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What is Microfinance?

MicrofinanceIn 2006, MIT Professor Muhammad Yunus was awarded the Nobel Prize for his work in the creation of the Grameen Bank. The Bank was created primarily to microfinance, or provide small loans, to the impoverished in Bangladesh. Today, over 97 percent of Bangladesh’s villages have a Grameen Bank presence, a whopping 7.5 million people have borrowed from the Grameen Bank and 65 percent of the borrowers “clearly improved their socio-economic conditions.” Yunus has even advocated for credit to be considered a human right because of the extent to which it can help people deal with their financial situations.

Prior to the emergence of this practice, the term “finance” largely carried the connotation of large banks, governments and corporations, and their respective handling of money or value. Liabilities, assets, savings, loans and other banking concepts can all be categorized under finance. So then, what exactly is microfinance?

Microfinance is the practice of bringing financial systems that are commonly used in the developed world, and applying these concepts on a much more personal and micro-scale. While we typically think of finance as a system that deals with large sums of money and organizations, microfinance is quite different because it deals with much smaller denominations of money and groups or individuals.

In practice, microfinance institutions or programs can differ in their specific models of operation. For example, Kiva is a microlending institution. It operates on donations, and any donor can personally become involved by browsing through testimonials and deciding whom to fund. On the other hand, the Grameen Bank no longer takes donations, and the Bank itself is actually 94 percent owned by the borrowers themselves. The majority of microfinance institutions deal primarily with microcredit, with most extending credit to women. About 97 percent of Grameen Bank’s loans are offered to women.

One point of criticism is the very high interest rates sometimes charged by various microfinance institutions; in some cases, the rate is over 50 percent. However, many argue that this is necessary to cover administrative and risk-taking costs. Defendants of the interest rates contend that participating in the loan program does not proportionately diminish the received benefits based on interest rate.

The benefits of providing financial services – often taken for granted – are unmistakably significant. The first benefit, as told by Mr. Yunus himself, is the mental and psychological stimulus a loan can give a person. The recipient of the loan becomes more independent and less inclined to feelings of marginalization. The second benefit is an increase in small businesses and economic activity in the villages. For some, small loans serve as the building blocks for small businesses. For others, the loans help pay for large goods or services like schooling, or healthcare costs, among other things. Providing small loans at affordable rates allows people to have more purchasing power than they might have otherwise, and to make purchases once considered not within their means.

An MIT study titled, “The miracle of microfinance? Evidence from a randomized evaluation,” was highly critical of the actual effects of microfinance versus the observed perceived effects before the study. Those conducting the study found that microfinance had some benefits for helping businesses increase profitability, and in increasing household income. They also found that household spending increased on durable goods, meaning goods that can be used more than once like cooking pots and mosquito nets. However, the MIT study found no significant changes in women’s empowerment, education or health. Finally, the study found that the adoption rate for microfinance was around 38 percent, indicating that many people still preferred to take out informal loans from other parties or family members.

Despite the critiques, microfinance has emerged as an innovative tool within the largely unchanging financial sector. By giving the impoverished access to financial services, the affected begin to have more opportunities and resources to turn to when dealing with personal or small business finances.

There are 2.5 billion people worldwide who are “unbanked” according to the World Bank. High costs, bureaucratic barriers and physical distance from banks facilitate this huge gap in the number of people with access to financial services and the total population. Microfinance has the potential to help bridge this gap by empowering the poor and providing them with more tools to help themselves. Although it may not be a miracle, it’s certainly better than nothing at all.

– Martin Yim

Sources: PBS, Kiva, Grameen Bank, MIT, World Bank
Photo: Flickr

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Mobile Financing

Mobile_Financing
It can get hard to save for the future, plan and invest in a business and survive economic reversals if one lacks access to finances or bank accounts. This is a reality for many individuals who live in poverty.

When the concept of microfinance was developed, people with extremely low incomes had the opportunity to acquire small loans with which they could start businesses and generate income. A revolution at the time, microfinance gave the poor a chance to get loans without a credit history and large collateral needed by the traditional banking sector. However, these kind of loans are still hampered by access and the need to handle finances which can drive up costs and interest rates. This hole is now being filled by mobile finance.

Electronic solutions are making banking options much more accessible across the world. They reduce the cost of infrastructure needed, and the administrative costs associated with maintaining financial accounts. Such remittances can be much more secure than traveling long distances to deposit cash in a bank. Government disbursement programs can also use mobile financing to directly remit payments to the welfare dependents. This cuts out the intermediaries, reduces opportunities for corruption and allows the beneficiary to get their monies quicker.  Worldwide, 170 million people who receive payments directly from their governments stand to benefit from this approach.

M-Pesa, launched in Kenya by Safaricom, is one of the most wide-reaching mobile financing solutions. Over 17 million people in Kenya now use this product and over 25 percent of their GDP is moved through this system. Originally designed to facilitate microfinance loan repayments, M-Pesa allows cash deposits, withdrawals and cash transfers between people in the same way you would credit a phone with talk time. It has now expanded to Tanzania and Afghanistan.

Some of these initiatives are supported by development organizations. For instance, Bangladesh based Bkash is supported by BRAC Bank, IMF and The Gates Foundation among others. The Gates Foundation and other such organizations are closely involved in the process of making these solutions hit their stride.

The Gates Foundation assists in finding innovative new solutions and researches factors that would encourage their adoption. The foundation also works with governments to develop and implement policies that would stimulate this sector and develop suitable methods for oversight and accountability among the providers. As the technology slowly becomes mainstream and more competitors enter the market, governmental regulations will start to become more and more important.

In the words of Jim Kim, President of the World Bank, “More than one in three people on earth now lacks access to basic bank accounts or any kind of credit. Our goal is to bring that number to zero in just five years. Doing so will be an incredible challenge, but the reward will set us on a path to end extreme poverty by 2030.” Mobile financing is going a long way to bridge this gap and help achieve this goal.

– Mithila Rajagopal

Sources: Bkash, Economist, The Gates Foundation, LinkedIn Pulse, World Economic Forum
Photo: flickr

Rebuilding Yemen: Public Works Project

rebuilding yemen
In 2011, mass protests overtook the country of Yemen, resulting in the eventual ousting of President Ali Abdullah Saleh. Without the president’s stabilizing force, violence quickly spread. Today in the south, Sunni Muslim militants from al Qaeda continue to create chaos, while in the north Shi’ite tribesmen and Sunni Islamists engage in ceaseless fighting.

The unemployment rate of Yemen is 35 percent and almost half of the population lives below the poverty line. It is the poorest country in the Middle East/North Africa region and one of the least developed in the world.

However, a recent project funded by the World Bank has been making significant gains for poor Yemenis. The Third Public Works Project was the recipient of an award by the U.S. Department of the Treasury for its efforts in rebuilding Yemen.

The aim of the project is to build basic infrastructure, which the country has been struggling without. Before, only 11 percent of rural roads in Yemen were paved. The project works with local contractors to design labor-intensive infrastructure plans which provide the dual purpose of rebuilding Yemen’s roads and buildings and creating jobs. The project, both directly and indirectly, has created more than 740,000 job opportunities. It has provided work and development options to 1,900 local contractors and 1,250 local consultants.

Benefits of the Public Works Project extend beyond job creation and infrastructure building. Due to newly built schools, education has increased by 141 percent for males and 181 percent for females.

“The location of the school is in the middle of the adjacent village, [which means] people in the village can now send their children to school without being worried, and they may also permit their daughters to go to school,” says one beneficiary of the project in Al-Ghoola Village in the Dhi Been District of Yemen.

As a consequence, literacy rates have improved, as well as access to health services and water.

“The project has left different social and economic impacts on people in remote areas and the poorest in Yemen through the alleviation of poverty and addressing its manifestations,” U.S. Secretary of Treasury, Jack Lew, said at the award ceremony.

Before the ceremony, the project had already completed 3,900 sub-projects which benefit 14.7 million of Yemen’s poor. Its plans for moving forward center around the World Bank’s hope to, with the help of committed partners, turn the project into a fund which will provide a sustainable way to finance future development projects.

– Julianne O’Connor

Sources: World Bank, U.S. Department of the Treasury, All Africa, Yemen News Agency (SABA), Reuters,CIA
Photo: Wikimedia

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Food Security in Cambodia

food security
A series of 88 hydroelectric dams to be built in the lower Mekong basin of Cambodia by 2030 is projected to put Cambodia’s largest source of food at risk. Cambodians eat 168 more grams of fish daily than the world’s average. The construction of the dams could cut the freshwater fish population up to 42 percent.

The growing demand for electricity in Cambodia, Laos, Thailand, China and Myanmar has prompted multi-national developers to begin planning 88 hydroelectric dams. Eleven of these dams will be located on the Mekong river mainstream and the 77 remaining dams will be on the various tributaries of the river.

“Cambodia is going to pay the highest price for dam development basin-wide, to the point of affecting the food security of its 80 percent rural population,” warned Eric Baran, a specialist with the WorldFish Centre.

The Agriculture, Forestry and Fisheries Minister, Ouk Rabun, reported that Cambodia takes approximately 528,000 tons of fish from freshwater fisheries each year.

Fish is the cheapest food option for Cambodians. Consumed far more frequently than beef or poultry, fish is the primary source of protein for a population where a fifth of the citizens live below the poverty line of $17 U.S. dollars a month.

More than 40 percent of national production — about 300,000 tons of fish per year — comes from Tonle Sap Lake. Located in northeastern Cambodia, Tonle Sap is the most productive inland fishery in the world. WorldFish estimates that 1.5 million Cambodians make 95 percent of their income directly from the lake.

Cambodia has exceeded the Millennium Development Goal poverty target, and the poverty rate has halved, from 53 percent in 2004 to 20.5 percent in 2011.

However, those who have escaped poverty are still vulnerable to slight economic fluctuations. Neak Samsen, Poverty Analyst of the World Bank in Cambodia warns, “the loss of just $0.30 (US) per day in income would throw an estimated three million Cambodians back into poverty, doubling the poverty rate to 40 percent.”

The proposed site for the dam construction is the Mekong basin. Of the fish normally caught in the basin, the Mekong River Commission (MRC) found that at least 39 percent are migratory.

Building dams in the Mekong would obstruct the migratory fish from swimming between the basin and Tonle Sap.

According to the U.N. World Food Program’s country director for Cambodia, Edith Heines, “The reduction of fish stocks due to the construction of the dams could have serious implications on the health, and specifically the well-being of malnourished children under five.”

The World Bank projects future generations of Cambodians will rely more heavily on aquaculture and rice field fisheries to meet their fish consumption needs.

However, this change in food source has implications for Cambodians living in poverty, because “the poorest people will not be able to simply shift to different agriculture practices without reallocating water, building infrastructure, or exploiting other water sources.”

Although government officials argue that the money gained from the dams will go toward agricultural development, there have been no guarantees and the impoverished in Cambodia may likely be the ones to suffer the greatest losses.

– Grace Flaherty 

Sources: IRIN, The World Bank
Photo: IRIN

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Public Education in Latin America

public-education-latin-america
The World Bank reports that low teacher effectiveness causes children attending public schools in Latin America and the Caribbean to miss the equivalent of one school day every week. Public education in Latin America is plagued by teacher absenteeism, low pay and poor school leadership; all contribute to this troubling inefficiency.

Latin America has enjoyed significant growth in recent years, paving the way for the reduction of poverty and inequality, yet in order for the region’s economic engine to continue running efficiently, its youth must have access to educational resources.

The recent World Bank study, “Great Teachers: How to Raise Student Learning in Latin America and the Caribbean,” draws on data from over 14,000 classrooms in seven countries in the region. It seeks to determine how teachers, who make up 20 percent of Latin America’s labor force, can improve their performance given the significant role they play in regional economic development.

Barbara Burns, the author of the report, states that “virtually all countries in the region appear trapped in a low-level equilibrium of low standards for entry into teaching, relatively low and undifferentiated salaries, weak instruction in the classroom and poor educational outcomes … moving to a high-level equilibrium will be difficult but it is an effort that the region can’t afford to postpone.”

The Organisation for Economic Co-operation and Development’s Programme for International Student Assessment (PISA) test, a standardized assessment of students on a global scale, reveals that Latin American and Caribbean children fall short in the middle-income category, yet researchers estimate that if Mexico raised its PISA performance to the level attained by the average German student, the country’s gross domestic product could jump two percentage points.

The World Bank publication determines that public schools in Latin America need better and younger teachers. Teacher salaries in the region are consistently lower than salaries in other professional fields, meaning motivation can be lacking. Additionally, data from university entrance exams show that although students pursuing education degrees receive high levels of formal education, they have been found to possess weaker cognitive skills.

The good news is that teacher quality has become a major development focus of Latin American countries in recent years, while researchers and academics are communicating just how essential education is to continued economic development and poverty reduction.

– Kayla Strickland

Sources: Kansas City infoZine, Plano Informativo
Photo: Plano Informativo

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World Bank Helps After Cyclone Phailin

cyclone phailin
On July 11, 2014, the World Bank, the government of India and the government of Odisha signed a $153 million loan assistance deal for the Odisha Disaster Recovery Project. The project aims to restore and improve housing and public services, as well as bolster the Indian and Odishan governments’ ability to respond to crises, and is a direct response to the cyclone that hit the country in the fourth quarter of 2013.

The project, which will be implemented over the course of five years, will impact the coastal areas of Ganjam, Khordh and Purj, all of which suffered massive damage. Additionally, around 350,000—the total population of Berhampur—will benefit from the project.

Cyclone Phailin struck on October 12, 2013, on the coast of Odisha near Golpapur. The cyclone affected over 13 million people and was the strongest on the Indian coast in over a decade. The state government responded quickly in tandem with the National Disaster Management Authority to evacuate over one million people. The effort led to the loss of only 44 human lives. The NDMA was founded after a similarly intense cyclone hit in 1999, when over 10,000 lives were lost.

In the wake of Phailin, the World Bank undertook a Rapid Damage and Needs Assessment with the Asian Development Bank. The damage is estimated to cost $1.45 billion with reconstruction for housing at nearly $500 million. According to a World Bank press release, the sectors included in assessment were, “housing and public buildings; roads; urban and rural infrastructure; agriculture; livelihood; energy/power and forest and plantations.” The World Bank will first seek to repair housing along the coast.

Assistance will also be distributed to include improvements to urban infrastructure, especially in Berhampur where over 40 percent of citizens live in 200 slums across the city. The project will seek to improve quality of life by remodeling drainage systems so they are more effective.

But another important aspect of the project is the focus on ways to mitigate future risk. Funds will be allocated to improve preparedness and disaster response time. The World Bank will ensure effectiveness by hiring technical experts in risk managements, hydro-met systems and remote sensing. The World Bank hopes to continue using state-of-the-art technology in their aid efforts.

– Andrew Rywak

Sources: Business Standard, Orissadiary, World Bank
Photo: CNN

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What Does Food Security Mean?

In 1996, representatives from more than 185 countries came together to address lack of food security at the World Food Summit. During that time, the summit came to the conclusion that, “when all people at all times have access to sufficient, safe, nutritious food to maintain a healthy and active life,” food security would be a global reality.

Thus, as the World Health Organization clarifies, food security necessitates three things:

1. Production

According to the Food and Agriculture Organization of the United Nations, there is plenty of food to fulfill the nutritional needs of every single person living today. However, food is often wasted and unable to reach the hands of the hungry through current distribution channels.

2. Distribution

Thus distribution is by far the greatest explanation for why we still have hunger and malnourishment today.

For consumers and farmers trying to sell their produce, market access is often unobtainable because of time, danger or cost. In fact, an estimated 16 percent of rural persons in the developing world lack easy access to markets to sell their produce.

Furthermore, while enough food is produced globally to feed every living person, not everyone can afford the prices, which further exacerbates food insecurity.

To combat distribution problems, investments in high-quality infrastructure, such as roads or railroads to provide better access to centralized markets, are vital. Because many governments don’t have the capital to spend on large-scale infrastructure, private investments or grants provided by the International Monetary Fund could pay for, or at least offset, the cost of infrastructure.

Food subsidies are another option for governments with impoverished and food-insecure populations. Subsidizing the cost of food can help the poor afford it while ensuring farmers have enough incentive to bring their food to markets in the first place.

3. Education

Educating farmers about more efficient techniques for crop production would help global food production and reduce waste. The farmers that would benefit most from improved crop production techniques are often those who cannot make enough money from their crops to pay for their own needs or feed their families.

Research conducted by the University of Minnesota’s Institute on the Environment found that “60 percent of nitrogen and nearly 50 percent of phosphorus applications exceed what crops need to grow.” The report also noted that over 30 percent of food is wasted worldwide, indicating farmers have a lot to learn on maximizing crop output while minimizing environmental impact.

Many university-sponsored programs already go out and educate farmers on this subject, but much more could be done to ensure farmers, particularly those in developing countries, have the knowledge to succeed at the highest level of food production.

The globe is already seeing increased food production from many countries in the developing world, especially in Africa. A March 2013 report by the World Bank predicted that the food and beverage markets in Africa would triple by 2030.

Unfortunately, food insecurity will remain an inevitability of global poverty if the core issues above are not addressed. Lawmakers in developing countries, members of the agribusiness sector and individuals affected by poverty all have a vested say in making the globe food-secure; time alone will not solve the problem.

– Joseph McAdams

Sources: World Health Organization, Food and Agricutlure Organization, MIT, University of Minnesota’s Institute on the Environment, sciencemag.org, The World Bank
Photo: Natural Habitats

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Rock the Vote Relaunch

Rock the Vote
#EndPoverty2030 is one of the most recent campaigns supported by The World Bank. For the first time in history, it is possible that we will eliminate extreme poverty across the world. It is up to the millennial generation whether or not this utopian dream becomes a reality. Rock The Vote has relaunched their campaign this year with the goal of getting 1.5 million voters registered by this coming November, 400,000 of whom would be 30 and under.

The Center for American Progress reports that the majority of the millennial generation supports and strongly identifies with progressive ideologies such as foreign aid and equity. Rock The Vote will help capitalize on this support by getting more millennials to the voting booths. Founded in 1990, Rock the Vote is a nonprofit campaign that utilizes popular culture to help engage young voters in the democratic process. The organization has gained support from cultural icons such as Madonna, rapper Snoop Dogg, rock group Aerosmith and singer Miley Cyrus.

The newly revamped Rock The Vote campaign will focus their efforts on the web and social media to account for the change in where young people now “hang out.” Rock the Vote will be making use of an updated website, online engagement tools and voter registration programs they have developed.

The organization is teaming up with Voto Latino to register 100,000 Latino voters by the November elections. Representatives are currently traveling with the Vans Warped Tour to encourage young citizens to register to vote. Rock The Vote is also fundraising for organizations that protect the right to vote and fight against restrictive voting policies such as the proposed voter ID law.

President Ashley Spillane of Rock The Vote explains, “We have run the largest voter registration drives for young people on record during the past six presidential elections.” Since the organization’s founding, the organization has been responsible for registering a total of six million voters. Now, Rock The Vote has become a valuable ally in the cause for eliminating extreme poverty.

– Christopher Kolezynski

Sources: Music For Good, Rolling Stone, The World Bank, Center for American Progress, Politico
Photo: Princeton Scoop

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How Mobile Banking is Changing Africa

mobile banking
More often than not, adopting a pre-existing idea is easier than creating a brand new one. The mobile phone is an example of this. In recent years, there has been an explosion in the adoption of mobile phones among people living throughout Africa. The impact of mobile phones includes paving a more secure form of mobile banking, and ultimately creating a shift in African culture.

Over the past decade, the use of mobile phones has increased in both developed and developing countries. According to the World Bank, mobile subscriptions have been increasing around the world every year – and African countries have made the biggest gains. In 2009, the US had 89 cellphones per 100 people, and 96 in 2013. Nigeria had 48 per 100 people in 2009, with 73 in 2013. South Africa had 91 cellphones per 100 people in 2009, and 147 in 2013. The greatest strides were made by African states.

According to The Economist, three phones exist for every four people, which describes the accessibility of these products. While mobile devices were initially created to function as telephones, Africans do not use them solely for communication. Just like people with iPhone’s in developed nation, Africans have access to a whole range of activities via their phones, including secure banking and e-payments.

According to Paul Edwards, the CEO of Emerging Markets Payments (EMP), only 15 to 20 percent of Africans have bank accounts. This number contrasts sharply with developed countries, where almost everyone has or is expected to manage a bank account as an adult.

Mobile banking has created a shift. Africa has a different banking culture than that of developed nations.

Furthermore, making e-payments and using mobile banking allows for less corruption. As all money transfers are electrically handled, transactions are instant and, therefore, significantly reduce the number of delays in payments.

Many Africans have used cash to fuel their informal sector jobs, but using less cash and more e-payments allows governments to track tax-able profits. Ultimately this creates a more regulated, tax-paying economy that will generate revenues for the state and further establish self-sufficiency.

The growing popularity of mobile phones displays a tangible shift in Africa’s culture. A public relations company named Portland conducted a survey of Twitter in Africa. They used devices that allowed for geo-location; by examining the hashtags in Tweets, they were able to look into the interests of Africans. Subjects ranged from Nelson Mandela’s death to football to public dissatisfaction with the government.

As Africans continue to use mobile phones for various purposes, the rest of the world will watch to see what this will mean for the development of Africa.

– Christina Cho

Sources: Foreign Policy, The Economist 1, The Economist 2, World Bank, Foreign Policy 2
Photo: CNN

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Growth Forecast Bleak For Developing Nations

developing nations
The World Bank has predicted disappointing growth ahead for developing nations, lowering its growth rate forecast to 4.8 percent – a drop from the initial January estimate of 5.3 percent. The recently published Global Economic Prospects report has revealed a weak first quarter for economic activity in 2014. Inclement weather in the United States, rebalancing efforts in China, political strife in various middle-income economies, slow progress on structural reform and capacity constraints have contributed to the third consecutive year of sub-5 percent growth for developing nations.

Nevertheless, this figure is expected to increase in 2015 and 2016 to 5.4 percent and 5.5 percent, respectively. The global economy is expected to “pick up speed” over the course of this year and expand by 2.8 percent. By 2016, the global growth rate will reach 3.5 percent. High-income economies will contribute to approximately half of global growth in 2015 and 2016 – compared to the sub-40 percent figure recorded in 2013.

Their addition of $6.3 trillion to global demand over the next three years is significantly more than not only their $3.9 trillion contribution during the last three years, but also the expected upcoming contribution from the developing world. The impending acceleration that high-income economies will experience has been cited as “an important impetus for developing countries.”

The national budgets of developing nations have weakened. Since 2007, debt-to-GDP ratios have increased by more than 10 percentage points. In nearly half of the developing world, government deficits exceed 3 percent of GDP. Countries with large deficits – such as Ghana, India, Kenya, Malaysia and South Africa – would benefit from tightening their fiscal policy. To maintain rapid income growth, many developing countries also need to revive and strengthen their structural reform agenda.

Despite the situation in Ukraine and “headwinds from global financial turbulence,” the growth rate of developing countries in Europe and Central Asia remained on track in the first quarter of 2014. The Ukraine situation has contributed to an estimated 1 percentage point off growth among low and middle-income nations in the region.

Currently, growth in the developing countries of the Middle East and North Africa region remain weak at 1.9 percent. Due to stronger oil-importing economies and rebound in oil production among oil exporters, however, this growth rate is expected to rise to 3.6 percent and 3.5 percent in 2015 and 2016, respectively.

Both oil-importing and developing oil-exporting nations are experiencing more stable economic activity following earlier disruptions, but aggregate production is still below the 2013 average. The World Bank states that the outlook for the Middle East and North Africa region is “shrouded in uncertainty and subject to a variety of domestic risks linked to political instability and policy uncertainty.”

Growth rates in the developing world remain too low to spur significant economic development and create the strong job market necessary to improve the lives of the bottom 40 percent. World Bank Group President, Jim Yong Kim, has urged for action, saying that countries “need to move faster and invest more in domestic structural reforms to get broad-based economic growth to levels needed to end extreme poverty in our generation.”

— Kristy Liao

Sources: ABC, Bloomberg, The Economic Times, World Bank
Photo: Lead Investing News