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Microfinance Alone Won’t Grow Business In Impoverished Regions

microfinance
Microfinance has become a popular economic strategy for those in the “bottom of the pyramid” hoping to obtain a better quality of life through entrepreneurship and investment in rural business. But microloans often trap loan recipients in cycles of indebtedness, thus exacerbating the poverty loan providers claim to strive to reduce.

The primary problem with microloans is that recipients often use them to purchase basic necessities, like food and clothing, rather than for entrepreneurial ventures or local investment. In South Africa, 94 percent of microloan funding goes to consumption, not investment. This leaves recipients without the means of generating the income to pay back the loans (or the artificially high interest rates that come with them), which necessitates taking out new loans to repay previous ones. Because of the poor economic conditions in impoverished regions, people often have no choice but to enter into this cycle of debt.

Even when microloans are used towards developing business, loan recipients often face obstacles that make realizing revenue difficult or impossible. “When micro-loans are used to fund new businesses, budding entrepreneurs tend to encounter a lack of consumer demand,” writes Jason Hickel, an anthropologist at the London School of Economics. “After all, their potential customers are poor and low on cash, and what little money they do have gets spent on basic goods that tend already to be available. In this context, new businesses end up displacing already-existing ones, yielding no net increase in employment and incomes. And that’s the best of the likely outcomes.”

The worst, he writes, is similar to the outcome described above: borrowers end up failing and entering into cycles of indebtedness to pay off previous loans.

One challenge facing loan recipients is a lack of coherence among labor markets in developing regions. Enterprises launched by individuals have a high rate of failure due to a lack of business experience and resources with which to invest or pay back debts. Enterprises launched by communities, however, are much more likely to succeed, the result of collective utilization of resources and solidarity among workers.

An example is Bangladesh’s BRAC, the world’s largest development NGO. BRAC organizes poor communities using their own resources and enables them to create their own supply structures and manage their own industries. One of BRAC’s enterprises, Aarong, has grown into one of Bangladesh’s largest retailers and now earns annual revenues of over $60 million. Aarong’s supply-chain coherence and community support empowers rural artisans, allowing them to create and sell goods on a globally competitive level without having to launch individual initiatives by taking out high-risk loans.
Because NGOs like BRAC are largely self-funded, it is unlikely for them to establish a presence in every developing or impoverished region. This means that for rural workers to have a chance to succeed, local investment in small business needs to be accompanied by state assistance, strong subsidies and assistance for failed entrepreneurial endeavors.

One such example is affordable agriculture insurance, which has the potential to help rural farmers whose operations are threatened by conditions out of their control, like violent climates. Because agriculture is a main source of income for rural communities (over 2 billion people depend on “smallholder” farms for income), they often need to take out loans to maintain the resources to cultivate crops. Because agriculture is a high-variable venture, farmers are often left without the means of recovering lost investments. Insurance coverage for these farmers enables them to invest in riskier but more lucrative endeavors and makes it more likely for credit to be extended to them on more reasonable terms.

Business-friendly initiatives like agriculture insurance present opportunities for American companies to invest in developing regions while making it more likely for rural entrepreneurs to succeed. The more U.S. investors engage in activities such as these, the more likely it is for new markets to develop, and the more likely it will be for development aid to effectively improve business conditions in developing countries.

– Zach VeShancey

Sources: The Guardian 1, Center for Financial Inclusion, The Guardian 2
Photo: The Guardian

What Are the Impacts of Microfinance, Really?

Microfinance
“The initial narrative around microfinance—that it was going to unleash the entrepreneurial spirit of the poor and lead to significant growth and poverty reduction—was never really all that realistic,” stated Asli Demirguc-Kunt, the Director of Research at World Bank, during a Policy Research Talk held in March 2015 to discuss the role of microfinance in today’s economy.

At its inception, microfinance was envisioned as a beacon of economic hope for the poor, specifically those operating small businesses, who were without access to loans and basic banking services. Given current data findings, it is debatable whether microfinance is reaching the poorest communities. Research provided by the Microfinance Information eXchange, or MIX, examines a handful of institutions and their clientele, stating how the institutions have impacted issues of poverty. One set of data shows the percentage of clients of each institution that are below the poverty line of either their respective country or the U.S. Some of the lowest percentages are three percent, 22 percent and 27 percent, while the highest are 73 percent, 80 percent and 86 percent. We are seeing that in some cases, the banks reach the poorest, but in other cases, the majority of their clients do not fall in this category.

A February 2015 policy brief from Poverty Action Lab, an organization focused on poverty research, drew several conclusions on the results of microfinance, citing its successes and failures. On the positive side, because of the accessibility of credit, some entrepreneurs have increased investments in their businesses and households have experienced greater flexibility in financial management. Although microfinance has proved beneficial in some ways, no major impacts have been seen in the level of client income, female empowerment or investment in childhood education. It was also determined that “demand of many of the microcredit products was modest.”

Robert Cull, Lead Economist of the World Bank Research Department, recognized some positive results of microfinance, but also pointed out that there have been no notable improvements in income per household or wealth, and the level of poverty has not dramatically changed.

Given the varied impacts of microfinance, many question how the industry can be improved. Some are advocating for a move toward digital banking, which would make services more accessible and inclusionary, while also helping banks and their clients to cut expenses. Certain microfinance institutions charge high levels of interest to support themselves, but money saved through an increased use of online transactions may enable them to lower rates so that more customers can borrow affordably. While certain initial expectations of microfinance have not been fulfilled, many agree that the institution has had enough successes that it should remain in place but with reforms.

– Amy Russo

Sources: Devex, The Mix, Poverty Action Lab, The World Bank
Photo: Flickr

ICRW Fights for Gender Equality

In the developing world, one in three girls is married before age 18, and over 200,000 women die each year from pregnancy-related causes. In Sub-Saharan Africa, women account for approximately 60 percent of HIV infections, despite making up just over half of the population.

The International Center for Research on Women, or ICRW, a Washington, D.C.-based global research institute and registered nonprofit, has been working for nearly 40 years to combat statistics like these.

Founded in 1976, the ICRW conducts empirical studies intended to measure the obstacles that hinder women in the developing world from reaching their full potential. The ICRW then recommends policy priorities and designs “evidence-based plans” for donors, program designers and policy makers that enable needy women to lead happier, healthier lives.

The ICRW focuses its research on several main areas related to women’s empowerment. The first of these areas centers on issues that begin in adolescence.

Specifically, the ICRW conducts research on child marriage, education, work, healthcare and relationships. By identifying ways to make the attitudes and options of adolescent boys and girls more equitable, the ICRW hopes to empower women to take better control of their own futures.

The ICRW also focuses its research on how disparity between men and women affects agricultural productivity and food security in developing nations; women’s economic empowerment, employment opportunities and property rights; reproductive health and fertility control; HIV contraction, stigma and discrimination; and domestic violence issues.

In the four decades since its inception, the ICRW’s research has been instrumental in bringing about meaningful change in the lives of women in need. Its research efforts have, among other accomplishments, guided the passage of a 2005 law in India working to combat domestic violence, increased the availability of microfinance loans available to women in developing nations and helped integrate women’s empowerment and gender equality into the Millennium Development Goals.

With new regional offices in Kenya and India, the ICRW continues to conduct relevant research aimed to produce “a path of action that honors women’s human rights, ensures gender equality and creates the conditions in which all women can thrive.”

– Katrina Beedy

Sources: International Center for Research on Women, Coalition for Adolescent Girls
Photo: Flickr

Mongolian Microfinance: Mercy or Menace

Microlending began with the innovation of currency. Friends and family would get together and pool their money to offer help in times of hardship. Mary Coyle, director of the International Institute at St. Francis Xavier University in Nova Scotia, Canada, has found many such groups throughout history and around the globe, “In West Africa, they were known as ‘tontines;’ in Bolivia, ‘pasanaku;’ and across Mexico and Central America, ‘tandas.’”

The shift from microlending to modern day microfinance came about in the 1970s. Groups such as ACCION International in Venezuela and Yunus’s Grameen Bank in Bangladesh began to institutionalize the process. They formalized the loan process and expanded on already existing microlending practices. This enabled small businesses to generate capital instead of just paying for basic necessities.

With the initial success it has long been thought that microfinance was a long term solution to the problem of poverty. While it has brought some out of poverty, it has also kept others where they were financially before the loan and in some cases worse off.

In 2009 two studies were released on the use and impact of microfinance on those that were lent money, conducted by Karlan & Zinman in Manila and Abhijit Banerjee, Esther Duflo, Rachel Glennerster and Cynthia Kinnan of J-PAL in Hyderabad, India. Neither study found that key factors of poverty had been directly impacted, though it was established that those in the Hyderabad study shifted their spending from temptation goods to durable goods. Another study in 2010 by Duflo and Co. in rural Morocco found similar results. There was no major change in poverty, but those that already had businesses did diversify.

These results have done little to curb the continued lending of XacBank in Mongolia. XacBank reported to the U.S.-based nonprofit Microfinance Information Exchange total assets of 594 million dollars and a gross loan portfolio of 393 million dollars with approximately 77,345 borrowers. The company helped a Mongolian baker turn a 100 dollar enterprise into a 75,000 dollar operation. The company and its investors have touted that many people across rural Mongolia have been helped in such ways.

This was put to the test by research done by Orazio Attanasio, Britta Augsburg, Ralph De Haas, Emla Fitzsimons and Heike Harmgart. All are affiliated with London-based institutions: the European Bank for Reconstruction and Development, the Institute for Fiscal Studies and University College London. The study was a random selection of three rural villages across Mongolia. Loans were explained, applicants were screened as individuals and groups and then finally money was offered. Only 50 percent of those offered loans took them.

The findings were in line with the three previous studies. “Although the loans provided under this experiment were originally intended to finance business creation, we find that in both the group—and in the individual-lending villages, about one half of all credit is used for household rather than business goals. Women who obtained access to microcredit often used the loans to purchase household assets, in particular large domestic appliances. Only among women that were offered group loans do we find an impact on business creation.”

With such little change in the poverty rate, some wonder why we would continue this trend of microlending. It has proven to help some, but the vast majority either can’t access the funds or are turned down due to credit issues.

Hope comes from the Norwegian Nobel Committee, when they spoke of Yunus and his work: “Yunus’s long-term vision is to eliminate poverty in the world. That vision cannot be realized by means of microcredit alone. But Muhammad Yunus and Grameen Bank have shown that in the continuing efforts to achieve it, microcredit must play a major part.”

– Frederick Wood II

Sources: UNDP, NY Times, MicroCapital, The World Bank, Center for Global Development, NPR, PBS
Photo: Bloomberg Business Week

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Kiva Moves Past Traditional Microfinance

A spinach farmer in Cambodia, a hot dog stand worker in Nicaragua, a fish seller in Uganda, a carpenter in Gaza and a bee keeper in Ghana were microfinance organization Kiva’s initial borrowers in 2005. However, Kiva has grown in scope and microfinance methods by combating global poverty from multiple angles. This week alone, 27,704 lenders made loans through Kiva.

Today, Kiva’s mission to alleviate global poverty through small-scale lending has grown far beyond its original scope. In the eight years since its inception, the nonprofit has sponsored loans totaling over $540 million. These loans fund over 1.2 million borrowers in 73 countries.

In its eighth year, Kiva is a leader in platforms for social improvement and poverty alleviation. The organization aims to empower low-income borrowers around the world to begin their own businesses, invest in home improvement and clean energies and more through small-scale loans of greater than $25.

Lenders are able to browse the profiles of people around the world who are seeking loans, and choose who they would like to support. Lenders then receive updates on the progress of their loan, connecting them to a larger global community dedicated to supporting low-income earners.

This concept of small-scale lending can be defined as microfinance. Microfinance is loans, savings and financial services for the poor or those without access to traditional banking systems, and the idea that these small-scale funds ultimately help to lift low-income borrowers out of poverty.

While effective in many ways, microfinance can also be limited in its reach due to high-risk costs and loans for more impoverished borrowers. In some situations, microfinance may not be the ideal way to assist borrowers, and cannot function as the only tool to fight against global poverty. In order to combat these limitations, Kiva seeks to be a more flexible form of microfinance by moving past economics and deeper into issues of agriculture, education and clean energy.

Currently, only 0.3 percent of microfinance borrowers take out loans for energy solutions. Kiva aims to combat the barriers of high cost and availability faced by low-income earners by taking on more creative, pay-as-you-go lending systems for borrowers. With credit delivered in more flexible ways, users are able to benefit from technologies while making their payments over longer periods of time.

Over the next decade, Kiva hopes to see clean energy products become regularities for its borrowers around the world. The ultimate goal for the nonprofit is the use of sustainable supply chains, improvement of health and well being and falling prices for renewable energy products.

Kiva has also increased awareness of microfinance in educational communities around the world. In August 2013, the organization launched Kiva U, a movement for students and educators dedicated to changing the world through microfinance. The initiative provides toolkits, resources and potential curriculum to promote communities where high school students, college-age students and teachers can connect and share ideas.

In October, Kiva hosted its inaugural Kiva U Summit, where 150 students and teachers came together to connect and discuss microfinance in an evolving world. In the same month, Kiva hit its one million lender milestone.

Through creative mechanisms and user-oriented strategies, Kiva has proven the potential for microfinance success in addressing low-income communities.

“Our approach is to see what works and share the results with a global audience,” Kiva President Premal Shah said. “Ultimately, our hope is to get high-impact products to people who have been too long overlooked, and demonstrate their success to the global market.”

 – Julia Thomas

Sources: The Borgen Project, Kiva, Kiva(2), Triple Pundit, MIT Press Journals
Photo: Design to Improve Life

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Bolsa Familia in Brazil

Brazil has created an anti-poverty program, Bolsa Familia “Family Grant,” which gives cash money to mostly women. Since its implementation in 2003, around 11 million families, a quarter of Brazil’s population, have joined the Bolsa Familia program. This program is the largest of its kind and is based on a conditional cash transfer.

If a family earns less than 120 reais ($68) per family member each month, the mothers are given debit cards and up to 95 reais ($35 to $70) each month by the federal government. As part of the program, their children are required to attend school and receive vaccinations. If a family does not meet these conditions, their payments are suspended after several warnings.

Similarly, microfinance programs in Brazil give women loans to empower them and alleviate poverty. Although evidence from several studies supports the idea that microfinance empowers women, these microfinance programs have not succeeded due to their reinforcement of “informality of labor and the creation and persistence of gendered discourse that places greater burden on women.” The microfinance loans, despite the programs’ positive intentions, may place women under greater stress. Instead of pursuing activities that may benefit themselves and their families, these women can become trapped by the programs, and become less independent as a result.

The microfinance programs give loans and credit to primarily women because they believe that females are more reliable than men, and that they will use the money on food, education and family; women will not squander the money on alcohol, drugs and gambling.

However, are women truly more reliable than men? Although researchers argue that women repay loans faster and save more money than men do, this may be due to popular perceptions of the female gender. Women are believed to be more honest, sensitive, caring and nurturing due to their gender and traditional female roles of childrearing and domestic chores.

There are two main concerns about the program. First, corruption and fraud could prevent beneficiaries from receiving 100% of the money. Local officials could also report inaccurate information on eligibility to receive kickbacks. Second, these programs are meant to be a “temporary boost” to aid the poorest families in Brazil. Critics worry that it could turn into a permanent program upon which many families will remain dependent.

While the microfinance programs have failed, Bolsa Familia has seen early success. The program has reduced income inequality across the country, encouraged the growth of small businesses and increased the rate of economic growth. The cash money allows women to be more financially independent from their husbands and to have a larger decision making role in the household. After 10 years of the Bolsa Familia program, researchers have found that the program is empowering women and changing traditional gender roles in Brazil.

– Sarah Yan

Sources: Deseret News National, Economist, Prospect Journal
Photo: Keck Journal

Transformation Through Loans

Grameen Bank Loans
Ever heard of Whole Foods, Ben & Jerry’s or Starbucks? These fortune 500 companies all started out of generous individals’ belief in the store founders. This belief manifested in the form of financial investment and loans given to the companies that Americans know and love today.

The American dream promotes the idea that anyone, no matter the circumstance, can achieve success. Although there are many rags to riches stories built on hard work alone, Kiva International founder Jessica Jackley shared, “85% or more of funding for small businesses comes from friends and family.” One of the best gifts in life is to be recognized, valued and believed in by someone. Jackley holds this belief as her approach to eradicating global poverty and creating lasting change. Change, according to Jackley, happens not when we give to relieve our own suffering but when we give out of a “genuine hope in change.”

By providing small loans to farmers, seamstresses and goat herders abroad, among others, Kiva creates relationships between lenders and borrowers that promote respect and maintain dignity.

On the Kiva website there are stories featuring young entrepreneurs like Virginia in the Philippines who needs money to help buy fertilizer and insecticide for her rice production. Lenders can give one time loans in the amount of $25 to help borrowers like Virginia reach their goals.

Think of success stories like Bill Gates and Steve Jobs. If no one had ever believed in or invested in those men we would have a very different world today.

Africa is host to millions of men and women that, if believed in and invested in have potential to better the world as well. Now, their requests are simple, such as buying another goat to make money to pay for their child’s education. That child, however, is another story to be believed in.

2006 Nobel Peace Prize winner, Dr. Muhammad Yunus is known for his pioneering of microfinance, or “financial services to low-income individuals or those who do not have access to typical banking services.” Yunus started what is known today as microfinance by lending money to poor women in Bangladesh in the 1970s.

Eventually, Yunus opened his first bank for the poor, Grameen Bank, meaning “rural,” or “village” in the Bangla language in 1983. The Grameen Bank is built on a structure that drastically opposes conventional bank norms. Yunus’ bank is majority owned by low-income women with no collateral or legal instrument. Rural borrowers own 90 percent of the banks shares whereas government owns only 10 percent.

With organizations and efforts like Kiva International and Grameen Bank, about 160 million people in developing countries are served through microfinance. (http://web.worldbank.org)

– Heather Klosterman

Sources: Business Pundit, Kiva
Photo: WordPress

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Kiva: Microfinancing and the Gift of Investment

kiva
Interested in empowering the poor? Look no further than Kiva, a San Francisco based nonprofit that has provided over $542,899,850 in small loans to poor entrepreneurs around the world. Founded in 2004, Kiva makes it easy for individuals to lend as little as $25 to provide affordable capital to beneficiaries and help them start or improve a small business.

This practice of lending is known as microfinancing, and Kiva operates under the idea that poor individuals are able to lift themselves from poverty if given access to the proper financial services, such as access to loans and savings accounts.

Kiva keeps things personal and helps prevent the dehumanization of the poor by connecting the lender and the borrower directly. Using a person-to-person setup, Kiva allows potential lenders to browse the stories, pictures and loan proposals of beneficiaries before choosing an individual to lend to.

Kiva loans have a 0% interest rate and 100% of each loan goes directly to the borrower. Kiva does not take a cut, rather, their business operations are funded through donations from various grants, corporate sponsors and foundations.

The lending process begins with the selection of Field Partners in the 73 countries where Kiva works. These partners consist of social businesses, schools, microfinance organizations or other nonprofits that are committed to using credit to empower the poor.

Kiva Field Partners identify borrowers, administer loans and send pictures as well as stories of the borrowers to a team of volunteers that translate the stories and publish them to Kiva.org. Lenders then browse these stories and are able lend anywhere from $25 to the full price of the loan to the borrower they select.

As the borrowers repay their loans, Kiva provides repayments to lenders. Kiva boasts an impressive 98.93% repayment rate over 1.2 million funded borrowers. Once loans are repaid, individuals can re-lend their money to another borrower – and another, and another.

Traditionally, credit is often available to the poor through informal or erratic means. However, in many cases, these informal moneylenders charge such high interest rates that business owners are left with little working capital.

Kiva’s work allows the poor to attain affordable credit, which opens the door to economic opportunity. Studies by the Consultative Group to Assist the Poor (CGAP) show that borrowing money helps households manage cash flow and regulate consumption as well as deal with everyday crises that may arise. Tangible impacts seen include households making greater investments in the education of their children, better nutrition and living conditions, and an increase in healthcare services when needed by members of the household.

In summary, using the resources provided by lenders via Kiva allows poor households, “to make the transformation from ‘every-day survival’ to ‘planning for the future.’”

– Madisson Barnett

Sources: Monica Brand: Stanford, CGAP, Kiva
Photo: Kiva

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Tujijenge Tanzania Helps ‘Build Africa’ through Microfinance

tujijenge_tanzania_microfinance
Tujijenge Tanzania is a microfinance company based in Dar es Salaam, Tanzania. Founded in 2006, the organization is both the largest and fastest growing microfinance institution (MFI) in Tanzania. Broadly speaking, MFIs are companies that provide financial services to low-income individuals, or that provide services in areas without access to “typical” banking. They operate off of the idea that poverty-stricken individuals can remedy their own situation if given access to financial services.

Today, Tujijenge Tanzania is part of the larger, not-for-profit company Tujijenge Afrika, a Swahili name that roughly translates to mean “let’s build ourselves, Africa.” The company was founded by six microfinance practitioners, who now serve on its board of directors. The founders sought to remedy a problem that they observed in African society by employing their own skills. That is, 90 percent of the country does not have access to financial services. They saw that few MFIs existed, forcing residents to rely on expensive banking alternatives that perpetuated a lifestyle of poverty.

Tujijenge Tanzania aims to provide financial help to individuals, both men and women, who are engaged in all manner of small businesses, ranging from stationery shops to restaurants. The company operates by sending Loan Officers into local communities to give presentations about their services. Interested individuals then form groups of up to 35 members and receive four weeks of training from the Loan Officers. This includes instruction on lending methodology and creating viable business plans. During this period, the group must satisfy several requirements, including electing leaders and opening an account with a commercial bank (the company partners with both Bank of America and Kenya Commercial Bank).

Furthermore, every member is required to save 20 percent of the expected amount of the loan during this training period. This serves the dual purpose of teaching the discipline of making weekly payments, as well as demonstrating that the individual is engaged in a serious, capital-generating business. Upon completion of the training period, if all requirements have been met, the group can make a formal application for a loan. After receiving the money, the group will continue to meet every week, both to make repayments and to discuss general business issues and practices.

Beyond making loans to small business owners, the company is also engaged in a wide variety of product development. Currently, Tujijenge Tanzania is in the process of developing a mobile banking solution for their clients to help serve those in less accessible areas.

In the past, they have developed both solar loan and agricultural loan models in collaboration with organizations such as Oxfam. They have also engaged in market research in the promotion of medical and life insurance all around Africa.

– Rebecca Beyer
Feature Writer

Sources: Tujijenge Afrika, KIVA

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The Microfinance Revolution

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Microcredit, microfinance, micro-insurance… There is a microfinance revolution occurring around the world, and it is changing the perceptions of what can be done for those living in poverty.

Empowerment is an important focus of aid and development work. A family that, instead of being given rice and feed for a season, is educated and provided with tools to grow rice and feed themselves, can become self-sustaining. However, providing this kind of empowerment assistance can be difficult. How can organizations provide loans or credit to people who do not have bank accounts? How can they insure farmers when the value of their crops does not reach the minimum premiums? How can they make health insurance available to families living in poverty?

There is a market available for all of these services, but it is taking a revolutionary approach to provide it. Insurance has typically been the domain of the middle and upper classes. Insurance providers have always targeted those with significant investments to protect, as that is where the money lies. But for small-scale farmers, with fewer assets, the dependence on the success of their investments is greater than that of the wealthy. It is these people at the bottom of the economic scale who need insurance the most, as they are the ones without a safety net.

Recognizing this, the international foundation Syngenta has begun offering an insurance program for small farmers. The project originated in Kenya, and offers insurance for farms as small as half an acre, charging them a rate of $5.25 a season. The project is run remotely, with local supply stores acting as purchasing points for insurance and weather stations used to calculate damages due to climate effects, resulting in minimal overhead costs. Operating in Kenya and Rwanda, the scheme has already sold more than 64,000 insurance policies, largely to farmers who have never before had the option of buying insurance.

Similar programs are being developed around the world, with some focusing on micro-credit while others provide insurance at a fraction of the cost of traditional insurers. Furthermore, as the field develops, larger insurance companies are also embracing the model. In 2005, micro-insurance was offered by only 15% of the largest insurance companies. Today, two thirds of those companies are offering with micro-insurance. Some estimates place the potential market of micro-insurance to be between 2 and 3 billion potential policies.

Small-scale farmers with insurance are better able to provide for their families, even in the event of crop failure. This minimizes the potential for famine and also decreases the need for foreign assistance to provide for people in the event of crop failure.

– David M Wilson 

Sources: The New York Times, Syngenta
Photo: Dowser