Microfinance

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Microfinance is a term for the practice of providing financial services, such as microcredit, microsavings or microinsurance to poor people. By helping them to accumulate usably large sums of money, this expands their choices and reduces the risks they face.[1] Suggested by the name, most transactions involve small amounts of money, frequently less than 100 USD.[2]

Contents

[edit] History

Microfinance is often dated to the 1970s. Only then, did any programs pass two key tests:

  • show that people can be relied on to repay their loans, and
  • show that it's possible to provide financial services to poor people through market-based enterprises without subsidy.

Recent evidence gathered by Timothy Guinnane, an economic historian at Yale, raises questions about this view. Guinnane demonstrates that the success of Friedrich Wilhelm Raiffeisen's village bank movement in Germany, which began in 1864 and reached 2 million rural farmers by 1901, resulted in large part from its ability to pass both these tests.

Guinnane shows how the village-based bonds of associations of these early cooperatives gave them both the information and enforcement advantages needed to make loans to people who were both too poor and too remote to access bank loans.[3] Raiffeisen was moved to action by the poverty of the recently freed serfs, and by the degree of exploitation they faced from local moneylenders.[4]

The caisse populaire movement founded by Alphonse Desjardins in Quebec, also met these tests. Desjardins and his wife Dorimène must have had strong faith in these principles. From 1900, when he founded the first caisse (which she managed), until 1906, when a law governing them was passed in the Quebec assembly, they both risked their personal assets for the liabilities of the entire movement.[5].

Like Raiffeisen, Desjardins was concerned about the poverty. But he was spurred to action by his outrage over usury. In 1897 as parliamentary reporter, he learned of "one notable [court] case in Montreal within the last few days, in which a man obtained a loan of $150, and was sued for, and was compelled to pay in interest, the sum of $5,000".[6]

In the 1970s, a new wave of microfinance initiatives introduced many new innovations into the sector. In the early 1970s, several pioneering enterprises began experimenting with loaning to the poor and underserved. An early pioneer of microfinance at the time was Akhtar Hameed Khan.

The first fully-incorporated microfinance and community development bank was ShoreBank, founded in 1973 in Chicago.[7]

Economics professor Muhammad Yunus is often credited with disbursing the first microloan in Bangladesh in 1974.[8] He later went on to found the Grameen Bank and was awarded the 2006 Nobel Prize for his efforts.

[edit] Composition

Microfinance is composed of many finance services such as loans, credit (See microcredit), insurance, etc, run on a smaller scale.[9]

[edit] Criticism

There is, however, criticism towards microfinance institutions. In 2001, a Wall Street Journal article raised the questions regarding the Grameen Bank,[10] including repayment rate, collection methods and questionable accounting practices.

On a larger scale, some argue that an overemphasis on microfinance to combat poverty will lead to a reduction of other assistance to the poor, such as government welfare.[11]

Research on the actual effectiveness of microfinance as a tool for economic development remains slim, in part owing to the difficulty in monitoring and measuring this impact.[12] Questions have arisen regarding whether microfinance can ever be as important a tool for poverty alleviation as its proponents and practitioners would submit.[13]

[edit] Key debate

Perhaps the most central debate within microfinance has been whether institutions should focus on impact, i.e. improved living standards for the poor, or financial sustainability. The former approach has been called 'poverty lending' or 'the welfarist approach', whereas the latter is sometimes termed 'the institutionist approach or 'financial system approach' [1]. Whereas the welfarist approach often supplement financial services with other services such as education and health the institutionists focus solely on financial service. The argument for this is that only by ensuring financial sustainability can the huge demand be met. Examples of the welfarist approach are Grameen Bank and Women's World Banking. Examples of the institutionist approach are ACCION International and BRI Unit Desa.


[edit] Institutions

Many institutions practice microfinance, or raise funds for microfinance, including the following:

[edit] Funding Institutions

  • The EBRD, alongside other international financial institutions, has invested inter alia in ten dedicated microfinance banks in Southeast Europe. [Webpage on EBRD of MFC.org]

[Webpage of the EBRD on microfinance and Kosovo

[Webpage of the EBRD on microfinance and Bosnia

[edit] Notes

  1. ^ Rutherford, Stuart. The Poor and their Money. Oxford University Press, Delhi, 2000.
  2. ^ Fairfield University :: Dolan School of Business :: Center for Microfinance Advice and Consulting (CMAC). Fairfield University. Retrieved on January 2, 2007.
  3. ^ see especially Co-operatives as information machines: German rural credit co-operatives, 1883-1914. (Journal of Economic History Vol 61, No. 2. June 2001.) and Regional organizations in the German co-operative banking system in the late 19th century. (Research in Economics, Vol 51. Academic Press Ltd., 1997.)
  4. ^ an interesting work on nineteenth century microfinance is Henry W. Wolff, People's Banks: A Record of Social and Economic Success, P.S. King & Son, London (1910).
  5. ^ http://www.biographi.ca/EN/ShowBio.asp?BioId=41452&query=Desjardins
  6. ^ Ronald Rudin, In Whose Interest? Quebec's Caisses Populaires: 1900-1945, McGill-Queens University Press (1990).
  7. ^ Mark Thomsen, ShoreBank Surpasses $1 Billion in Community Development Investment, SocialFunds.com, 2001-10-01. Retrieved 2007-02-07.
  8. ^ Bruck, Connie. "Millions for millions:This year’s Nobel Peace Prize winner and some high-tech entrepreneurs are competing to provide credit to the world’s poor", The New Yorker, 2006-10-30. Retrieved on January 10, 2007.
  9. ^ CGAP: About Microfinance. CGAP. Retrieved on January 1, 2007.
  10. ^ Pearl, Daniel, and Phillips, Michael M., "Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a Repayment Snag", The Wall Street Journal, p. A1, 2001-11-27, URL retrieved 2007-01-10.
  11. ^ Bond, Patrick, "A Nobel loan shark?", Z Communications, 2006-10-19, URL retrieved 2007-01-10.
  12. ^ Littlefield, Elizabeth; Morduch, Jonathan and Hashemi, Syed (2003-01-01). "Is Microfinance an Effective Strategy to Reach the Millennium Development Goals?" (PDF). FocusNote (24). Retrieved on 2007-03-27. 
  13. ^ Dichter, T.. Hype and Hope: The Worrisome State of the Microcredit Movement. The Microfinance Gateway. Retrieved on March 27, 2007.

[2] Agabin, Meliza and John Owens Experience of Philippines' Rural Banks in Microfinance Finance for the Poor, June 2006 Volume 7 Number 2, Asian Development Bank

[edit] External Links

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