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Microfinance

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Community-based savings bank in Cambodia. There is a rich variety of financial institutions which serve microentrepreneurs and small businesses.

Microfinance is usually understood to entail the provision of financial services to micro-entrepreneurs and small businesses, which lack access to banking and related services due to the high transaction costs associated with serving these client categories. The two main mechanisms for the delivery of financial services to such clients are (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group. In some regions, for example Southern Africa, microfinance is used to describe the supply of financial services to low-income employees, which however is closer to the retail finance model prevalent in mainstream banking. For some, microfinance is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers."[1] Many of those who promote microfinance generally believe that such access will help poor people out of poverty. For others, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Although microcredit is one of the aspects of microfinance, conflation of the two terms is endemic in public discourse. Critics often attack microcredit while referring to it indiscriminately as either

'microcredit' or 'microfinance'. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact.[2]
Contents
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1 Challenges 2 History 3 Boundaries and principles 4 Debates at the boundaries 5 Financial needs of poor people 6 Ways in which poor people manage their money 7 Current scale of microfinance operations 8 Domestic microfinance

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8.1 History of domestic microfinance in USA 8.2 History of domestic microfinance in Canada 8.3 Principles

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8.3.1 Principle differences from international microfinancing

8.4 Impact 8.5 Domestic microfinance institutions

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8.5.1 Canada 8.5.2 United States

9 "Inclusive financial systems" 10 Microcredit and the web 11 Evidence for reducing poverty 12 Microfinance and social interventions 13 Other criticisms 14 Bibliography 15 See also 16 Notes 17 External links

[edit]Challenges
Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income. Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved.

The fixed cost of processing loans of any size is considerable as assessment of potential borrowers. even in places where microfinance institutions are active. and they can be very flexible when borrowers run into problems. Paul Rosenstein-Rodan. for reasons summarized well by Adams. although the total gross revenue from delivering one hundred loans worth $1. the efforts of national planners and experts to develop financial services for most people have often failed in developing countries. Latin America and Africa concluded that 76% of moneylender rates exceed 10% per month. whose interest rates can be very high.[5] While moneylenders are often demonized and accused of usury. meeting the operating costs of a retail branch by serving nearby customers has proven considerably more challenging. administration of outstanding loans.[6] While the success of the Grameen Bank (which now serves over 7 million poor Bangladeshi women) has inspired the world. it takes nearly a hundred times as much work and cost to manage a hundred loans as it does to manage one.[4] Because of these difficulties. collecting from delinquent borrowers. their services are convenient and fast.[citation needed] Over the past centuries practical visionaries. However. Hopes of quickly putting them out of business have proven unrealistic. Moneylenders usually charge higher rates to poorer borrowers than to less poor ones. etc. . As documented extensively by Hernando de Soto and others. when poor people borrow they often rely on relatives or a local moneylender.For example. Seen from a broader perspective. even if they happen to own land in the developing world. they may not have effective title to it.. the development of a healthy national financial system has long been viewed as a catalyst for the broader goal of national economic development (see for example Alexander Gerschenkron. most poor people have few assets that can be secured by a bank as collateral. their repayment prospects and security.[3] This means that the bank will have little recourse against defaulting borrowers. Graham & Von Pischke in their classic analysis 'Undermining Rural Development with Cheap Credit'. A similar equation resists efforts to deliver other financial services to poor people. it has proved difficult to replicate this success. from the Franciscan monks who founded the communityoriented pawnshops of the 15th century. Poor people usually fall below that breakeven point. In nations with lower population densities. An analysis of 28 studies of informal moneylending rates in 14 countries in Asia. has to be done in all cases. In addition. Anne Krueger). There is a break-even point in providing loans or deposits below which banks lose money on each transaction they make.000 each will not differ greatly from the revenue that results from delivering one loan of $100. Joseph Schumpeter. to the founders of the European credit union movement in the 19th century (such as Friedrich Wilhelm Raiffeisen) and the founders of the microcreditmovement in the 1970s (such as Muhammad Yunus) have tested practices and built institutions designed to bring the kinds of opportunities and risk-management tools that financial services can provide to the doorsteps of poor people.000. including 22% that exceeded 100% per month.

It is not easy to distinguish microfinance from similar activities. and concerns have arisen that the rate of capital flowing into microfinance is a potential risk unless managed well.[7] The industry has been growing rapidly. and the overwhelming majority of people who earn less than $1 a day. Friedrich Wilhelm Raiffeisen founded the first cooperative lending banks to support farmers in rural Germany. as well as by strengthening the capacity of those institutions. is in favour of the group model. Independently to Spooner. neglect of duties and inadequate regulations.[8] As seen in the State of Andhra Pradesh (India). They receive funds transfers through formal or informal remittance networks. he says.Hans Dieter Seibel. poor operating procedures. . They receive loans and grants from charities. board member of the European Microfinance Platform. Another pioneer in this sector is Akhtar Hameed Khan. since different institutions serve different needs. In recent years there has also been increasing emphasis on expanding the diversity of institutions. or a charity that runs a heifer pool are engaged in microfinance.[10] The modern use of the expression "microfinancing" has roots in the 1970s when organizations. the problem has not been solved yet. such as Grameen Bank of Bangladesh with the microfinance pioneer Muhammad Yunus. or a moneylender that engages in usury. continue to have no practical access to formal sector finance. Microfinance has been growing rapidly with $25billion currently at work in microfinance loans. Microfinance programmes also need to be based on local funds. This particular model (used by many Microfinance institutions) makes financial sense. these systems can easily fail. Ensuring financial services to poor people is best done by expanding the number of financial institutions available to them. Some reasons being lack of use by potential customers. especially in the rural areas. They buy insurance from state-owned companies. [edit]Boundaries and principles Poor people borrow from informal moneylenders and save with informal collectors.[9] [edit]History The history of microfinancing can be traced back as long to the middle of the 1800s when the theorist Lysander Spooner was writing over the benefits from small credits to entrepreneurs and farmers as a way getting the people out of poverty. because it reduces transaction costs. over-indebtedness. were starting and shaping the modern industry of microfinancing. Local Roots Although much progress has been made.[7] It is estimated that the industry needs $250 billion to get capital to all the poor people who need it. It could be claimed that a government that orders state banks to open deposit accounts for poor consumers.

Borrowers were prepared to pay very high interest rates for services like quick loan . the role of the traditional moneylender has been subject to much criticism."[12] 7. or so poor they are unlikely to be able to generate the cash flow required to repay a loan. Microfinance institutions should measure and disclose their performance – both financially and socially. Poor people need not just loans but also savings.and can be clearly distinguished from charity. 4. 3. "The key bottleneck is the shortage of strong institutions and managers. "Microfinance can pay for itself. 6. and so to reach large numbers of poor people. Those from the private-sector side respond that because money is fungible. 9. Microfinance also means integrating the financial needs of poor people into a country's mainstream financial system. Microfinance means building permanent local institutions. such a restriction is impossible to enforce. Others are best served by financial institutions. and that in any case it should not be up to rich people to determine how poor people use their money. 10. "Donor funds should complement private capital. Microfinance is considered as a tool for socio-economic development. microfinance must pay for itself. insurance and money transfer services. [edit]Debates at the boundaries There are several key debates at the boundaries of microfinance. 5. "The job of government is to enable financial services. not compete with it. Families who are destitute. which chokes off the supply of credit. build up assets and/or cushion themselves against external shocks.Some principles that summarize a century and a half of development practice were encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at the G8 Summit on June 10. especially in the early stages of modern microfinance. 2. Practitioners and donors from the charitable side of microfinance frequently argue for restricting microcredit to loans for productive purposes–such as to start or expand a microenterprise."[12] 8. should be recipients of charity. Microfinance must be useful to poor households: helping them raise income."[11] Subsidies from donors and government are scarce and uncertain. As more poor people gained access to loans from microcredit institutions however. not to provide them. it became apparent that the services of moneylenders continued to be valued. Perhaps influenced by traditional Western views about usury. 2004:[6] 1. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs."[12] Donors should focus on capacity building.

This focus on women is questioned sometimes. Industry data from 2006 for 704 MFIs reaching 52 million borrowers includes MFIs using the solidarity lendingmethodology (99.[16] Microfinancial services may be needed everywhere. confidentiality and flexible repayment schedules. A recent study of microenterpreneurs from Sri Lanka published by the World Bank found that the return on capital for maleowned businesses (half of the sample) averaged 11%. dealing with health costs or securing the family food supply). whereas the return for women-owned businesses was 0% or slightly negative. Modern microfinance emerged in the 1970s with a strong orientation towards private-sector solutions. in developed economies intense competition within the financial sector.disbursement. They did not always see lower interest rates as adequate compensation for the costs of attending meetings. They also found it distasteful to be forced to pretend they were borrowing to start a business. ensures that most people have access to some financial services. attending training courses to qualify for disbursements or making monthly collateral contributions. combined with a diverse mix of different types of financial institutions with different missions.[14] Although it is generally agreed that microfinance practitioners should seek to balance these goals to some extent. including the developed world. Graham & Von Pischke).[citation needed] However. Microfinance experts generally agree that women should be the primary focus of service delivery. there are a wide variety of strategies.[15] Because operating margins become tighter the smaller the loans delivered. This is true not only for individual institutions. Evidence shows that they are less likely to default on their loans than men. There has been a long-standing debate over the sharpness of the trade-off between 'outreach' (the ability of a microfinance institution to reach poorer and more remote people) and its 'sustainability' (its ability to cover its operating costs—and possibly also its costs of serving new clients—from its operating revenues). but also for governments engaged in developing national microfinance systems.9%).[citation needed] Efforts to transfer microfinance innovations such as solidarity lending from developing countries to developed ones have met with little success.1%). This resulted from evidence that state-owned agricultural development banks in developing countries had been a monumental failure. The delinquency rate for solidarity lending was 0.[4] Nevertheless public officials in many countries hold a different view. [13] The more recent focus on inclusive financial systems (see section below) affords moneylenders more legitimacy. many MFIs consider the risk of lending to men to be too high. while 0. however. and continue to intervene in microfinance markets.3% female clients) and MFIs using individual lending (51% female clients). actually undermining the development goals they were intended to serve (see the compilation edited by Adams.[17] .3% of loans were written off (individual lending— 0. arguing in favour of regulation and efforts to increase competition between them to expand the options available to poor people.9% after 30 days (individual lending—3. ranging from the minimalist profit-orientation of BancoSol in Bolivia to the highly integrated not-for-profit orientation of BRAC in Bangladesh. when they were often borrowing for other reasons (such as paying for school fees.

But circumstances often arise in their lives in which they need money or the things money can buy. floods. jewelry.[edit]Financial needs of poor people Financial needs and financial services." and in the 1990s. 54). funerals. childbirth. primarily through creating and exchanging different forms of non-cash value. the 1980s demonstrated that "microfinance could provide large-scale outreach profitably. injury. securing a job (which often requires paying a large bribe). The obstacles or challenges to building a sound commercial microfinance industry include: . While much progress has been made in developing a viable. several issues remain that need to be addressed before the industry will be able to satisfy massive worldwide demand. commercial microfinance sector in the last few decades. "microfinance began to develop as an industry" (2001. money is not used to carry them out. Personal Emergencies: such as sickness. poor people have very little money. widowhood. cyclones and man-made events like war or bulldozing of dwellings. Disasters: such as fires. Almost by definition. In the 2000s. In developing economies and particularly in the rural areas. buying land or equipment. theft. etc. p. harassment or death. and to play a role in reducing poverty. old age. and precious metals. Common substitutes for cash vary from country to country but typically include livestock. education. In Stuart Rutherford’s recent book The Poor and Their Money. As Marguerite Robinson describes in The Microfinance Revolution. homebuilding. unemployment. Investment Opportunities: expanding a business. improving housing. many activities that would be classified in the developed world as financial are not monetized: that is. Poor people find creative and often collaborative ways to meet these needs. he cites several types of needs:[18]     Lifecycle Needs: such as weddings. the microfinance industry's objective is to satisfy the unmet demand on a much larger scale. grains.

bribes. Since these loans must be repaid by saving after the cost is incurred. Because all the value is accumulated before it is needed. Rutherford's point is that microcredit is addressing only half the problem. uniforms. etc. this money management strategy is referred to as 'saving up'. from a moneylender to buy rice.[citation needed] Often people don't have enough money when they face a need. agricultural microfinance methodologies [edit]Ways in which poor people manage their money Saving up Rutherford argues that the basic problem poor people as money managers face is to gather a 'usefully large' amount of money. A poor family might borrow from relatives to buy land. remittances or insurance Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural. Children’s schooling may be funded by buying chickens and raising them for sale as needed for expenses. Building a new home may involve saving and protecting diverse building materials for years until enough are available to proceed with construction. so they borrow.      Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs that meet the needs for savings. and arguably the less important half: poor people borrow to help them save and accumulate assets. Rutherford calls this 'saving down'. Microcredit institutions should fund their loans through savings accounts that help poor people manage their myriad risks. [citation needed] . or from a microfinance institution to buy a sewing machine.

they also included postal savings banks (318 million accounts). A useful recent benchmark was established by an analysis of 'alternative financial institutions' in the developing world in 2004. A benchmark impact assessment of Grameen Bank and two other large microfinance institutions in Bangladesh found that for every $1 they were lending to clients to finance rural non-farm micro-enterprise.[19] This parallels the experience in the West. financial cooperatives and credit unions (35 million accounts) and specialized rural banks (19 million accounts). especially during start-up. Regionally the highest concentration of these accounts was in India (188 million accounts representing 18% of the total national population). flexible place to save money and withdraw it when needed is also essential for managing household and family risk. . they may find it as useful to borrow for consumption as for microenterprise. A safe.000 institutions that are serving people who are poorer than those served by the commercial banks.[21] The authors counted approximately 665 million client accounts at over 3. Of these accounts."[20] The work of Rutherford. For example a study by Wright and Mutesasira in Uganda concluded that "those with no option but to save in the informal sector are almost bound to lose some money – probably around one quarter of what they save there. Wright and others has caused practitioners to reconsider a key aspect of the microcredit paradigm: that poor people get out of poverty by borrowing. Reflecting the diverse historical roots of the movement. in which family businesses are funded mostly from savings. building microenterprises and increasing their income. with the highest rate of penetration in West Africa. however. While they need loans. Recent studies have also shown that informal methods of saving are unsafe. Considering that most bank clients in the developed world need several active accounts to keep their affairs in order. mostly their clients' savings. these figures indicate that the task the microfinance movement has set for itself is still very far from finished. 120 million were with institutions normally understood to practice microfinance. about $2.50 came from other sources. state agricultural and development banks (172 million accounts). and the highest growth rate in Eastern and Southern Africa [22] ). The new paradigm places more attention on the efforts of poor people to reduce their many vulnerabilities by keeping more of what they earn and building up their assets. [citation needed] [edit]Current scale of microfinance operations No systematic effort to map the distribution of microfinance has yet been undertaken. The lowest concentrations were in Latin America and the Caribbean (14 million accounts representing 3% of the total population) and Africa (27 million accounts representing 4% of the total population.Saving down Most needs are met through mix of saving and credit.

At the end of 2009 it was tracking 1. this report had become a global study. operate in most countries in the developing world. . In Canada and the US. which are generally designed and managed by poor people themselves with little outside help. Most of these institutions are structured as nonprofit organizations. domestic microfinance organizations target marginalized populations unable to access mainstream bank financing. the InterAmerican Development Bank.[28] [edit]History of domestic microfinance in USA In the late 1980s microfinance institutions developed in the US. which is published by Microfinance Information Exchange. indicating that these organizations. funerals and sickness.[27] Help can come in the form of more and better qualified staff. focusing only on Latin America and the Caribbean. but by 2009. also known as the Microscope."[23] An important source of detailed data on selected microfinance institutions is the MicroBanking Bulletin. thus higher education is needed for microfinance institutions. as Oliver Schmidt describes. Change in social welfare policies and focus on economic development and job creation at the macro level. The 2011 report contains information on the environment of microfinance in 55 countries among two categories. has also been applied to the domestic context throughout North America and Europe. Mind the management gap [edit]Domestic microfinance Microfinance.[28] There were three key factors that triggered the growth in domestic microfinance. This has begun in some universities. This is a worldwide pattern that does not vary much by region.By type of service "savings accounts in alternative finance institutions outnumber loans by about four to one. By 2007 there were 500 microfinance organizations operating in the US with 200 lending capital. was first developed in 2007. and others. Numerous case studies have been published however. publication prepared by the Economic Intelligence Unit (EIU).084 MFIs that were serving 74 million borrowers ($38 billion in outstanding loans) and 67 million savers ($23 billion in deposits). They served low income and marginalized minority communities. [26] As yet there are no studies that indicate the scale or distribution of 'informal' microfinance organizations like ROSCA's and informal associations that help people manage costs like weddings. 1. Regulatory Framework and the Supporting Institutional Framework. [25] This publication. [24] Another source of information regarding the environment of microfinance is the Global Microscope on the Microfinance Business Environment. while well known as an international concept.

Microfinance institutions serve entrepreneurs who live or work in low-income neighborhoods. These factors incentivized the public and private supports to have microlending activity with in the United States. These credit unions provided financial services to the Canadians who could not get access to traditional financial means. Microfinance in the U.[29] [edit]Principles The mission of microfinance institutions is to increase access to credit. Approximately 30 years later Father Moses Coady introduced credit unions to Nova Scotia. the average domestic microfinance loan size is US$9. Encouragement of employment.S. aboriginals.2. 3. Two separate branches of credit unions developed in Canada to serve the financially marginalized segment of the population.[28] [edit]History of domestic microfinance in Canada Microfinance history in Canada took shape through the development of credit unions. According to reports by Microenterprise FIELD. [32] [edit]Principle differences from international microfinancing Unlike international microfinancing.[28] [edit]Impact Common areas of impact considered by microfinance organizations operating in developing countries include:    Increase of personal income Empowerment of women Improvement in nutrition . including self-employment.000. CRA guidelines restrict microfinance loans to a maximum of $25. domestic microfinance institutions have historically financed a lower number of borrowers. International institutions average 9. Alphonse Desjardins introduced the establishment of savings and credit services in late 1900 to the Quebecois who did not have financial access. This is ten times the size of an average international microfinance loan (US$973).610 borrows while domestic only average 337 borrowers. context is defined as the extension of credit up to $35.[30] Organizations may target new immigrants.[28] Another key difference between domestic and international institutions is the average loan size. as a strategy for improving the lives of the poor. mental health and addiction populations[31] and other marginalized groups.000. [28] In Canada. who are unable to receive traditional financing from banks.732. The increase in the proportion of Latin American and Asian immigrants who came from societies where microenterprises are prevalent. These were the models of the modern institutions still present in Canada today.

Alterna is a financial alternative to Canadians. Domestic microfinance has created jobs as research has found 60% of borrowers are able to hire others. these business owners are able to improve their housing situation. Rise is a Rotman and CAMH initiative that provides small business loans. The domestic microfinance organizations are impacting the above aspects of the lives of the borrowers as well as their communities.4 jobs. and lines of credit to entrepreneurs with mental health and/or addiction challenges.  Alterna Savings Formed in 2005 through the merging of the Civil Service Savings and Loan Society and the Metro Credit Union.[33] According to reports every domestic microfinance loan creates 2.[33] [edit]Domestic [edit]Canada  microfinance institutions Rise Asset Development Founded by Sandra Rotman in 2009. Their banking policy is based on cooperative values and expert financial advising. on average.   Increased education of the borrower’s children Access to clean water Increased access to medicine These are different from the common areas of impact in domestic microfinance organizations:       Creation of jobs Business growth Increased income to the business owner Improved credit rating Graduating from social support programs (ODSP and OW in Canada) Overall improvement of quality of life. leases.  Access Community Capital Fund .[34] These entrepreneurs also provide wages that are.[35] Small business loans eventually allow small business owners to make their businesses their primary source of income with 67% of the borrowers showing a significant increase in their income as a result of their participation in certain micro-loan programs.[33] Ultimately. 25% higher than minimum wage. many of the small business owners that use social funding are able to graduate from government funding.[33] In addition. 70% indicating their housing has improved.

[edit]United States  Accion USA ACCION USA. savings programs.and moderate-income entrepreneurs for their small businesses who cannot get financial support through traditional means. ACCESS is a Canadian charity that helps entrepreneurs without collateral or credit history find affordable small loans. become computer literate. and networking opportunities. Ontario. and credit establishment to low-income entrepreneurs. Momentum offers opportunities to people living in poverty in Calgary. especially in urban and near-urban areas and . and purchase homes. [edit]"Inclusive financial systems" The microcredit era that began in the 1970s has lost its momentum. Vancity is now the largest English speaking credit union in Canada. offers microloans and other financial services to low. Project Enterprise provides support to entrepreneurs and small businesses in lower income communities through access to business loans. Montreal Community Loan Fund provides accessible credit and technical support to entrepreneurs with low income or credit for start-ups or expansion of organizations that cannot access traditional forms of credit. Accion Chicago Accion Texas-Louisianna  Project Enterprise Founded in 1997 in New York City. financial education.  Grameen America Based in New York and founded by Muhammed Yunus. to be replaced by a 'financial systems' approach. Momentum provides individuals and families who want to better their financial situation take control of finances.  Momentum Using the community economic development approach. business development services. While microcredit achieved a great deal. borrow and repay loans for business. secure employment.  Vancity Founded in 1946.Based in Toronto. Grameen America provides micro-loans.  Montreal Community Loan Fund Created to help eradicate poverty. an affiliate of ACCION International.

Unless they are effectively regulated and supervised. distinguishes between four general categories of microfinance providers. Like their informal cousins. These services can also be costly and the choice of financial products limited and very shortterm. However. pawnbrokers. DC. pioneering banking techniques like solidarity lending. Member-owned organizations These include self-help groups. their governance structures can be fragile. like the Gamelan Council. Prodem in Bolivia. Because they know each other well and live in the same community. Grameen Bank is a member-owned organization. others. and they can become overly dependent on external donors. address larger regions. ASCAs and input supply shops. and a variety of hybrid organizations like 'financial service associations' and CVECAs. ROSCAs. these NGOs have spread around the developing world in the past three decades. its progress in delivering financial services in less densely populated rural areas has been slow. Informal services that involve savings are also risky. these providers may have little financial skill and can run into trouble when the economy turns down or their operations become too complex.with entrepreneurial families. many people lose their money. convenient and fast services. village banking and mobile banking that have overcome barriers to serving poor populations. with boards that don’t necessarily represent either their capital or their customers.316 of these MFIs and NGOs lending to about 133 million clients by the end of 2006. and the diverse settings in which they live and work. They have proven very innovative. credit unions. which means they have access to good knowledge about each others' financial circumstances and can offer convenience and flexibility. It is also rooted in an increasing awareness of diversity of the financial service needs of the world’s poorest people. NGOs The Microcredit Summit Campaign counted 3. . their costs of operation are low. money-guards. savings collectors.[36] Informal financial service providers These include moneylenders. they can be 'captured' by one or two influential leaders. and argues for a pro-active strategy of engagement with all of them to help them achieve the goals of the microfinance movement. Brigit Helms in her book 'Access for All: Building Inclusive Financial Systems'. The new financial systems approach pragmatically acknowledges the richness of centuries of microfinance history and the immense diversity of institutions serving poor people in developing world today. and FINCA International. Since they are managed by poor people. they understand each other’s financial circumstances and can offer very flexible. headquartered in Washington.[37] Led by Grameen Bank and BRAC in Bangladesh. they are generally small and local. However. and the members can lose their money.

each of these institutional types can bring leverage to solving the microfinance problem. [39] The volume channeled through Kiva's peer-to-peer platform is about $100 million as of November 2009 (Kiva facilitates approximately $5M in loans each month). However. They are regulated and supervised. peer-to-peer platforms have developed to expand the availability of microcredit through individual lenders in the developed world. and control a branch network that can extend across the country and internationally. for example Kiva. they have proved reluctant to adopt social missions. [edit]Microcredit and the web Due to the unbalanced emphasis on credit at the expense of microsavings. Another WWW-based microlender United Prosperity uses a variation on the usual microlending model.[38] With appropriate regulation and supervision. the US-based nonprofit Zidisha became the first peer-to-peer microlending platform to link lenders and borrowers directly across international borders without local intermediaries.[41] The use of flat rates. agricultural development banks. Zidisha and the Microloan Foundation. with United Prosperity the micro-lender provides a guarantee to a local bank which then lends back double that amount to the micro-entrpreneur. and due to their high costs of operation. such as trade credit is increasing commercial banks' interest in microfinance. efforts are being made to link self-help groups to commercial banks.Formal financial institutions In addition to commercial banks. New platforms that connect lenders to micro-entrepreneurs are emerging on the Web. offer a wider range of financial services. the needs for microcredit are estimated about 250 bn USD as of end 2006. There have been problems with disclosure on peer-to-peer sites. to reduce transaction costs and exchange rate risks. as well as a desire to link Western investors to the sector. In 2009. The increasing use of alternative data in credit scoring. which has been outlawed among regulated . In comparison. For example. to network member-owned organizations together to achieve economies of scale and scope. and to support efforts by commercial banks to 'downscale' by integrating mobile banking and e-payment technologies into their extensive branch networks. often can't deliver services to poor or remote populations.[40] Most experts agree that these funds must be sourced locally in countries that are originating microcredit. with some reporting interest rates of borrowers using the flat rate methodology instead of the familiar banking Annual Percentage Rate. these include state banks. savings banks. rural banks and non-bank financial institutions.

microfinancing begets the general tendency of a small business initially supported on credit to gain profits with time and generate micro savings.[44] To further the point stated by Prof Karlan. Taking Stock of What We Know" by Nathanael Goldberg[43] (now with Innovations for Poverty Action) and an update.financial institutions in developed countries. can confuse individual lenders into believing their borrower is paying a lower interest rate than.[citation needed] [edit]Evidence for reducing poverty Research on the effectiveness of microfinance as a tool for economic development remains mixed. as well as some findings that suggest limited or negative impact in some cases. At the 2008 Innovations for Poverty Action/Financial Access Initiative Microfinance Research conference. economist Jonathan Morduch of New York University noted there are only one or two methodologically sound studies of microfinance's impact. Grameen Foundation has released two papers summarizing the state of research on the impact of microfinance on poverty: "Measuring the Impact of Microfinance. are perhaps not as compelling as once thought. Nicholas Donabet Kristof states that there is no evidence of any negative influence of micro financing but countless examples of people now looking at the bigger picture and saving for better things . they are. "Measuring the Impact of Microfinance: Taking Another Look" by Professor Kathleen Odell. In a radio interview with Professor Dean Karlan of Yale University. financed through microcredit and one control group in the Philippines. The income that went up in business was true only for men. the famous two time pulitzer prize winner. This is striking because one of the supposed major beneficiaries of microfinance is supposed to be targeted at women. Professor Karlan's conclusion was that whilst microcredit is not necessarily bad and can generate some positive benefits. a point was raised concerning a comparison between two groups: one African. In his latest study. despite some lenders charging interest rates between 40-60%. The BBC Business Weekly program reported that much of the supposed benefits associated with microfinance. also giving citizens in poor countries access to rudimentary and cheap savings accounts. and not to those seeking to establish new businesses. in fact. it isn't the panacea that it is purported to be. He advocates rather than focusing strictly on microcredit. These two papers identify scores of findings indicating positive impact in research conducted over the last twenty years.[42]. The results of this study suggest that many of the benefits from microcredit are in fact loaned to people with existing business. Many of those receiving microcredit also used the loans to supplement the family income. in part owing to the difficulty in monitoring and measuring this impact. and not for women.

Other studies concluded similarly.T. and none of which employed rigorous methods such as randomized control trials similar to those reported by Innovations for Poverty Action and the M. found that much of the evidence on the effectiveness of microfinance for alleviating poverty is based in anecdotal reports or case studies.D.[49] A project undertaken in Peru by Innovations for Poverty Action found that those borrowers randomly selected to receive financial training as part of their borrowing group meetings had higher profits. .I.[45][46] Sociologist Jonathan H.[47] [edit]Microfinance and social interventions There are currently a few social interventions that have been combined with micro financing to increase awareness of HIV/AIDS. train them further. One of these studies found that microfinance reduced poverty. He initially found over 100 articles on the subject. and allow them to implement an Action Plan to their respective centres. delivered in the absence of other microfinance services such as savings. although they attributed some positive effects to the program. remittances. gender-based violence. payments and insurance. where the number of savers has grown to twice as much as the number of borrowers. although there was not a reduction in "the proportion who reported having problems in their business". Westover.[50] [edit]Other criticisms See also: Microcredit: Criticism Most criticisms of microfinance have actually been criticisms of microcredit. with surveys finding that a majority of participants feel better about finances with some feeling worse. Ph. Microfinance has also been combined with business education and with other packages of health interventions. Jameel Poverty Action Lab. but included only the 6 which used enough quantitative data to be representative. and HIV/AIDS infections to strengthen the communication skills and leadership of women [48] "The Sisters-for-Life" program has two phases where phase one consists of ten one-hour training programs with a facilitator with phase two consisting of identifying a leader amongst the group. Two others were unable to conclude that microfinance reduced poverty.have surfaced. Such interventions like the "Intervention with Microfinance for AIDS and Gender Equity" (IMAGE) which incorporates microfinancing with "The Sisters-for-Life" program a participatory program that educates on different gender roles. further strengthens his theory. The example of BancoSol(Bolivia).

In some cases. as they also include local inflation and the bad debt expenses of the microfinance institution. overall.For example.[55] Some of these concerns have been taken up by unions and socially responsible investmentadvocates. selling crafts or agricultural produce through an organization controlled by the MFI. Critics maintain that there are few if any rules or standards in these cases governing working hours."[53] The role of donors has also been questioned. particularly when borrowers become quasi-wage labourers. either because it gets hung up in unsuccessful and often complicated funding mechanisms (for example. the author of Why Doesn't Microfinance Work?. However. and in his latest book[52] argues that microfinance institutions that charge more than 15% above their long-term operating costs should face penalties. The desire of MFIs to help their borrower diversify and increase their incomes has sparked this type of relationship in several countries." he argues.3% annually. The Consultative Group to Assist the Poor (CGAP) recently commented that "a large proportion of the money they spend is not effective. microfinance has been a development policy blunder of quite historic proportions. argues that microcredit offers only an "illusion of poverty reduction"." Bateman concludes that "The international development community is now faced with the reality that. poorly conceived programs have retarded the development of inclusive financial systems by distorting markets and displacing domestic commercial initiatives with cheap or free money. but "these isolated and often temporary positives are swamped by the largely overlooked negatives.[51] Muhammad Yunus has recently made much of this point. holidays."[54] There has also been criticism of microlenders for not taking more responsibility for the working conditions of poor households. or it goes to partners that are not held accountable for performance. a few in poverty do manage to establish microenterprises that produce a decent living. Milford Bateman. For example. where hundreds of thousands of borrowers effectively work as wage labourers for the marketing subsidiaries of Grameen Bank or BRAC. BusinessWeek reported that some Mexicans are stumbling with terms of newly available funding. a government apex facility). "As in any lottery or game of chance. safety or child labour. annual rates charged to clients are higher. there has been much criticism of the high interest rates charged to borrowers.[56][57] . The real average portfolio yield cited by the sample of 704 microfinance institutions that voluntarily submitted reports to the MicroBanking Bulletin in 2006 was 22. most notably Bangladesh. and few inspection regimes to correct abuses. working conditions.

Undermining Rural Development with Cheap Credit. Connecticut.). What’s Wrong with Microfinance? Practical Action. Bloomfield.  Branch. Dale W. since documentary maker Gayle Ferraro found the woman alive and well. SKS Microfinance also went public.  de Aghion. Westview Press. The Grameen Reader.[60] Some problems with microcredit are mistakenly alleged in The Micro Debt. Brian & Janette Klaehn. Graham & J. Grameen Bank.  Christen. In both instances Muhammad Yunus publicly stated his disagreement. In July 2010 India's biggest MFI. . This allegation is disputed. Von Pischke (eds. 2006. Washington 2004.  Gibbons. 1992.. Financial Institutions with a Double Bottom Line.  Dowla. Cambridge. As the company put its shares on Mexican Stock Exchange it was able to generate very high profits that were achieved by rising interest rates on their microloans that at some point reached 86% per year. Kumarian Press Inc. The MIT Press. Robert Peck. The Economics of Microfinance. Asif & Dipal Barua. [58][59] Microcredit has been blamed for many suicides in India: aggressive lending by microcredit companies in Andhra Pradesh is said to have resulted in over 80 deaths in 2010. Massachusetts. saying that the poor should be the only beneficiaries of microfinance. Beatriz Armendáriz & Jonathan Morduch. 2002. The Poor Always Pay Back: The Grameen II Story.  Dichter. Muhammad Yunnis. Dhaka. a film by the Danish journalist Tom Heinemann. have been taken. confirming the original Grameen story. the original loan recipient of Grameen. in Jobra Village. the alleged problems have been proven to be false and no further actions against the Grameen Bank and its founder. 2005.[62] The documentary by Heinemann also looks at the effectiveness of Grameen Bank and alleges that it has little impact on poverty by highlighting the purported continued poverty of Sufiya Begum. PACT Publications.Other criticism was raised by the IPO (Initial Public Offering) of a Mexican MFI Banco Compartamos in 2007. Thomas and Malcolm Harper (eds).[61] After a thorough investigation in December 2010 by the Norwegian Foreign Ministry.. Consultative Group to Assist the Poor. Washington. Jayadeva. 1984. Boulder & London. Douglas H. David. Veena & Richard Rosenberg. D. 2007.[63] [edit]Bibliography  Adams. Striking the Balance in Microfinance: A Practical Guide to Mobilizing Savings.

Delhi. Neuwied on the Rhine. 2005.. Bloomfield CT.  Robinson.  Hirschland. The Poor and Their Money. July.  United Nations Department of Economic Affairs and United Nations Capital Development Fund. Graham A. Micro Finance: The Pillars of a Tool to Socio-Economic Development.) Remittances: Development Impact and Future Prospects. The University Press Ltd. 2008. Building Inclusive Financial Sectors for Development. Development Gateway. 2006. Shahidur R. The Credit Unions.S. Washington. Creating a World Without Poverty: Social Business and the Future of Capitalism. Stuart..  Raiffeisen.. Consultative Group to Assist the Poor. Bangladesh edition. Banking on mobiles: why. Marguerite S. Henry W. World Bank. Germany.C. Access for All: Building Inclusive Financial Systems. New York. Brigit. Oxford University Press. 2001. 2006.) Savings Services for the Poor: An Operational Guide. Samuel Munzele & Dilip Ratha (eds. The Raiffeisen Printing & Publishing Company. Ignacio and Kabir Kumar. The University Press. London. Fighting Poverty with Microcredit. The World Bank. 2006.  Mas. 2006. PublicAffairs.N. The World Bank. FW (translated from the German by Konrad Engelmann). Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. 2000.  Wright. Microfinance Systems: Designing Quality Financial Services for the Poor. 1970. how and for whom? CGAP Focus Note #48. 2008. Muhammad. Dhaka. Washington D. 1910.  Ledgerwood. Wolff. 1999. 2005. .  Yunus. New York. P. Madeline (ed. The microfinance revolution. Joanna and Victoria White. Vrajlal K. Kumarian Press Inc. Helms. People’s Banks: A Record of Social and Economic Success. King & Son.   Rutherford. Dhaka.  Sapovadia. 2000..  Khandker.  Maimbo. United Nations.