2010 Journal of Microfinance
Carolina Microfinance Initiative
Carolina Microfinance Initiative University of North Carolina at Chapel Hill Chapel Hill, NC 27514 www.carolinamicrofinance.com
Table of Contents Page 4 Microfinance Going Commercial: Consequences to Target Borrowers Sam Gu Page 7 Are Interest Rates Too High? Susan Dixon Page 8 Microfinance Regulation Justin Langdon Page 10 Empowering Women Through Microfinance Tobia Giachetti and Rob Sukumar Page 11 My Internship with the Grameen Bank Sana Ansari Page 13 Microfinance in Haiti Christina Ruge Page 14 Microinsurance: Granting Access to Health Care Ian Collins Page 16 Microfinance and Social Media Matt Neimkin
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Staff Editors-in-Chief Michael Kale, ‘13 Clara Kim, ‘11 Design Editors Susan Dixon, ‘10 Allie Pierce, ‘10 Contributors Sana Ansari, '11 Ian Collins, '11 Susan Dixon, ‘10 Sam Gu, '11 Tobia Giachetti, '09 Justin Langdon, ‘11 Matt Neimkin, ‘11 Christina Ruge, ‘10 Rob Sukumar, '09 Special thanks to: Beata Debinski Lauren Peterson Dan Kennedy
Forward Microfinance appears to be reaching maturity. While it faces an uncertain identity, it is clear that microfinance is moving in a positive direction. New lenders are coming online every day, and microfinance is front page news in the New York Times. On college campuses throughout the country students are working to ensure a bright future. Here at Carolina we are headed in our own new direction. This journal represents months of work on behalf of myself, my co-chair and our committee. It is our aim to promote awareness, educate and enhance the microfinance community and highlight the work we are doing as a part of the Carolina Microfinance Initiative. As the research and development committee we explored the various challenges facing microfinance today. We learned how microfinance is becoming increasingly commercialized. We examined various interest rates and types of regulation to make microfinance more productive. Our members also shared their own experiences as an intern at Graamen Bank, and shared their thoughts and views on the future of the field. Following the earthquakes in Haiti, we looked at the impact that microfinance was having there. We also looked into the future of microfinance with micro insurance and the use social media. Our peers in the Carolina Microfinance Initiative have brought numerous speakers to the university through our workshop series and have raised hundreds through our KIVA dinners. This summer we will be sending teams to work with various microfinance organizations throughout the world and we are already discussing how to expand our international presence next year. After our year of study it is clear to each and everyone of us that microfinance has a bright, but uncertain future. The microfinance community is well equipped to address the challenges of developing microfinance into a mature industry. -Michael Kale, ‘13 & Clara Kim ‘11
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Microfinance Going Commercial: Consequences to Target Borrowers By Sam Gu
The recent crises that have plagued some unsustainable MFIs have given rise to questions concerning the direction of the microfinance industry. In Morocco, for example, a microfinance bubble has recently developed due to the unsustainable expansion of MFIs and their inability to update internal controls, maintain responsible credit policies, and apply effective governance. Such trouble has threatened to derail the momentum of what, since its inception, has been a hot emerging industry. While most MFIs were originally local NGOs providing both financial and nonfinancial services and training to improve the welfare of their low-income borrowers, many have since become large scale, commercialized financial institutions supported by private investors. Many microfinance purists are concerned that this huge influx of private capital causes MFIs to abandon their poverty alleviation initiatives in the face of pressure to return profit. An important and controversial question has now been raised: does the commercialization of the microfinance industry by private capital prevent MFIs from fulfilling their social mission? While microcredit was created to alleviate poverty by offering financial services to those tradi-
tionally excluded from the formal banking system, microfinance institutions have become attractive investment opportunities to private investors. High growth rates, low volatility and steady returns on capital have draw major investment banks such as Morgan Stanley, Deutsche Bank, Credit Suisse, and Citigroup to create whole funds that offer investments in microfinance. Traditionally, smaller microfinance organizations on the grassroots level such as selfhelp groups have not strayed from their focus of improving the social welfare of their communities, especially focusing on the poorest of the poor and women. If one looks at larger MFIs that mimic regulated financial institutions in structure, one will find organizations working towards very different goals. MFIs such as Grameen Bank, BRAC, and ASA have become very large but still emphasize their social missions of eradicating poverty, reaching out to women, improving public health, etc. However, the industry of forprofit MFIs has become extremely attractive; in fact, six out of the ten largest MFIs (in terms of numbers of borrowers) in the world are now commercial MFIs. Furthermore, two of these commercial MFIs explicitly state that they are for profit. One of these is India‟s Spandana, which states its mission is to become the larg4
est provider of financial services and to maximize stakeholder‟s welfare (without discerning who is considered to be a stakeholder, meaning poorer and wealthier clients alike are both welcome). Similarly, BRI, another for-profit MFI in Indonesia, states its mission to be “profits for stakeholders”. This commercialization trend is especially prevalent in Latin America. Banco Compartamos, a MFI in Mexico, held a public offering of 30% of the bank‟s holdings in April 2007; the bank was soon worth 1.6 billion. However, commercialization is not necessarily a bad thing. Growing MFIs have legitimate reasons to commercialize in order to stay sustainable. MFIs have a high overhead cost; through commercialization, MFIs are able to gain easier access to outside capital, allowing them to leverage economies of scale for their own benefit so that they can stay sustainable and increase outreach to new clients. Some may argue commercialized MFIs cannot help but sacrifice attention to lower income borrowers, women or social initiatives in favor of increasing loan sizes and returns on capital. However, the corresponding „mission drift‟ that has accompanied the commercialization process has left some MFI supporters alarmed. Mission drift is a term applied to MFIs who are transitioning from an NGO to a regulated financial institution and have increased their average loan sizes in the process. From the perspective of poverty reduction, mission drifts produce negative
consequences because increased loan sizes reflect the fact that relatively wealthier clients are served at the expense of lower income ones. The best way to quantify a MFI‟s outreach to the poorest borrowers is to use average loan size as the standard of measurement. Studies have shown that as MFIs become commercialized, increasing competition and operation costs have led these averages to balloon. For example, the commercial MFI Banco Compartamos‟ loans run $450 on average, while the loans of noncommercialized MFI ASA averages around $67. Even though commercialization has afforded MFIs like Bancos Compartamos the resources to reach out and offer loans to many more low income borrowers, these institutions‟ rapid growth and lending practices have faced criticism from many microfinance insiders who emphasize the social imperative of the lending practice. Because Bancos Compartamos is a large, publicly traded company, it must charge borrowers higher interest not only to cover operation and management costs, but also to bring its investors their required rate of return. These higher interest rates hurt low income borrowers by increasing the costs of acquiring a loan. Muhammad Yunus, considered to be the father of microfinance, has been highly critical of Bancos Compartamos‟, which charges 94% interest rates on one-year loans and returned 25% in profit revenues in 2005. Yunus argues that “when socially responsible investors and the general public
learn what is going on at Compartamos, there will very likely be a backlash against microfinance.” Another example of a commercial MFI that has experienced mission drift is Bolivia‟s Bancosol, an organization that increased its average loan size of $326 from its founding in 1992 to over $900 in 2000 in order to stay competitive, while also relaxing its screening and penalization process to attract more first time borrowers. Complicating the problem is the fact that the quality of Bancosol‟s outreach has declined since its commercialization: the ratio of loan officers to borrowers has doubled and nonfinancial poverty reduction initiatives such as health education have been scrapped. MFIs that focus on a greater number of smaller loans ultimately face higher transaction and operating costs. It is no coincidence that out of the top ten MFIs, the average loan size for the four “poverty reducing” MFIs was around $175 while the average loan size for the other six commercial MFIs was around $1065.
The average loan size of a MFI has important implications. Larger loans are usually given out either because the client is relatively wealthier or because he or she has demonstrated an ability to repay previous loans. When the former is the case, larger loan sizes usually translate into less loans given to poorer clients (poorer clients receive smaller loans, especially for first time borrowers). The squeeze on these smaller loans has been felt most by women. According to the UNDP, women in developing nations constitute the majority of the poorest individuals. Therefore, increases in average loan size suggests that banks are decreasing the number of loans to women while allocating these funds to wealthier borrowers. In a four year study by Women‟s World
Photo courtesy of Addie Honeycutt, Guatemala 5
Banking which began in 2002, the percentage of women served by commercialized MFIs had steadily decreased by 4.5% each year, while noncommercialized MFIs only saw that figure drop by .25%. By the end of 2006, commercialized MFI loan portfolios were comprised of only 60% women borrowers, which paled in comparison to the 78% of women borrowers that received noncommercialized MFI loans. Women in developing countries are often unable to operate certain types of businesses, especially larger businesses, because social customs dictate that they spend the majority of their time maintaining their households. Women thus tend to operate smaller businesses that are close to their homes, which also means women often generate less revenue than, and cannot take on as much debt as, their male counterparts. Since commercialized MFIs target higher loan sizes, many poorer women are systematically excluded from loan opportunities. Even commercial MFIs have produced some social good. According to the Microcredit Summit Database, 2153 MFIs have reached out to over 90 million clients worldwide. However, this number pales in comparison to the 1.4 billion people in the developing world, who, according to the World Bank, live on less than $1.25 a day. If MFIs genuinely want to accomplish their mission of reducing poverty, they have a lot more outreach to do. However, MFIs cannot grow sustainably by relying only on private and government grants. A paradox
thus arises: MFIs must commercialize in order to attract investors so they can expand outreach efforts to fulfill their stated goal of alleviating poverty; however, these same MFIs must sacrifice some of their social objectives in order to secure such commercialization. The microfinance industry has consequently partitioned into two fundamentally different ideologies. One extols the traditional NGOâ€&#x;s purely social approach and views commercialized MFIs as predatory lenders who endanger the social mission of the microfinance industry. The other centers on microfinance as a social investment. These individuals defend their position by citing the rules of the market, and argue that the net impact of commercialization, which allows MFIs to serve more borrowers, outweighs the consequences of sacrificing a social mission. Both sides have compelling arguments for their case, and it therefore seems inevitable that the future of microfinance will head into two vastly different directions, one based on the social business model and the other on the market.
References Galema, Rients, and Robert Lensink. "Microfinance Commercialization: Financially and Socially Optimal Investments." Microfinance Gateway. www.microfinancegateway.org/gm/ document-1.9.41222/Microfinance% 20commercialization.pdf (accessed March 8, 2010). "MIX Market | Financial Data and Social Performance Indicators for Microfinance." MIX Market | Financial Data and Social Performance Indicators for Microfinance. http://www.mixmarket.org (accessed March 18, 2010). Armandariz, Beatriz, and Arian Szafarz. "Microfinance Mission Drift." Harvard University Department of Economics. www.economics.harvard.edu/faculty/ armendariz/files/BA%252BAS_01-309_FV.pdf (accessed March 9, 2010). Cull, Robert, Asli Demirguc-Kunt, and Johnathan Morduch. "Microfinance Meets the Market." Financial Access Initiative. www.microfinancegateway.org/ gm/document-1.9.31151/16.pdf (accessed March 8, 2010). Tassel, Eric. "Emerald: Article Request A study of group lending and incentives in Bolivia." Emerald: Welcome to Emerald. http://www.emeraldinsight.com/ Insight/ViewContentServlet? Filename=Published/ EmeraldFullTextArticle/ Articles/0060270716.html (accessed March 9, 2010). Barzelay, Jenna. " BancoSol: Mission Drift in Microfinance Institutions / Council on Hemispheric Affairs." COHA is an NGO specialized in monitoring Latin American and Canadian Relations for more than 30 years‌ / Council on Hemispheric Affairs. http:// www.coha.org/bancosol-mission-drift-in -microfinance-institutions/ (accessed March 23, 2010). "MIX Market | Financial Data and Social Performance Indicators for Microfinance." MIX Market | Financial Data and Social Performance Indicators for Microfinance. http://www.mixmarket.org (accessed March 18, 2010).
Sam Gu is a sophomore at UNC majoring in Mathematics and Economics.
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Are Interest Rates on Microloans Too High? By Susan Dixon
institutions (MFIs) base their interest rates on four factors: Cost of funds: MFIs have to pay to borrow Photo courtesy of Shelia Papa, Bangladesh money for Microfimicrofinance is a lending practice that nance loans. On average, the aims to alleviate poverty costs are 8.3% of the Gross through small loans. MiLoan Portfolio (GLP) per year. croloans to individuals are primarily used to start or stimuLoan loss expenses: Though late entrepreneurial businesses, defaulted loans are a considnamely in manufacturing, eration in formulating the intransportation, agriculture, or terest rate, they do not play a retail. Though microfinance major role because the amount loans are given to some of the of money lost when a borrower most impoverished individuals defaults is not very substantial. in the world, the interest rates Operating expenses , which that accompany these loans are include personnel and adminstaggeringly high. The interest istrative costs, consume the rates on microfinance loans difmajority of interest income. fer considerably by country, but Administrative costs include the worldwide average is about “rent, utility charges, trans26.4%, with a 95th percentile port, office supplies, and deinterest rates of about 70% and preciation of fixed assets.� a 5th percentile rate of15%. 1 Maintaining and ensuring Interest rates have been under these loans are paid back is an high scrutiny, with some proexpensive process. In counposing ceilings to be introduced tries where there are poor teleto standardize a maximum incommunication, transportaterest rate. However, it is imtion, and infrastructure sysportant to investigate the reatems, the cost to cover these sons why MFIs charge high inloans is elevated. terest rates in the first place in order to understand the possiProfits are clearly another ble alternatives. Microfinance incentive for MFIs to charge 7
high interest rates. This in itself is a controversial topic due to the ethics of banks seeking profits from the poorest of the poor. However, two thirds of the 555 sustainable MFIs are not-for-profit, meaning that the profits go back into the organization.1 To put the microfinance interest rates in perspective, some compare the interest rates between MFIs and commercial banks. Yet this is a crude comparison because the loans are very different. Most commercial loans are large, and the risk and operating costs associated with the loans are significantly lower. Therefore, commercial banks donâ€&#x;t have to charge a risk premium and can charge a lower interest rate on their loans.2 If MFIs attempted to match commercial interest rates, they would have to increase the amount of the initial loan. This would, in turn, cause a greater amount of indebtedness or cause MFIs to only give loans to higher income individuals, defeating the original mission of the MFI. Simply stated, MFIs must charge high interest rates in order to cover costs and stay afloat. Therefore, putting a cap on interest rates for the NGO MFIs would essentially put them out of business.,5 The default rate for MFI loans is about 4%, about half the rate on subprime loans made by US lenders. The low default rate indicates the successful repayment rate of microcredit loans, even in the face of high interest rates. However, there have been several instances of suicides, bullying, and humiliation because
individuals have not able to pay back their loans.4 Unfortunate as they are, however, these examples are generally the exception rather than the rule. It is also unclear as to whether or not the interest rate directly correlates to this problem. This is not to suggest that abusive lending does not occur at all. There are certainly a number of banks that abuse the high interest scheme to produce enormous rates and returns, and a benefit of a cap would be the elimination of unfair interest rates by these types of banks. Microfinance has transferred funds to the poor in a uniquely impactful way. The future of microfinance also looks bright; there has been a downward trend in microfinance interest rates over the last couple of years. While it is fair to criticize MFIs with unreasonable profits, most microcredit loans charge justifiable interest rates.
Susan Dixon is a Senior at UNC majoring in Environmental Health Science.
References: Research - World Bank Updates Poverty Estimates for the Developing World." Data & Research. http://econ.worldbank.org/WBSITE/ EXTERNAL/EXTDEC/ EXTRE-
SEARCH/0,,contentMDK:21882162~pagePK: 64165401~piPK:64165026~theSitePK:469382 ,00.html (accessed March 23, 2010). Rosenberg, Richard; Gonzalez, Adrian; and Narain, Sushma, “The New Moneylenders: Are the Poor Being Exploited by High Microcredit Interest Rates?” CGAP Ocassional Paper No. 15 (2008). SSRN. Web. 7 Feb 2010. Fernando, Nimal A. Understanding and Dealing with High Interest Rates on Microcredit. Asian Development Bank, 2006.
Hamm, Steve. "Setting Standards for Microfinance." BusinessWeek Online (2008): 21. Academic Search Premier. EBSCO. Web. 7 Feb. 2010. "Microsharks." Economist 380.8491 (2006): 6263. Academic Search Premier. EBSCO. Web. 7 Feb. 2010 Uhlfelder, Eric, and Ilma Ajanovic. "Micro Loans, Solid Returns." BusinessWeek 3932 (2005): 100-102. Academic Search Premier.
Microfinance Regulation By Justin Langdon
Licensing is one of the most critical components of MFI sustainability. Unfortunately, it is difficult to determine the best method of regulation as MFIs are a relatively new phenomenon. Although a contentious topic, a “tiered” regulatory framework is currently the most widely accepted method of proposed regulation. This technique discredits a “onesize-fits-all” methodology and instead breaks MFIs down into tiers based on the institution‟s method of acquiring capital; an approach that tailors the type of regulation to the type of MFI. Joselito Gallardo provides a methodology for breaking MFIs down into the categories that require their own form of external regulation. All MFIs that leverage other people‟s money are labeled Category A, those that use the organization‟s members‟ money fall into Category B, and the institutions that use the public‟s money are in Category C. It is important to note that small, informal member-based MFIs that receive capital from the community do not perform 8
any activities that require external regulation. Category A primarily applies to NGO microcredit organizations and is further broken down into two sub-categories depending on if its funds are solely donations from the general public or if the MFI receives additional funding as a commercial loan. The proposed form of regulation for donor-funded MFIs is simply to officially register as a non-profit organization, which is a non-prudential, easily achievable form of regulation. No significant regulatory framework is implemented for these MFIs as, provided they operate properly and do not lend more than they receive in donated funds, they take no action that warrants the need of prudential regulation.3 For the second sub-group of Category A MFIs, a form of prudential regulation is deemed necessary as the additional funding via the commercial borrowing generates an added liability. It is suggested that these forms of MFIs should register as a limited liability company (LLC), undergo ratings from a
credit rating agency, and become licensed by the host nation‟s central bank authority as a non-bank finance company. The regulatory authorities for the second sub-group‟s more intensive regulation would require supervision from the nation‟s registrar of companies, central bank authority, and its securities regulatory agency.3 Category B MFIs are owned by a group of members who share a common bond. These members thus collectively fund the microcredit organization through their own donated share capital and deposited savings. Because there is an inherent conflict of interest among members, regulation is deemed as necessary. To remedy this issue it is proposed that Category B MFIs register as a financial cooperative, or a “co-op,” and undergo supervision from the state‟s registrar of cooperatives or the state‟s central bank authority.3 Category C MFIs are financed through the combination of share capital, commercial loans, wholesale deposits, and retail public deposits, i.e. interest is returned to the investor. These added sources of financial capital incur additional liability, necessitating regulation. The suggested regulation for this category is very similar to that of Category A. It is proposed that these MFIs register as a LLC and become licensed by the state‟s central banking authority as a Non-Bank Financial Institution with the regulating authority being the registrar of companies or the central bank authority.3
Ghana is a nation that exemplifies the inability of MFIs to reach the vast market in need of microcredit, as Gallardo states “large portions of the bankable public, particularly microenterprises and small businesses, [have] limited or no access to convenient credit and savings options.” PRODEM, an MFI located in Bolivia, illustrates how licensing can allow for the expansion needed to provide microcredit service to a larger share of the market. This MFI, once a licensed commercial bank, was able to expand its active/ repeat borrowers from14,300 to 80,000 active loan accounts in just 7 years, resulting in the single MFI capturing about 20% of the nation‟s potential microcredit market. Microcredit is a relatively recent phenomenon and the need for sustainability is ever more salient. A vital step for achieving long-run sustainability lies within the adoption of a regulatory framework. The tiered method as laid out above divides MFIs into three groups dependent on the source of the organization‟s capital. By making the source of money the distinguishing factor for each tier, a common form of regulation can be implemented for all of the MFIs that fall into that specific tier. Regulation helps allow NGOs and semi-formal MFIs to become formal lending institutions and thus grants them an augmented access to the finan9
cial resources the commercial market has to offer. With greater financial leverage, a greater market outreach and sustainability for the long run can become truly feasible.
Justin Langdon is a Junior at UNC majoring in Political Science/ Economics.
References: Christen , Robert, and Richard Rosenberg. "The Rush to Regulate: Legal Frameworks for Microfinance." 2000.http://pdf.usaid.gov/pdf_docs/ PNACL635.pdf (accessed March 15, 2010). Gallardo, Joselito. "A Framework for Regulating Microfinance Institutions: The Experience in Ghana and the Philippines." November 2001.http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=634468 (accessed March 15, 2010). Steel, William F. “Microfinance Regulation and Standards: Issues and Experience”, presentation at World Bank Institute Distance Learning Course for Ethiopia, Ghana, Uganda and Tanzania on “Microfinance and Poverty Alleviation: What Have We Learned”, The World Bank: Washington, DC, December 15, 2000.
Empowering Women Through Microfinance By Tobia Giachetti and Rob Sukumar
by a professor at the London School of Economics showed that men in devel-oping Latin American countries tended to spend between 5068% of their income on their families and household, while women reinvest all of their income in their family and household.
Courtesy of Shelia Papa, Bangladesh
One of the major obstacles against growth in developing countries is gender inequality. Women are often restricted to child-bearing and house-hold tasks that limit their financial independence and influence within the community. Microfinance organizations like Grameen Bank challenge this by offering impoverished women small loans to start businesses.
sonal empowerment, and that 29 percent of them were able to stop it through group action. Microfinance organizations require women to form groups in order to receive loans. These solidarity groups help keep everyone on time with their loan repayments, but also help women stand up against oppression and abuse.
Microfinance not only helps women establish a source of income, but empowers them by giving them the means to make more decisions in the family and community. A study done by the Working Womenâ€&#x;s Forum in India showed that 41 of its members were able to stop domestic violence through per-
Microfinance is particularly pertinent to women because over 80% of micro-loans are given to women. Women quickly proved to be better credit risks than men. In the developing world, income generated by women goes to business and family matters at a greater rate than the income generated by men in the household. A study done 10
The fact that women put a priority on produc-tive business activities and the family makes them powerful agents against poverty. The greater household spending generated by microfinance-funded businesses leads to better housing, health care, education, and food for children. Equally important, women are more likely to treat their female children as well as their male children. All these extra benefits provided by microfinance are steps towards ending poverty in the develop-ing world, where infant mortality, lack of education, and low life expectancy are common characteristics. Despite the successes of microfinance, women of the developing world face many challenges when it comes to financial empowerment . Tobia Giachetti and Rob Sukumar are graduates of UNC
My Internship with the Grameen Bank By Sana Ansari
My four-week internship at Grameen Bank last summer was a life changing and highly inspirational learning experience. Before I came to the internship, I imagined it to be a rigid program in which interns were assigned specific tasks involving pressing Grameen initiatives. I was impressed by the reputation and mission of the Bank, and pictured it to be an extravagant, technologically-advanced building. When I first stepped into Grameen, I was not expecting a 21 story building with no air conditioning. I was also surprised by how the internship was conducted;
Grameen was not selective in their internship process and accepted interns from all areas of the world who were studying in different fields in their universities. What struck me most, however, was how little Grameen seemed to expect of their interns. The internship was more of a learning process, structured so that student can learn as much as possible about how Grameen functions as an MFI. To its credit, this learning process entailed plenty of village trips and sister company visits. And not only does Grameen teach its interns about its Courtesy of Allie Pierce, Bangladesh
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own institution, but it also exposes them to other NGOs working in areas where Grameen has not yet achieved success. For example, Grameen has not yet developed nor implemented an urban microfinance program, yet one of Grameenâ€&#x;s programs involved taking interns to a local urban center meeting run by another MFI. I believe Grameenâ€&#x;s internship program is effective in exposing people to what they do. During the first week, I felt frustrated because Grameen did not have any substantive tasks for its interns. I came to Grameen with the expectation of being able to have a direct impact on poverty. Students from Western universities define an internship as an employment or a job, but Grameen defines it as a learning experience. At first I did not understand why Grameen would advertise a learning experience as an internship, but I soon realized that because of the language barrier, there was actually little an intern could do. Interns relied on Bengali translators during their village visits to talk to local borrowers or to talk with rural branch managers and sister company of-
fices. It would only be appropriate for Grameen to keep their work related files in Bangla, and as such, it would be difficult to find enough work for interns. The first real exposure I had to observe how Grameen Bank operates was the 4-day village trip. I, along with two other girls, went to the Cholangra District to observe center meetings and interview borrowers. A Grameen translator was not needed since we had a native Bengali speaker among our three person group, and along with a branch officer who gave us privacy during our interviews, I felt as if the borrowers were very open about their feelings and experiences. I quickly learned that a majority of the female borrowers gave their loans to their husbands, which troubled me about Grameen‟s program. Their mission statement is to alleviate poverty through the empowerment of women, yet I was seeing little empowering since most women who were receiving loans were still staying in their homes. When we visited the Grameen area office and interviewed the area manager, we asked him how Grameen defines empowerment because we were not witnessing a change in the status of most women. He replied that the main goal of Grameen Bank is to let the women do
something with their capital so that they are not completely dependent upon their husbands. Grameen Bank is not trying to revolu-
Grameen, which, despite the worldwide attention it receives, still operates in a simple, barely air-conditioned
“Their mission statement is to alleviate poverty through the empowerment of women.” tionize the status of women, but they hope to give them some control over making certain family decisions. This discovery helped me understand the cultural and societal barriers that Grameen cannot tackle alone. Bangladesh is a Muslim country, so there are many religious norms practiced by the men and women. Women normally observe the purdah and thus they find it inappropriate to sit in store fronts to attract attention to themselves. The women borrowers in the village found no problem giving their loans to their husbands since it is customary for women to not work outside their homes. The Western concept of empowerment differs greatly than that of the East, and would be abnormal to apply it to all parts of the world since gender disparities differ so heavily everywhere. During the course of the internship, I learned to better appreciate and understand Grameen‟s programs. I appreciated the humility of 12
building. I cherish my interactions with the rural women and their children and with all the Grameen staff, despite feeling so agitated by heat. I am truly blessed for all my experiences and my four weeks there and I wish Grameen the best of success for all of its future endeavors.
Sana Ansari is a junior at UNC majoring in Public Policy . She interned with the Graamen Bank during the summer of 2009.
Microfinance in Haiti By Christina Ruge
The earthquake that hit Haiti this past January has devastated the country‟s people and economy. Almost 250,000 individuals have died, over 300,000 were injured, and the capital, Portau-Prince, now lies in ruins. Even before this natural disaster, Haiti was the poorest country in the western hemisphere with an average GDP of $790 and an estimated unemployment rate of about 70 percent. Now, more work than ever must be done to rebuild the troubled nation. While humanitarian aid and donations are imperative, another option needs to be given strong consideration: microfinance. Before the earthquake struck, microfinance was already a significant component of Haiti‟s economy. The largest microfinance organization in Haiti, Fokonze, had more than 50,000 clients by the end of 2009. Fokonze calls itself an “Alternative Bank for the Organized Poor” and provides its patrons with financial services as well as literacy and lifeskills programs. Because of low rates of loan default, the bank was in a position to begin offering former clients larger loans governed by a more formal system of policies and procedures. Now
that parts of Haiti are almost completely destroyed, these plans will be deferred for some time. Port-au-Prince‟s infrastructure, badly crippled by the earthquake, is now less conducive to economic activity. Government institutions, schools and hospitals are destroyed , and streets are still full of dirt and debris. More than 600,000 citydwellers fled to the countryside in what the New York Times has called a “mass exodus”. Fokonze was hit hard; many of its offices were demolished, and employees were killed, injured, or became homeless. The organization says its “highest priorities right now are establishing an emergency operations center; obtaining cash so clients can withdraw cash transfers and savings, and access new loans.” The bank is also guaranteeing clients that their funds are secure. By the beginning of February, the bank had already brought in $2 million in cash from Haitians working in the US and re-opened many of its branches before commercial banks did. Today, more than two months after the catastrophe, living conditions in Haiti, even in the areas rela13
tively untouched by the earthquake, remain intolerable. International aid is concentrated in the capital, so the process of reconstruction is forging ahead at a faster pace in Port-au-Prince than in regional areas. The microfinance industry in Haiti is now facing the challenge of making capital accessible to the broader public to help them rebuild their homes and businesses. It must be kept in mind, however, that microfinance institutions like Fokonze are not relief agencies. The purpose of microfinance is to provide people without access to traditional banking services with the financial means to escape poverty and develop some degree of financial self-sufficiency. This can include the purchase of an asset and, in the case of earthquake-ravaged Haiti, the reconstruction of a family‟s home, small business or whatever a group or individual needs for basic wellbeing. There is hope for this kind of aid, since thousands of Haitians have experience with microloans and institutions like Fokonze. As with all other microfinance clients around the world, the people of Haiti will learn how to benefit from the inspiring empowerment of a microloan. However, neither the Haitian people nor the microfinance institutions can rebuild Haiti
without international support. A great way to get involved is to contribute to the several fundraising campaigns that have been launched by organizations like ACCION international, the Grameen Foundation, and WOCCU, or to donate directly to Fokonze. Funds are desperately needed in both the short term for immediate help, and in the medium and long term to ensure that the microfinance industry in Haiti will flourish again.
Christina Ruge is a Senior at UNC majoring in American Studies Major . She will be returning to Germany upon completion of her senior year.
Microinsurance: Granting Access to Health Care
By Ian Collins
Micro-insurance is, in its most basic form, insurance with low premiums that ensures future economic safety. “Micro” refers to the fact that it targets the lower end market through inventive cost structures, premium packages, and terms of coverage. Microinsurance is a solution for those who have been economically excluded from basic insurance. It is a financial arrangement to protect lowincome families or organizations from specific problems or disasters that could potentially ruin them financially if they occurred. Like normal insurance, micro-insurance is by no means a “one-size-fits-all” structure, but can be developed in different forms; however, unlike normal insurance, 14
Courtesy of Lauren Peterson, Peru
it is much more accessible to those with limited means. In developing countries, where micro-financing is more prevalent, individuals that own businesses backed by microfinancing or that own or work for any business, for that matter, are always at a very high risk of losing their financial security. Unexpected shocks can often erode hard-earned gains. In situations where either the “breadwinner” of a household becomes sick or dies or where an important asset of a business is destroyed, poor people generally do not have savings to sustain their business and family at the same time. In addition, because they do not have any form of insurance, they are not com-
pensated for these losses and are forced to suffer the severe economic hardship as a result. In many cases, the poor are forced to liquidate assets, such as land or livestock, which are helping them gain money for the future. This liquidation solves immediate, short-term needs, but it only digs them into deeper holes later on when they have no income flow. Essentially, what the poor need is an affordable way to protect themselves from risks that could potentially ruin them. One potential solution to this need is micro-insurance.
members. It is bad because the pooled funds are not sufficient to help everyone in a catastrophic situation or to sustain a single family for an extended period of time. In many places, burial societies are another form of a micro-insurance scheme. Members of the communities will make small regular payments to a communal fund and in return are ensured the fullpayment for the burial of their family members. Some microfinance organizations have begun to include credit-life policies in their contracts with entrepreneurs. In this situation, if the person taking out the loan dies during a loan cycle, the insurance company will cover the cost of the standout loan as well as pay for the lump sum cost of the funeral. This can all be paid for with a small premium. One organization, Uganda Micro-care has recently offered health coverage for low costs. It has also researched the idea of crop insurance for farming communities. Generally, however, formal insurance such as health insurance is unafford-
One of the advantages of microinsurance is that it is very flexible and can be implemented in many ways by creating a microinsurance scheme. This is an insurance mechanism whose beneficiaries are people excluded from formal social and economic protection schemes. Generally, it is implemented in a communal setting much like micro-financing. One type of usable system is called a Rotating Savings and Credit Association (ROSCA). In this system, an individual makes regular contributions to a group pool. The fund that is created by group pooling is then handed “Unexpected shocks can often out to an indi- erode hard-earned gains.” vidual on a weekly or biweekly basis. able to the poor unless it is Through this system, individusponsored by a microfinance als can expect to receive periagency. odic lump sums of cash. In addition, when faced with a cerWhile some of the suggested tain emergency, individuals can options would make large imwithdraw their “turn” early. pacts in the lives of the poor, This type of system is good bemicro-insurance has failed to cause it is flexible and it creates take hold in the international bonds between community 15
community. Some of this failure stems from significant technical deficiencies: lack of sufficient funds to meet large and unpredictable losses; lack of adequate risk distribution; and lack of competent talent for underwriting, claim and fund management. But much of this failure stems from a lack of knowledge about what microinsurance is and a lack of trust in loan organizations. Stepping up consumer education and working to create trust in the affected poor communities could do much to rectify this situation.
Ian Collins is a Junior at the University of North Carolina at Chapel Hill
Microfinance and Social Media By Matt Neimkim
Why have social movements gone digital? The transformation is largely due to “social media.” Technological innovation and the lowered costs of communication that have resulted have sent all types of social causes to the Internet; microfinance is no exception. Social media communities such as Facebook, Twitter, bookmark aggregating websites (i.e. Digg, StumbleUpon), and blogs have allowed grassroots organizations to connect with a global audience. Pertaining to the world of microfinance, these new forums for communication have facilitated the growth of online peer-to-peer lending websites and communities like Kiva, United Prosperity, Dvelo, MicroPlace, and Wokai. These online forums allow community members to lend to impoverished entrepreneurs via their locally based microfinance institutions (MFIs). Alternatively, microfinance related blogs and forums now allow individuals to communicate with one another and stay up-to-date with industry news. While social media has undoubtedly empowered microfinance to continue making positive impacts on many lives and the industry as a whole, the subsector is by no means devoid of its critics. Before turning to the problems plaguing internet-based microfinance, it is important to emphasize the achievements of the
online microfinance communities. To begin, social media has invariably brought greater transparency to the industry. Blogs and online forums serve as an accountability mechanism for the microfinance world. Members that are active in the online community are quick to draw attention to MFIs and their intermediaries that are not performing their job adequately. In a relatively recent example, Kiva was denounced by its own community members via its own forum, www.kivafriends.org, for utilizing misleading marketing strategies regarding the impact
ogy have also increased discussion and experimentation with cell phones as a means to increase loan access to the rural poor. Short message service (SMS) has been proposed to cut administrative and other transaction costs within MFIs, enabling expanded coverage.3 On the flip side of this technological coin, there are many well-documented concerns. The most prevalent issue is that technological innovation will detract from person-toperson contact, considered a major factor in the high repayment rate of loans.3 Following this rationale, the web of social media can only extend so far before repayment rates begin to decline.
Straining person-to-person contact, social media—and technological innovation more generally—also exerts competitive pressures on MFIs and their website intermediaries to raise consumer awareness in order to augment their market share. In spite of claims that media “Social media has undoubtedly social serves as a correcempowered microfinance.” tive mechanism through which of a microloan while also pubtransparency is ensured, Kiva licizing false person-to-person still misrepresented their loan connections that were repremodel. In an effort to personalsented on the website. ize their loan efforts, they stated that people loaning money through the website could Social media has also inchoose an entrepreneur.1 In accreased public awareness of tuality, the money goes to a mimicrofinance. Bhalchander crofinance institution that adVishwanath, founder of United ministers the loan.1 Thus, Kiva Prosperity, cites social media— fell victim to social media while blogs, Facebook, Twitter—as a making an attempt to capitalize significant factor in raising on its potential. awareness about the organization.2 Innovations in technolThe personalization efforts 16
References Timothy Ogden 2009. “Kiva's Cautionary SocialEntrepreneurship Tale”. BusinessWeek, October 19. http:// www.businessweek.com/ managing/content/oct2009/ ca20091020_373698.htm D. Murali 2010. “Financing a silent entrepreneurial revolution”. The Hindu, February 3, Business Section. http:// beta.thehindu.com/ business/article99971.ece 2
made by Kiva and other online lending websites have confused some lenders, leading them to mistakenly believe that loans are merely a form of charity. In a recent testimony to the US Committee on House Financial Services, Damian von Stauffenberg, Chairman of Microrate, stated that inefficiencies are created when lenders need to give a loan more than the MFI needs the funds.4 Von Stauffenberg, stressing the importance of viewing MFIs as financial institutions, said, “In our ratings we have seen a fairly consistent link between the degree of dependence on donor support and a general lack of excellence of an MFI.” 4 In sum, there are many good things to be said about the effects of social media in the world of microfinance. Social media has spurred greater transparency, increased the impact of microfinance, and lowered transaction costs for MFI‟s and their online lending platforms. Yet, with these innovations have come new sets of challenges. Person-to-person contact cannot be digitalized,
Courtesy of Shelia Papa, Bangladesh
and microfinance and its institutions must ensure they preserve the social relationship with their borrowers that are so important to the success of the microfinance model. The insistence on personal contact should coincide with checks on the expansionary pressures for microfinance organizations in order to decrease potential false advertising and the misconception of microfinance as charity. While social media holds tremendous growth potential for microfinance related organizations, it is important that this potential complements the tangible benefits already put forth by microfinance instead of merely replacing them with a prettier digital gloss.
Matt Neimkim is a Junior at the University of North Carolina at Chapel Hill. He is an International Studies/Business Double Major.
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SocialEarth. “#Mifimon: Social Media, Text Messaging, and Microfinance”. http://www.socialearth.org/ mifimon-social-media-textmessaging-and-microfinance 3
4 Nagesh
Narayana. “Microfinance requires no donor money, says MicroRate chief Stauffenberg”. Microfinance Focus. February 2, 2010. http:// www.microfinancefocus.com /news/2010/02/02/ microfinance-requires-nodonor-money-says-microrate -chief-stauffenberg/
CMI seeks to promote awareness, education, and engagement about the field of microfinance and related issues. We accomplish these goals through a diversity of different teams. CMI's role is to not only educate our community about microfinance and facilitate a flow of monetary support for microfinance, but also to provide MFIs with the human capital they need to ensure that they are using such financial support to make an optimal impact in their communities. As such, at the core of CMI's mission is training and educating college students to positively and sustainably support microfinance programs around the world.
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