Date: 29th May 2007, 5.45-7.30pm
Location: Barclays, One Churchill Place, London E14 5HP
Network link: Microfinance club
Discussion of new book taking a critical look at the affects of micro-finance and the impacts on the poor. These are notes from the session presented by the authors.
Overview:
Pace of Microfinance is like a machine that is running fast. It is time to have a look at the progress and re-appraise our actual achievements in order to counteract any exaggerated claims. The phenomenon has been fanned by the recent Nobel prize for Grameen Bank, and considerable interest has been raised.
In order to ensure that attention and funds are directed where they can make the best impact on poverty a re-evaluation is urgently needed. There is very poor quality of actual data available and a lot of the success of microfinance is anecdotal at best. However, estimates suggest that 500 million people have been affected by microfinance in over 100 million households
This talk sets out to provoke a number of questions, in service of a better solution for the worlds poor. Issues that were raised during discussions about mf:
- Promotes debt not savings, and does not offer a full financial solution
- Often excludes the very poorest, and even within schemes the poorest tend to have the lowest levels of improvement in favour of those with higher income potential
- Under utilised and does not combine with other community development services such as health/education
- Does not create jobs and so does not build a strong sustainable local economy, but does create self-employed informal workers
Pod groups
Microfinance loans are typically organized in pods with shared credit exposure, these pod effectively guarantee the loans of the whole group and have weekly meetings to collect debts and discuss progress
- Very time consuming for the borrower hours lost from working of childcare to attend sessions
- Drop-outs often face sever implications from society which has led to suicides and group conflicts not covered by press
- Promotes mistrust and self-policing attitudes
- A better model may well be individual loans as proposed in Grameen2.
Gender empowerment
Microfinance has high uptake from women (95%) and are considered to be more reliable due to higher levels of repayment. Studies from University of Maine suggest that MF adds considerably to a woman’s workload and they would prefer wage employment.
Women do tend to be sole traders in the informal market, often distributing goods for more wealthy individuals. As such they are unlikely to become employers and do not enlarge the local economy.
Women are easier to intimidate in the group, and can be subject to abuse. They are rarely given training to develop themselves and their “business”.
Cost of capital
Once the costs of administration and other supporting services have been added to the base interest rate the affect cost for a loan can be very excessive for the borrower e.g. 80%-100%.
Where as this is lower then other means such as money lenders, the implication is that the borrower is supporting a pyramid of costs including several highly paid support staff, loan officers etc. As a result microfinance is not suitable for some sectors, especially farming which rarely produces returns above 50-60%.
Economic model
MF is debt based, typical economic development begins with savings models and proceeds to leverage unused capital. There is no evidence of a sustainable economic system that began with debt. MF does not provide capital for small business or housing, the typical economy created is petty informal short-term sole trading, which is highly susceptible to shock.
Transparency
Poorly measured, with little rigour, rely on anecdotes and heart warming stories. “Repeat borrowing is often quoted as a success measure. So what we are really saying is that these people paid of their loans and then came back to borrow more. Is that success? The same behaviour can be seen with drug users yet we consider increasing need and dependency as bad."
Not enough data is available to look at the purpose of loans or track the progress of “Borrowers”, there is some evidence that consumption smoothing is a major use of mf, often to pay off money-lenders.
Jumping on the bandwagon
The current media attention could potentially be diverting attention away from better interventions for the poor. There is evidence of a considerable amount of money entering the system looking for investment homes. Potentially 20-70% of current funds are unallocated waiting for assessment. A number of new investment funds have entered the market with $7-10bn potentially in the pipeline from 90 new funds in 2007.
The poor of the world may not have the capacity to handle that volume of debt, and there is not that much effective demand for capital.
Notes:
Organization looking at helping progress rural farmers in Mozambique
http://www.technoserve.org/strategy-1.html
Useful links:
Purchase the Book http://styluspub.com/books/BookDetail.aspx?productID=165037
Microfinance club http://www.microfinanceclubuk.org/
Grameen Bank site http://www.grameenfoundation.org/
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