What's so great about Microfinance?

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Permalink Reply by Sindhu Sagar on April 23, 2009 at 12:04pm

I think microfinance is a great concept. It is a unique and effective means to empower the poor. I would compare it to the power of education. It is one thing to give a homeless child a few dollars and say, “go buy yourself some food”, and once that food is finished, he/she is back in the same state they began. But it is a whole another thing to teach that kid how those few dollars can be made in an honest way. Teach that kid to read and write, then in the long run, it gives him or her the means to express themselves, gives them a broader understanding of how the world runs, gives them the means to stand up against slavery and overcome poverty, gives them the means to earn their own money so they never have to run have out of food again. Knowledge is power right? And education is a necessary tool.

Similarly, teach a poor person how to invest, teach them the basic concepts of running a small business, provide them with a basic loan, and it has the power to make them rise above the dust, to rise above the dollar a day earnings by doing menial jobs. They will be able to earn their own livelihood by doing something more effective and long lasting. This is what microfinance does in my view. And that is a very powerful thing.

So sure, bring on the development aid and the handouts but once I am done using up the aid and when I have no idea what the handout says because I can’t read or I have more pressing matters to deal with like getting through the day alive, there is nothing much else that is going to change my situation. So I think empowering the poor is the way to go.

As Thomas Jefferson once said, "Enlighten the people generally, and tyranny and oppressions of body and mind will vanish like evil spirits at the dawn of day."

Of course it is not a perfect formula, but we have to start somewhere.

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Permalink Reply by Chris Temple on July 24, 2009 at 4:37pm

Singhu,
This is an insightful and informative post. I am curious though about how much capacity building you believe a Microfinance institution (MFI) should provide for their clients. You highlight education as the krux of microfinance, but do you feel that MFIs should provide formal business training? Or how about environmental or health advice?
Essentially, how much should be learned organically versus how much should be instructed? This is a pressing question amongst MFIs around the world.

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Permalink Reply by chris macrae on July 24, 2009 at 5:21pm

at a basic level grameen provides a benchmark response to your question

namely membership takes at least 5 days of induction in a 5 person team; those that qualify immediately belong to a 60 women's village centre where they meet their peers, communally organise around the 16 decision and do the weekly banking transactions, after a year their savings also entitle them to being a shareholder of the bank

remember the grameen model starts with the poorest of the poor- typically people without literacy, and its systems seem to me to be about 90% abour personal, self-employment and communal development, and only 10% of what we in the west might mean by banking

there's an extraordinary infrastructure embedded in grameen with about 140000 village centres now that mobile phones make knowledge sharing between them simple but much of grameen's capacity building is about general family upbringing - health, schooling, planting vegetables etc because we are talking about a context revolving around income generation and family nurturing of women within rural community- now if you want capacity building of say youth membership in slums maybe you should benchmark what http://jamiibora.org does ; conversely grameen increasingly looks at what it can do to develop the smartest of village youth (members children) because now a generation on its still taking in new illetrate female members whilst also connecting what the overall development club wants to see their next generation achieve- grameen recently opened a very exciting vocation training centre for youth and expects to replicate it and start up bottoms up employment agencies for young people but this is within the overall grameen mix of 100 social businesses http://mapgrameen.blogspot.com which include health and solar and mobile for the poor but are organised by different enetrpreneurial networks than the bank staff

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Permalink Reply by Chris Temple on July 24, 2009 at 5:51pm

I understand the Grameen model and have heard Professor Yunus say on several occasions that "Grameen bank is a University, and the loans are simply incentive to get people to come."
With that said, does Grameen do enough? In theory, the center meetings and 16 decisions sound great, but how about in practice? I spent a month in Bangladesh last year during which I visited villages and sat in on center meetings. I was instantly struck by how little advice was being offered to the borrowers in terms of business expansion, the environment, or health. For example, my translator asked all of the women at one of center meetings if they knew the 16 decisions, and only one out of the 30 women could recite them to us. This trend continued throughout my time there.

I am glad that you cited Jamii bora above, because I see them as an example of an organization that takes a more wholeistic and hands on approach to teaching their clients. Another great example is Fonkoze, started by Anne Hastings. www.fonkoze.org. Does anyone have any other organizations they feel have a more hands on method?

I am simply interested in hearing what people feel is the best approach to providing education to the borrowers while ensuring that they still maintain ownership over their own lives and businesses.

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Permalink Reply by chris macrae on July 24, 2009 at 6:37pm

well I have been to bangladesh 3 times, filmed dr yunus entrepreneurial leaders with 10000 dvds being given away so we can understand what grameen does http://yunus10000.com and I think there is a danger of "education" meaning all sorts of things and ending up doing none well if we try and overlay ideals on top of the actual system that each microcredit is designed around

one way that helps me map what's practical is to understand those services that a particular microcredit offers as franchises (where clearly a standard of service is learnt by the member) - I suppose grameen's biggest franchise is the mobile telephone lady (300,000) though the work by http://www.gshakti.org to develop 100000 solar village jobs by 2013 is perhaps even more inspiring

I dont personally believe it would ever be good uses of grameen's particular strengths to try and start business education in the village at a level beyond the general development knowledge its poorest members peer to peer share -now let's take brac- that's almost completely different; brac takes responsibility for developing a whole sector from the bottom up- so for example it looked at poultry; decided a villager couldnt make a living wage with ordinary village chickens; bred some superchickens but then found those need innoculation and so village microvets; put that altogether and the whole bottom up chicken industry involves one of 4 microfinanced jobs; breeding; para-vetting; egg laying; distribution of eggs to towns

interestingly brac seems to be the portal supplier of the internet to the whole of bangladesh (one such portal connecting its 30000 primary and 10000? senodary teachers) while grameen is the mobile standards explorer for the poor see http://www.grameensolutions.com ; these are huge developments of world leading significance for banks owned in trust for the poorest but I suspect it is:

jamii bora who is really going to have to be oh so different in the area you seem to be exploring as many of its members are city youth not rural householders;

do you have a bookmark to a talk on grameen bank as a university- whilst I study dr yunus talks with a lot of attention, I dont recall a stream of consciousness using those words as applied to poorest members

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Permalink Reply by chris macrae on July 25, 2009 at 7:16am

reflecting overnight there is something really great for me about grameen that this educational debate may be at the heart of

I love grameen for its minimum system interventions; conversely I am bothered by "wouldnt it be lovely to have this?" if this could risk being hi-cost and not central to the core poorest members

If I am right - and please blame me not grameen if I have got some details wrong - once opened a branch of about 5 people serve 4000 members at about 70 village centre locations each of which a branch member visits once a week to do the transactions; the branch staff are therefore already pretty busy

The main training (in terms of extra staff time comes at the 5 day paulo freire type induction of new groups of about 5 (often illiterate) poorest of the poor; once inducted they go to a centre where 60 people are communally organising and sharing peer to peer knowledge as well as keeping an eye out on whether each new member has chosen an activity that there is enough need for in the community to be income generating

Your challenge if you want to find a grameen compatible service for developing business acumen is how to design its cost structure to sustain itself , ie not add cost to any of the poorest of the poor services. One of DR Y's most persisent slogans is the less poor will drive out the poorest from any banking system design unless you always proactively ask does this suggested new concept benefit the poorest

One of my favourite grameen add-on products - though not training as such - is http://www.grameenkalyam.org - what health insurance can do you do for $2 per year per family. Secret 1 is to test and test and test small until you have found a low cost design- again I may have the details wrong but roughly what design grameenkalyam does is one kalyam centre serves 20 bank branches where it aims to prove its subscription worth to at least half of families -that's probably $80000 of annual budget. It is staffed by one doctor and 2 para-nurses whose job is to correctly diagnose what illness patients present themselves with as well as to relay early warning trends etc. Any solution to the diagnosed illness is an extra cost but kalyam aims to know the best value solution (see also how http://worldcongress.com organises extremely affordable poster competitions, and hilary clinton enjoys kalyam briefings!), and over time kalyam centres can test our remote technology or become feeded centres to the green children eye hospitals. They are therefore the system core to build the world's lowest cost rural national health system but to get anywhere near that they depend on what social businesses we all can connect in through almost free knowledge transfers. A crucial point is that kalyam sees itself as planting something that may take 15 years to or more to add anything like what you might regard as a full service but it has started in the minimalist member sustaining way. It has no fat and is impossible to pork barrel! This is also why we should never ask that poorest members try out something that is going to be expensive to trial.

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Permalink Reply by Lisa Kant on February 10, 2010 at 1:44pm

This is a great post from a Kiva Fellow working with AMK in Cambodia: Microfinance Will Not End Poverty, Microfinance Institutions Will

Microfinance is “the most visible innovation in anti-poverty policy in the last half century.” Because of this, many have put such high expectations on the effects of microfinance and the pace at which it can have an impact on ending poverty. Some have even called it the panacea for poverty.

The truth is, microfinance alone cannot end poverty and anyone who is involved in microfinance will tell you the same. But before you start freaking out and withdrawing all of your Kiva credit, let’s look at what microfinance can do.... (read the rest at the link above)

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Permalink Reply by Fehmeen Khan on February 17, 2010 at 3:25pm

I like the idea of microfinance because it develops societies in a bottom-up manner (as opposed to the top-down manner of the commercial sector), and empowers the weakest citizens (specially women) at the same time.

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Permalink Reply by Florian Wagner on February 26, 2010 at 1:21am

Micro-finance might be a viable tool to end the worst forms of poverty since it is starting at the grass-roots, and exercises a great degree of freedom on the client's side regarding what to do with the money. But it should be nothing more than an intermediary vehicle. When MFIs start educating people, providing health care they are doing what the state should do. So the question is rather how can the state be enabled to fulfill these tasks without relying on private/third sector services.
The aim of any such development related activities must be: how can we make us and the work we do needless? Since micro-finance has become a business and is on its way to become big business when Citigroup, Deutsche Bank, and other global players stepped in I cannot not see any attempts to make it needless. On the contrary, the debate on extending micro-loans to so-called developed nations rather shows that micro-finance is to become the new "education hoax". Some time ago education was, and still is, seen as the panacea for low-income, unemployment and development in general. It attained a quasi-religious status. Now, what did these campaigns achieve? Are people in the third world better off? How about their counterparts in the first? The gap between poor and rich is still widening, unemployment in Europe is rising, in the USA people need two or more jobs to survive. So, with extended micro-financing people might be a tiny bit better off, but they are also a great deal more dependent. And given the greedy bankers and their inability to manage funds responsibly in combination with the power they exercise I really cannot see how anyone would want to give them even more power. The proliferation of micro-finance would result in a further accumulation of corporate power and this has to be seen as an immediate threat to democracy.
I am willing to admit that in the developing world where democratic governance is more the exception than the rule and states are predominantly weak micro-finance in combination with educational servcies might empower people but in nations like the USA or European countries the introduction and promotion of commercial micro-finance has to be seen as a confession of failure of the state.

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