their incomes without having to go into major debt. For example,  62-year-old Consuelo Esperanza Rueda Aguilar has been able to start several businesses, from running a taxi service to selling a variety of different items ranging from cell phones to clothing to pots and pans. By utilizing FINCA’s services, Consuelo carefully invested her earnings to develop her entrepreneurial endeavors. She was also able to educate all five of her children and to buy a bigger house.

Models like FINCA and Rural Savings and Credit Unions strive to reduce poverty by increasing credit access in Honduras, providing economic opportunity for people in the most vulnerable settings and increasing economic empowerment by giving Hondurans the tools to become more financially stable.

– Sydney Lacey

Photo: Flickr

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Global Public Goods (GPGs) — covered in an earlier Borgen post — are essentially goods that enhance the welfare of society when consumed and have associated effects that are not bound by discrete political units. Examples include the provision of knowledge, cleaning up oceans and eradicating disease. The expanding discourse around Global Public Goods has grown in tandem with globalization and international issues that are more technical like phytosanitary foods export, satellite transmissions and financial stability are being studied, explored and debated.

The idea of financial stability as a GPG is better viewed inversely. It is best to look at how the instability of financial markets create recessions, downturns and depressions that slow global output and either increase poverty or decrease the rate of poverty reduction.

Financial markets may be unstable for many reasons including poor oversight and regulation and mismanaged macroeconomic policies at the national level. Advances in financing practices and telecommunications have complicated things and the liberalization of capital flows has raised the level of instability. With increasingly integrated and complex financial markets, mistakes in one nation act as contagions with global effects.

A quick look at Europe’s headache over the debt crisis in Greece, who is now on a course to drop from the eurozone and “destabilize the region and reverberate around the globe,” which, in turn, was catalyzed by the 2008 Wall Street shocks, is a present-day example of how these interdependent markets can result in a type of shared vulnerability and of the far-reaching effects that an unstable financial system results in.

Unfortunately, developing economies are exposed to greater risk due to the volatility of capital flows and the difficulty for developing countries to access financing, something that has been called the double stability and efficiency problem. Many studies have quantified the cost of financial instability on developing countries and an analysis of the literature puts the cost at one percent of GDP per year from 1975 to 2000, resulting in a reduction of income for developing countries by 25 percent for that time period.

It is clear that unstable financial markets are a malady for a strong global economy and that their costs are unfairly distributed, with developing nations being the hardest hit.

So what can be done? The GPG framework advances a solution, one based on the recognition that “the world has made enormous strides in communications and interdependence between countries, yet we have not developed the policies or institutions needed to manage that process.” Therefore, international institutions are needed to ensure the stability of the financial market, precisely because it is an international affair.

The prescriptions for securing stability that this new institution would advance would likely include harmonizing and introducing codes and standards for financial sector regulation, surveillance and coordination of macroeconomic policies and enabling liquidity injections for severely struggling economies, among other technical fixes.

Although unlikely to draw a crowd, these efforts would have a real impact on fighting poverty and making the world a more stable place.

The work required to coordinate and implement something of this nature will require sustained international cooperation, but what better venue to begin than the Third International Conference on Financing for Development (IMF), which is taking place next week in Addis Ababa, Ethiopia’s capital. There, the IMF plans to discuss “international policy issues such as maintaining global financial stability and international tax cooperation.” Along with other international efforts and the difficult realities faced by financing the Sustainable Development Goals, Addis Ababa may prove to be a turning point for GPGs.

– John Wachter

Sources: United Nations Industrial Development Organization, The New York Times, International Monetary Fund

Financial Inclusion Improves Globally

What is financial inclusion? Financial inclusion is when all members of society have access to financial services at affordable prices.

What does financial inclusion have to do with poverty? Some people may not be able to afford certain financial services. In addition, financial inclusion can help decrease global poverty. For example, when people have access to financial services, they can start and expand businesses, invest in higher education for their children and withstand financial hardships more easily. When other marginalized groups like women and disabled people have access to financial services, this can improve the economy of a country as the whole.

In 2011, 51% of adults,, or roughly 2.5 billion people, did not have a bank account. Now, 62% of the world’s adult population, or 2 billion, have an account.

China, India, Indonesia, Mexico and Tanzania have seen significant increases in account ownership. Account ownership in China increased from 64% to 79%, from 20% to 36% in Indonesia, from 35% to 53% in India, from 27% to 39% in Mexico, and from 17% to 40% in Tanzania.

Mobile money accounts have also helped increase financial inclusion. In Cote d’Ivoire, Somalia, Tanzania, Uganda and Zimbabwe, adults are more likely to have a mobile money account than an account at a financial institution. Mobile money accounts are the sole reason for the dramatic increase of account ownership in Tanzania.

In terms of the poor, account ownership increased disproportionately among adults in the poorest 40% of households. In 2011, only 29% of the poorest individuals had an account. Now, 46% of these individuals own an account. This is great news!

Overall, women are more likely to own an account than ever before. In 2011, 47% of women owned an account. Now, 58% of women own an account. Again, this is significant progress.

Account holders are using their accounts. About half of account owners in developing countries use their account to make or receive a payment. About a quarter of account owners in developing countries use their debit card to make direct payments. About 39% of account holders in developing countries use their accounts to save. This is secure and helps the economy grow.

Can we still make progress? The short answer is, of course we can. About half of the poorest individuals still do not have an account. Additionally, there is about a 7% gender gap in account ownership. The good news is that there are many ways that we can decrease this number.

Governments and businesses could drastically decrease the number of unbanked adults by digitizing wages and transfers. Additionally, many farmers are unbanked. About 23% of people in developing countries receive cash for agricultural sales. Countries could focus on banking these farmers. Additionally, mobile money accounts could be a way to expand account ownership significantly, especially among women and the poorest individuals.

Overall, financial inclusion is improving in developing countries. More adults than ever own an account. This will help improve both financial equality and financial prosperity.

– Ella Cady

Sources: Center for Financial Inclusion, Impatient Optimists, World Bank
Photo: Live Mint

The year 2014 will be one of major change for Afghanistan, beginning with an economic transition that is expected to be both difficult and painful. The departure of foreign troops by the end of December, as well as a predicted drop in international assistance, marks a turning point for the country.

Afghanistan remains one of the world’s poorest countries, even after 12 years of relative success in a number of sectors including health and education. As the ‘war economy’ ends, the United States hopes to buffer the economic impact that will result from the pull-out of contractors and service providers that have supported military operations within the country since 2001.

The U.S. Agency for International Development recently announced three new United Nations initiatives worth almost $300 million that are aimed at insuring that Afghanistan does not fall deeper into poverty.

The U.N. initiatives include:

  • A program that will give $125 million to Afghanistan’s food and farm sector (the base of its economy,)
  •  A $77 million, four-year program to open Afghanistan up to greater international trade and investment opportunities, including joining the World Trade Organization by 2015,
  • And a program worth almost $100 million that will partner three U.S. universities with 10 Afghan universities and provide students with practical skills to work in both the private and public sectors.

This package of aid initiatives is not the only assistance being offered to the country.

A humanitarian appeal from the UN Office for the Coordination of Humanitarian Affairs, known as The Strategic Response Plan, claims the number of people in need of access to health services has increased from 3.3 million to 5.4 million. The plan is asking for $406 million to alleviate what they believe is a worsening humanitarian situation.

Although almost $90 billion of aid has been pledged to Afghanistan since the 2001 invasion, the country is still in a dire situation. North American Treaty Organization-led international forces are currently debating whether they should remain in Afghanistan, as it is known to be one of the most dangerous countries for aid workers. Last year alone, 80 aid workers were victims of attacks, kidnappings or killings according to the Aid Worker Security Database, which is the largest number of incidents any country has seen in a single year.

Many are frustrated with the Afghan government and the dangerous and unstable conditions that are wracking the nation. Uncertainty is growing among those who are reluctant to continue providing generous aid to the country; it is unknown how much outside help it can expect within the coming years.

Hopefully, these UN initiatives will be enough to push Afghanistan in the right direction after years of war that has ravaged the country.

– Mollie O’Brien

Sources: UNRIC, Reuters
Photo: Council on Foreign Relations