By now, anyone with an interest in microfinance or poverty alleviation has read the criticism. There are tragic crises in Andhra Pradesh, the regrettable stepping-down of Muhammad Yunus from Grameen, and provocative headlines in the media claiming to refute microcredit's effectiveness. However, I feel strongly that if readers listen only to the white noise, they'll do themselves and the microfinance industry a disservice and, more to the point, they'll be misled.
It's true that a few microfinance institutions and microlenders have behaved irresponsibly and, at times, negligently, locking already-vulnerable people into a cycle of financial dependency and over-indebtedness. But I strongly urge you not to paint all MFIs with the same brush. Most nonprofit organizations, including Opportunity International, are committed to using microfinance -- microcredit in combination with a diverse portfolio of financial tools tailored to people at the base of the economic pyramid -- to alleviate global poverty and build permanent financial independence. These organizations do not ignore their clients' tenuous financial situations or trap them into a cycle of dependency that makes any economic advance unsustainable without the organization's ongoing help. Opportunity International offers a long-term approach to microfinance that avoids over-indebtedness, and provides financial training and education, as well as safe places for clients to save and earn interest on their savings. We're committed to sustainability, not profitability. Our clients are able to build viable businesses that grow, employ their neighbors, and strengthen their communities. In addition, 93 percent of our clients are women. Though both our male and our female clients are hardworking and responsible, we know that when women earn an income they contribute more to the nutrition, education and welfare of their children, improving life for the next generation of a community. This is not just talk; these are real results that Opportunity and other organizations have found. Here's how we do it...
Microloans
A Trust Group is the first point of entry for loan clients with very small businesses who have never before accessed formal credit. The members co-guarantee each other's loans, eliminating the need for collateral. And because groups choose their own members, they select the (mostly) women in their community whom they know are trustworthy and responsible. If for some reason a client can't make a payment one week, the rest of the group will chip in or dig into a group emergency fund to cover her -- but the social structure means that a client will only ask for help when absolutely necessary so as not to risk disappointing the group. Our clients have a 95 percent repayment rate in four-month loan cycles.
Savings
Organizations do not need to tell clients to save. Many have been saving for years through informal savings collectors in their villages, by hiding it in each other's homes, or by burying it in their backyards. (For an eye-opening look at the complex but risky informal financial strategies employed by people in poverty, read Portfolios of the Poor by Daryl Collins et al.) To help clients avoid risky savings strategies, we offer a safe place to save with our regulated deposit-taking banks where they earn interest. In addition, many of our MFIs require that clients make a small savings deposit as a condition of getting a loan. This protects clients for whom one unexpected expense can trigger a slip back into extreme poverty. Opportunity is in these countries for the long haul and we develop long-term relationships with clients. Enabling them to weather difficulties without resorting to unsafe borrowing or saving practices is not only in keeping with our mission, it creates stronger clients who grow their businesses and become success stories we're proud to share with our contributors. These results matter to us.
Insurance
Whether it's through our banks in a particular country, or through our microinsurance subsidiary MicroEnsure, we know that offering insurance is crucial not only to protect our clients from personal and economic disaster, but to ensure their long-term financial health and resiliency. We know that for people at the bottom of the economic pyramid, one disaster can tip them back into poverty. We're constantly working to develop new insurance products carefully tailored to the needs and requests of our clients -- whether it be health, credit life, funeral, weather index crop insurance for farmers, or other products that help preserve families' financial stability.
Training
Training is a critical and permanent element of our work with clients. It's not enough to give people a small loan; it's not enough to give them a safe place to save or insurance to protect them. We must offer education in financial literacy and planning. Some of our clients are illiterate and some have never had access to formal banking before, so enabling them to increase their financial knowledge is crucial to their success. We also offer non-financial training with a goal to improve overall quality of life, which may include health, HIV/AIDS prevention, domestic violence, and more.
There's no doubt that the global problem of poverty and its solutions are complex, which is why the microfinance industry needs to approach them with eyes wide open and insist on transparency and results. We're committed to being open with clients and the industry. We treat clients as equal partners because we know the extraordinary amount of wisdom, ingenuity, dignity and courage it takes for them to work their way out of extreme poverty. We are with them throughout that struggle, offering the tools they need to permanently create a better life for themselves and their families. An end to global poverty does not happen overnight -- it takes time and a patient adherence to a strategy and mission. President Bill Clinton once said of poverty alleviation: "Our goal should be to work ourselves out of a job." For microfinance institutions in business for the right reasons, that is all we want.
1. For the sake of continuity and balance the much needed macro-finance is not readily and easily available as the micro-finance.
2. Such financing is not possible without the corresponding macro-economic interventions, and such interventions are unlikely because most Governments and the normal Banking system are
unwilling to adopt such measures.
3. Micro-finance organizations in the supply chain charge high interest rates to recover their high operating costs.
4. These organizations, in their effort to show a high recovery rate to ensure further financing, hide the high default rate by continuously restructuring the defaulted loans and creating a new loan.
5. This practice over the years have resulted in a situation that more than 30% of the money that has been disbursed as micro-finance loans are not recoverable.
The loan sharks just like the real sharks must continue to swim or they die.
Kadita Tshibaka was raised in extreme poverty in the DR Congo, but due to his family’s hard work and a timely college scholarship, he earned a bachelor of economics from Dartmouth College and an MBA from The Amos Tuck School of Business Administration. Until his retirement in 2007, Kadita was head of the Divisional Risk Management team at Lloyds TSB Group PLC, and prior to that he spent 33 years working in Citibank’s operations, ultimately serving as head of Corporate Credit Risk for Emerging Markets. Kadita has provided leadership and support to Opportunity International since 2003, joining the board of directors in 2008.
One thing you bring up that represents a critical shift in our thinking in development is your comment on the focus toward what those living in poverty are ALREADY doing to manage their funds. I think the critical question then becomes how microfinance can both capture and improve on the informal money management tools that people already use. You discussed this point on another blog post you wrote recently: http://cfi-blog.org/2012/05/16/tapping-into-the-potential-of-the-unbanked-in-the-drc/
Building on this theme, I wonder what the future of microfinance work will be--will we be more client-focused, paying attention to and building on what people are already using in the absence of financial inclusion? Or will we try to discern what products are needed using what has worked in the past?
No, sorry, even long-time microfinance supporters now concede that the accumulated evidence shows pretty conclusively that microfinance simply doesn't work to reduce poverty. The claims made for it on this basis were all nonsense. The poor would be made very much better off if the equivalent resources were invested elsewhere (health? infrastructure?) or else intermediated into small businesses with a much greater chance of being sustainable/equitable/growth-oriented. OK, a hell of a lot of microfinance providers will 'suffer' if the focus on microfinance ended, since they would have less chance to exploit the poor with high cost-no impact microloans. But most individuals (e.g., Vikram Akula, Eduardo Bazoberry and others) and the institutions they created (SKS, Banco Compartamos. Prodem and so on) have already sucked up so much money from the poor that I'm sure they would survive. Check out my short contribution on the issue here:
http://column.global-labour-university.org/2012/01/microfinance-delusion.html
Milford Bateman
I work for an Australian charity very similar to Opportunity International, except that through us, lenders have the option to withdraw their money once it's repaid. We work in the Asia Pacific and provide education to our borrowers as well, so they can grow sustainable businesses and manage their debts and savings. It's called Good Return – check it out now at www.goodreturn.org!