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Facts
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- 2005 is the United Nations International Year of Microcredit.
Microcredit, and microfinance more broadly, is seen as an important
tool for eradicating poverty and hunger - one of the United Nations'
Millennium Development Goals - and for empowering poor people.
- The World Bank estimated in 2004 that there were over 7000 microfinance
institutions worldwide, serving over 16 million poor people.
The combined turnover of these institutions was estimated at US$2.5
billion.
- The experience of microfinance institutions shows that women are a
good credit risk, and that they invest their income for the wellbeing
of their families. At the same time, they benefit from the higher social
status they achieve through being able to provide income.
- The Grameen Bank of Bangladesh, with origins in 1976, has loans currently
in the hands of borrowers totaling over US$300 million, with deposits
of a similar amount.
Over 95% of the Grameen Bank's 3.8 million members are women.
- Although microcredit involves the lending of small amounts, the interest
rates can be as high as 20% or more. This reflects the relatively high
cost of providing a large number of very small loans.
Sources: United Nations Capital Development
Fund: http://www.uncdf.org/english/microfinance/facts.php
Global Development Research Centre: http://www.gdrc.org/icm/
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Background
Why is microfinance necessary?
If you want to buy something or start a business but do not have the money
you might try and save the money, sell or pawn something you own, or borrow
the money from family, bank or lending institution. To save money assumes you
have a way of earning it and there is somewhere safe to keep it. To borrow money
from family assumes they have it and are able to do without it until you are
able to pay it back. To borrow money from a bank, credit union or other lending
institution assumes you can demonstrate an ability to pay it back. Lending institutions
will not lend to people unless they have some kind of security, or collateral,
for the loan, to ensure that if it is not paid back, the bank or other institution
will be able to recover part of the debt. Poor people often do not have spare
money to lend other family members, access to banks or the collateral to guarantee
a loan, so they find it difficult to try to improve their situation through
loans. Yet a very small loan can make a great difference to a poor person. Microcredit
is helping millions of poor people, especially poor rural women, with tiny loans
so they can start small, create self-employment and improve their lives.
There is a common view that poor people cannot or do not want to save. But
the reality is different. Because the poor have little money, making the most
of what they do have is vital. Building a pool of savings that can be drawn
on in emergencies, or that can help to finance the education of children or
the purchase of a productive asset, is vital to poor households, and providing
them with safe and accessible means of doing this is therefore an important
service.
Poor households are particularly vulnerable to the setbacks that come from
ill-health, loss of employment and other emergencies. Providing insurance that
can mitigate the impact of such setbacks is another vital financial service.
While insurance is a very different business from taking deposits and making
loans, a number of microfinance organisations are looking at including insurance
services in their range of products.
The beginnings of microfinance
The idea of microfinance was developed as a survival strategy for the poor.
Ela Bhatt established the Self-Employed Women's Association (SEWA) in India
in 1974, while in 1976 Mohammed Yunus founded the Grameen Bank project in Bangladash.
Ela Bhatt's first loan was $1.50 to a woman who sold herbs, while Mohammed Yunus'
initial outlay was a total of $27 to forty-two poor people.
How microfinance works
Poor people often live from day to day, and have few reserves for major expenses
such as illness, weddings, house repairs or education. They are often unable
to save for these expenses, or have been unable to open a bank account that
would enable them to build their savings, and therefore need to borrow, frequently
at exorbitant rates, to meet these unexpected costs, further worsening their
economic situation. Microcredit provides poor people with access to small loans
at more manageable interest rates, and can lead to self-sufficiency and poverty
alleviation. There are many models of microcredit. A common model is for small
groups to form a collective and with a start up grant to provide an initial
pool of money, which is augmented with regular savings and interest members
pay on their small loans. One or two members take loans to develop small businesses,
and, when they have repaid their loan, others are able to draw on the collective
fund. They may be supported with business and other training to help make these
micro-enterprises successful. The outside support and group pressure leads to
a low default on repayments.
Where poor people are able to build their savings, they can often use these
savings to meet their needs for lump sums of money, either to meet emergencies
or to finance a productive investment. This is less risky than relying on credit,
because it doesn't involve going into debt. Saving and borrowing are really
different ways of turning small amounts of money into lump sums. Saving involves
building a lump sum by first accumulating smaller amounts; borrower is taking
the lump sum first and then 'saving' afterwards in the form of loan repayments.
How does microfinance address poverty?
With less interest to repay, more profitable businesses and autonomy, poor
people have been able to reduce debt burdens and break the cycle of poverty.
Studies of the impact of microfinance in more than 24 countries have found
dramatic improvements in household income levels. These improvements take place
mainly through growth in the borrower's business. Access to microfinance allows
the borrower to reduce costs with lower interest rates and bulk purchasing of
raw materials. Income increases as the number of goods or services offered is
expanded and reduced product costs increase sales.
Is it all good news?
Although microfinance can demonstrate huge levels of success, there are risks
and other disadvantages to the scheme. Maintaining a sustainable small loans
program is costly, and the high interest rates take their toll on borrowers,
although less than that of local money-lenders who may charge even higher interest
rates or indenture children.
Microfinance fosters self-employment, but the odds are stacked against the
self-employed in the global marketplace. Business training and support can be
important so that loans can be effectively used. However, many poor entrepreneurs
in fact know very well what to do, but lack the capital needed to set up or
expand their businesses
While women have taken a high percentage of the loans and invested in their
households, improving the health and education of their children, this has had
a cost. Running a business has added to their workload and changed their role
in the family, sometimes putting a strain on their marriage. Moreover, in some
cases husbands have used the loans, but expected the women to repay it. It is
important to include gender training as part of the microfinance program to
address these problems.
Microfinance programs may enable poor people to improve their situation, but
they do not eliminate the need for other basic social and infrastructure services.
Microfinance can help poor households to reduce their vulnerability to economic
shocks, but they do not eliminate such shocks. It helps the poor to take advantage
of economic opportunities, but it does not create such opportunities. Microfinance
can only ever be one part of a broader process of social and economic development.
Australia's response
During 2003-4 the Australian Agency for International Development (http://www.ausaid.gov.au/anrep04/s2c.html#02.3.3)
provided microcredit and saving facilities to enable more than 143 000 men and
women in the region to take advantage of saving and loan services, and to pass
the benefits onto their estimated 410 000 dependants.
Australia has also recently supported microfinance organisations benefiting
hundreds of thousands of people in China, Sri Lanka, India, Papua New Guinea,
Indonesia, Vietnam, Vanuatu and Bougainville
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