Microfinance - the next stage

There is a very good, detailed, yet simple, research paper at the website of American Enterprise Institute for Public Policy Research, titled Building on Success: The Next Challenges for Microfinance, by Robert Eichfeld and Henry Wendt.

Tracing this history of Microfinance, from Muhammad Yunus' Grameen Bank story in Bangladesh, the paper talks about the challenges facing the Microfinance industry and how commercial funding can help in growing the microfinance sector and helping 100 million poor families by 2007.

An important turning point in the history of MFIs took place in 1997, when 2,900 delegates from 137 countries met at the first Microcredit Summit and set the goal of providing microcredit to 100 million of the poorest families in the world by the end of 2005. At that time fewer than 8 million families were being reached. As of the end of 2004, by contrast, 92 million poor and 62 million of the poorest were being helped. If the program continues to grow at its historic rate of 39 percent annually, the Microcredit Summit goal will be reached as early as 2007.

The paper talks about two key methods by which commercial funds can come into microfinance institutions, and quotes two examples. In both cases, Grameen Foundation has helped make things work.

First is loan-portfolio purchase agreement in which ICICI Bank of India purchased a portfolio of 42,500 small loans with SHARE Microfin Ltd. for $4.3 million, in January 2004. This deal was facilitated by a first-loss, collateral deposit by Grameen Foundation of $325,000 (about 8% of 4.3 million).

This money will be used by SHARE as new capital and will help provide loans to more poor people. This helps ICICI Bank to reach poorer people who it can never reach directly. SHARE will be responsible for the collection and servicing of this loan portfolio as well. The risk on non-payment is however not imposed on SHARE, but on Grameen Foundation (8%) and ICICI Bank (92%). The paper quotes Economist as saying:

Grameen [Foundation] sees its cash deposit multiply twelvefold on its way to the poverty stricken borrower.

Second scheme, developed by Grameen Foundation in partnership with Citigroup is called Grameen Foundation Microfinance Growth Guarantees. Wealthy individuals can pledge their money not as donations or grants but as guarantees to banks of their choice, which "in turn will provide letter of credit hrough Citigroup to local microcredit institutions for the specific purpose of raising leveraged local currency financing for microfinance institutions." This can help in microcredit institutions getting capital at a considerably reduced interest rate, which in turn can be used to (a) offer loans at lower interest rate to poor people (b) enable microfinance institutions to reach breakeven.

As of October 2005, Grameen Foundation Growth Guarantees has reached $31 million.

While commercial borrowing is the best way of growing the microfinance sector, Government grants and risk capital in the form of venture capital would still be the best way of starting up microfinance institutions in India (and around the world).

There will have to be dedicated micro banks for women (like SEWA Bank) across the country, which goes a little farther than a standard MFI, and perhaps possibly Dalit Banks, started with grants and VC money. After 2-3 years of performance, they should be able to tap into commercial money through loan-portfolio sale to larger banks and raise money through Grameen Foundation Growth Guarantees or similar schemes.

Alleviating poverty – while making money

Christian Seelos writes in "Ethical Corporation" about how Telenor of Norway teemed up with Grameen Bank of Bangladesh to set up a super efficient telecom setup, made money and at the same time created thousands of jobs for the poor.

For example, Bangladesh has become one of the most profitable growth markets for Norwegian telecommunications company Telenor, which has cornered 60% of the Bangladeshi market through its collaboration with Grameen Bank (the micro-credit network – "bank of the villages" in Bangla – founded by Muhammad Yunus). Three other companies that entered the market without such partnerships share the remaining 40% between them.

Traditional corporate structures are perhaps not best suited to delivering multiple social and economic objectives at the bottom of the pyramid.

Telenor and Grameen set up two separate structures. One, run by Telenor managers, aimed to create financial returns, but the other, GrameenTelecom, run by Grameen managers, had a very different objective: maximise job creation while being financially viable.

The symbiosis turned out to be incredibly efficient: GrameenTelecom created more than 100,000 jobs in one of the world’s poorest countries, while Telenor created fewer than 1,000 jobs but achieved impressive economic returns and contributes significant tax revenues in Bangladesh.

Grameen Bank model ideal for middle east

Muhammad Yunus thinks the Grameen Bank model of microcredit can help alleviate poverty in Middle East.

From Gulf News

Death by microcredit

Times of India has a story, the date of which is not clear to me, by Sudhirendar Sharma on how microfinance institutions are fleecing poor people and driving them to suicides. The writer is with Ecological Foundation.

I feel that the writer is entirely off the mark. He is shocked by the fact that MFIs charge over 20% interest rate. I have taken personal loans from Citibank at 24% interest. Today, all Indian credit card companies offer convertion of large single payments through credit card into EMIs with effective interest rate of 2% per month. The outstandings on credit cards are generally charged at as much as 36% in India.

The neighbourhood usurer in Chennai and across Tamil Nadu charges as much as 10% per month simple interest! It is never lower than 5% per month. (It is called anju vatti - 5% per month, paththu vatti - 10% per month in Tamil.) Then there are kandhu vatti, speed vatti and so on, where the interest rates of at least 1% or more charged per day - effectively 30% interest per month, or 360% interest per year!

The poor, if they cannot get loans from Government, will have to depend on such atrocious interest rates.

If MFIs come and offer 20% or 24% per year, Sudhirendar Sharma and others come crying, asking for regulating this sector.

Regulation is one thing, but fiats controlling the upper limit on the interest rates that can be charged is another thing. A regulator can certainly provide a greater degree of transparency, stopping of harassment/physical threat by a lender and so on.

A while back, Tamil Nadu Govt. came up with an act that set the ceiling on what interest can be charged by the private money lenders. If I amnot mistaken, the ceiling was 15%. Obviously, despite being passed as a law, no one is following it. Not even the Nationalised banks (whose personal loan interests generally hover around 16% onwards), though the law was only impacting the private pawn brokers and moneylenders.

The MFIs have to be kind to the borrowers. It does not help driving the borrower to committing suicide. If proven, it is an illegal act, and the directors or trustees of the MFI can be locked up behind the bars.

A state government has all the powers to prosecute the baddies. But they better not muck around with a budding financial sector. The poor needs more credit than stupid regulation.

Microcredit and women's empowerment

From a letter to the editor in The Daily Star:

The MFIs consider the women as potential borrowers as the commercial banks are unwilling to lend to women or mobilise deposits from them, as they perceive that women are unable to control the household income. The women face cultural barriers that often restrict them to home, making it difficult for them to have access to financial services. The women have more traditional role in economy and disproportionately large household obligations. Their property right is limited, which is given importance for collateral by commercial banks.

The women generally have a high sense of responsibility. They are good savers as well as good re-payers of the loan and attend the meetings regularly. Any increase in women's income benefits the household to a greater extent, as they take better care of children. No matter who uses the loan, it benefits the household.

It also facilitates the effective utilisation of the hidden economy of women.

Muhammad Yunus wins Seoul Peace Prize

Grameen Bank founder and microcredit evangelist Yunus has been awarded the Seoul Peace Prize - a prize given to "an individual or organization that makes a significant contribution to international peace and harmony." The press release issued says:

Chairman of the Seoul Peace Prize Selection Committee Lee Chul-seung said Dr. Yunus had been selected from a wide spectrum of candidates worldwide, including heads of state, peace movement activists, humanitarian workers, international relief organizations, and human rights groups.

Two stories on Grameen and Microcredit

In Times (UK), Andrew Mitchell, MP who is the Shadow Secretary of State for International Development writes about his trip to Bangladesh and Grameen Bank, and what he saw there.

CNN is doing a special called "The Poverty Trap", "which airs Saturday and Sunday at 8 p.m. ET, former U.S. President Bill Clinton sat down with CNN's Dr. Sanjay Gupta to discuss micro-credit and other potential solutions for eradicating global poverty."

In Chennai, I won't get to see it, as I don't subscribe to CNN. It is not clear whether CNN broadcasts this program in India anyway. Perhaps, there will eventually be an archive online.