microfinance

Applying Counterpressure to the Microfinance Backlash: FP Op-ED

Jamie Zimmerman — Wed, 28 Oct 2009 17:43:00 -0400

I've been arguing for awhile now that microcredit has been overly hyped, even dangerously so (i.e., credit will end poverty). But now media (see The Times, The Boston Globe, Foreign Policy, articles, for examples) are beginning a backlash against microcredit (likely caused in large part by failed expectations caused by said hype) that I nonetheless find equally, if not more, disturbing (i.e., microfinance isn't working). I've never thought of credit as a panacea, but I do believe financial inclusion and access to an array of asset building financial services are essential if the poor are ever to move out of poverty.

So, I'm pleased that my colleague, Shweta Banerjee, just published an piece in Foreign Policy magazine - How Microfinance Can Change the Lives of Millions - that applies some much need counter pressure to the new naysayers of microfinance, by focusing on what is working, what might work, and why we should continue our efforts to innovate before falling back into old (and bad) development policies and practices.

In particular, the piece highlights specific programs and experiments aimed at providing the very poor with effective financial services, including WOCCUs matchsavings.org, Oxfam's Savings for Change and the Center for Social Development's AssetsAfrica pilot study, among others.

I'm interested in hearing others' opinions on which microfinance programs and services are most innovative and also worthy of a spotlight as this debate livens up. Send along your thoughts!

*******PS. I received this note from a colleague at WOCCU, with a slight correction to the description of matchsavings.org in the FP article:

"There isn't actually a physical credit union in these people's villages (a field officer from a nearby branch office travels to outlying communities 1x/month), and the reason they didn't join wasn't so much because of the membership fee. They can actually save over time to achieve full membership, and MatchSavings.org participants become full members after 2 months of saving. Some participants I spoke with didn't join existing credit union groups in their communities because they felt the savings requirement (set by the group itself) was too high for them or they didn't feel ready to join. The MatchSavings.org program, though it required a higher monthly deposit, incentivized people with the 100% match. And when they receive their match after 6 months, the group members then set their own savings goal (the same for all members) and continue on the monthly deposit schedule in their community, with access to the full range of credit union services."

To learn more about WOCCUs matchsavings.org and other matched savings programs in developing countries: http://www.newamerica.net/publications/policy/promoting_savings_tool_international_development

Thursday Event: Matched Savings as a Tool for International Development

Leila Seradj — Tue, 13 Oct 2009 14:54:00 -0400

What goes up, as the saying goes, must come down, and for all the splash that the microcredit movement has made in the past decade, it seems that the belief that small loans will provide a pathway out of poverty is revealing some fissures.

A recent Times of London article (World poverty guru "fails" to spread wealth) brought attention to the questions surrounding the movement to which Muhammad Yunus helped to bring awareness. The article cited a recent study conducted by Dean Karlan and Jonathan Zinman in the Philippines, where they discovered that microcredit recipients did not fare better than those not receiving loans.

That's not to say that the advent of microlending has not been a vital and necessary innovation. But it isn't a panacea, and more voices have arisen to ask: what about providing the poor the financial services to which they so often lack access; most notably, a safe place to deposit and save their money?

One innovation that has shown to be particularly promising is that of matched savings. Also known as Individual Development Account programs, the innovation targets individuals providing both an incentive and a place to save, with savings being targeted toward building specific assets (e.g. a small business, a home, or investment in higher education). The World Council of Credit Unions (WOCCU) recently launched a program in Mexico, called MatchSavings.org, which raises funds to match the savings of rural-dwellers in Veracruz through an online-giving platform.

This Thursday, the Global Assets Project will convene a panel to discuss lessons from MatchSavings.org and from the matched savings/IDA movement in both developed and developing countries, as well as to launch its new issue brief, Promoting Savings as a Tool for International Development: Spotlight on WOCCU's MatchSavings.org. WOCCU Executive Vice President Brian Branch will provide remarks, followed by a panel discussion featuring Daryl Collins (Bankable Frontier Associates, and co-author of the much talked-about Portfolios of the Poor), Evelyn Stark (Financial Services for the Poor, Gates Foundation), JD Von Pischke (formerly of Frontier Finance International), and Asset Building Program Director Reid Cramer.

For more information or to RSVP, visit the event page. The event will be held at the New America Foundation's offices in Washington, D.C.

We look forward to seeing you on October 15 at 12:15 pm-- lunch will be provided, and for those unable to make it to D.C., it'll also be webcast (no RSVP necessary).

In this week’s Time: The forgotten half of microfinance

Leila Seradj — Fri, 04 Sep 2009 17:55:00 -0400

A quick note on an interesting article in this week's Time: Barbara Kiviat writes about the emergence in the field of microfinance for the need for a safe place to save and deposit money, which is something that we at the Global Assets Project have been talking about for a while.

While microcredit was at the root of the microfinance movement's beginnings, what's becoming clear is that those who take out small loans also desire a place to deposit and save their money. Indonesia's Bank Rakyat, she notes, has ten savers for every one borrower, and their borrowers use the loans for household needs about 30% of the time. And they save in the form of assets (such as livestock and jewelry), requiring them to pay a fee to pawn those assets in times of need.

Some solutions? Agent-based banking, where financial services are delivered through pharmacies, newsstands, or other institutions. Mobile banking has likewise taken off in places like Kenya, with 7 million customers registered under M-PESA's mobile-based service for storing and sending money.

While Kiviat notes that some microfinance institutions are hesitant to take deposits- -seeing it as time-consuming, expensive, and not profitable-- other organizations are finding creative and grassroots ways to bring savings to the center.

Oxfam's Savings for Change program, for example, is working at the village level in Mali, Cambodia, Senegal, and El Salvador to create small savings groups. Based on the tanda model in India and tontines in West Africa, members pool savings on a weekly basis and lend out portions of the savings to members in need of loans.

Yunus awarded Medal of Freedom: implications for bottom-up approaches in foreign assistance?

Shweta Banerjee — Fri, 07 Aug 2009 19:06:00 -0400

The recipients for this year Medal of Freedom have been announced and include Nobel prize winner, Muhammed Yunus. When Yunus (then the chair of the rural economics program at the University of Chittagong) launched the Grameen Bank as a pilot research project in 1976 in a post-war Bangladesh, his motive was to extend credit and foster micro-entrepreneurship amongst the poorest that were largely ignored by the formal Banking sector. Since then, Grameen has become synonymous with micro-credit and has inspired, along with other pioneers such as SEWA and ACCION, many other lenders to mushroom across the world. However, its own evolution as an organization reflects advancements in the microfinance field as a whole, which is increasingly shifting its focus from credit to savings.

The recently published "Portfolios of the Poor" (2009) provides an account of the transformation of Grameen Bank. In 1998, a devastating flood in Bangladesh only exacerbated the declining loan portfolio of the Bank. This spurred two major reforms. The first was loosening some ends of an erstwhile tight system of rules, making the terms of repayment more flexible. The second was to focus on savings and deposits. A personal savings account was introduced that allowed clients to save and withdraw from their accounts at any time. It also started to offer fixed deposit savings which would provide a good interest rate if the individual guaranteed to save at least $1 a month over five or ten years. Grameen has evolved from being a micro-lender to being a retail bank but one that tailors its products for the poor. In 2002, the total savings portfolio of Grameen Bank at $142 million was 68% of the total lending. In 2005, the savings had jumped to $460 million, surging ahead of the total lending which had also grown to be about $406 million.

In the February 2009 Budget overview, the Department of State and International Programs, USA, does not set savings led microfinance or micro entrepreneurship as a priority. The budget intends to put the United States "on a path to double foreign assistance" that will help the "world's weakest states reduce poverty, combat global health, develop markets, govern peacefully and expand democracy worldwide". In 2010 the projected expenditure, excluding food aid, is projected to be $51.7 billion - a 26% increase from $40.9 billion in 2008. The question here is: what kind of new initiatives would all of this extra cash launch? This is a good time to push for more investments in bottom-up approaches that focus on savings and asset building. It is necessary that recognition of innovation, such as that of Yunus, translate into investments in these types of poverty-reduction approaches through adequate funding.

To read more thoughts on asset building through America's foreign assistance from my colleagues at the Global Assets Project, click here and here. Ray Boshara's article on "Combating Poverty by building Assets" can be found here.

Shweta Banerjee is a consultant with the Global Assets Project at the New America Foundation.
Banerjee@newamerica.net

PODCAST: The Promise of Savings-Linked Conditional Cash Transfers

Jamie Zimmerman — Tue, 12 May 2009 16:09:00 -0400

On April 29^th, the Global Assets Project hosted an event to launch its newest policy brief, "Savings-Linked Conditional Cash Transfers: A New Policy Approach to Global Poverty Reduction," at the New America Foundation. By request, we have created a 10 minute Podcast summarizing the paper and key points from the event, for those unable to attend the two-hour event or watch or listen to it in its entirety on our website or YouTube.

The event, which attracted almost 900 participants in house and (mostly) via webcast, explored the opportunities for linkages between CCTs and savings accounts, the potential impact on financial inclusion and economic empowerment as well as the possible challenges of such a proposal. While the concept of financial inclusion and economic empowerment through CCTs is still in its infancy, participants agreed that it is already building incredible momentum in both social policy and financial services fields.

The podcast , narrated by Jamie M. Zimmerman, includes highlighted remarks from the policy brief co-author Yves Moury (Proyecto Capital) and panelists Michelle Adato (IFPRI), Mark Pickens (CGAP), Marguerite Robinson, and Luis Tejerina (IADB). Please visit our website or contact us for additional information about the policy brief or the event.

Policy Innovation toward Financial Inclusion: Colombian Government Links CCTs to Savings

Jamie Zimmerman — Mon, 20 Apr 2009 16:54:00 -0400

Just days before the New America Foundation released its Global Assets Project policy brief, "Savings-Linked Conditional Cash Transfers: A New Approach to Global Poverty Reduction," the Colombian announces a major effort to do just that - link the beneficiaries of its nationwide CCT program with savings accounts. This major policy development in Colombia has emerged in part as a result of the efforts of the policy brief's co-author Yves Moury (Executive Director of Fundación Capital), and his project, Proyecto Capital. Our brief, released today, advocates using the (typically) massive CCT infrastructure to formally bank the largely unbanked poor populations in developing countries. But we also advocate going one step further: use the power of CCTs to encourage saving and asset accumulation of the poor. This approach can be viewed as a two-pronged poverty reduction strategy of building income and assets while increasing the effective financial inclusion of an entire poor population.

Back in September 2008, the Proyecto Capital signed a cooperation agreement with the Government of Colombia to mobilize, in bank accounts, the savings of millions of beneficiary families of Familias en Acción (Families in Action), promoting their financial inclusion and facilitate their socioeconomic graduation from the program. Proyecto Capital's role in the agreement includes assessing possibilities (and possible bottlenecks) for these families to participate in a program that would encourage them to save part of the conditional cash transfers they receive from the CCT programs in a savings account.

Late last week, the administrators of the Familias en Accion, announced the official launch of this massive financial inclusion effort. The plan is to open no-minimum balance savings accounts for up to 3 million beneficiary families in a partnership with Colombia Bank, Banco Agrario. Beneficiaries will also receive debit cards for the accounts.

The administrators are calling it "the largest financial inclusion plan in the history of Colombia." Not only will all beneficiaries of the CCT program have access to savings accounts and debit cards, but those who comply with the requirement of the program (based on proper education and nutrition of poor families, in particular children), will receive their conditional nutrition and education subsidies on their debit cards, without the use of intermediaries. The Colombian government stated that it believes this effort will reduce the vulnerability of the poor to costly informal financial services, such as payday lenders and other informal loans to help them smoother consumption.

The Government of Colombia should be congratulated for their bold effort to provide their poorest and most vulnerable citizens with formal financial access, in particular access to savings account that will help them smooth consumption, prepare for their futures, invest in themselves and (hopefully) move out of poverty. I hope the financial inclusion field watches this effort with keen interest to observe if and how it achieves its ambitious goals.

*Please Note: We will discuss this innovation along with a number of other policy ideas for linking CCTs and Savings at an upcoming event at the New America Foundation on April 29^th. For more information, click here.*

Weighing in on Microfinance and the Financial Crisis

Jamie Zimmerman — Mon, 23 Mar 2009 20:24:00 -0400

Signs point to toughening times for the microfinance industry. A recent article from the Economist has echoed my concerns that selling microcredit (as a concept or a product) will grow increasingly difficult as the global economy stumbles (or crashes and burns) on the heels of a debt-led recession in the United States. Not only in the concept politically less appetizing than it was back when Muhammad Yunus won the Nobel Peace Prize in 2006, the capital fueling the industry is drying up. The similarities and differences between subprime lending that fueled the US recession and the "sub, sub, subprime" lending happening in developing countries through microfinance institutions have been debated and analyzed for over a year now. But only recently has the engine of seemingly-endless capital to MFIs around the world starting slowing, sputtering to slow chug in some instances.

The Economist article argues that the microfinance industry is more insulated from the crisis than many of my colleagues working in the sector would currently state. Just because the Grameen Bank has not faltered in this financial crisis doesn't equate to an entirely healthy sector. Moreover, the decrease in capital, and the resulting liquidity constraints and challenges institutions will face, does not represent the variety of challenges that MFIs, or the microfinance sector, could and will likely face as a result of this crisis. While I commend the Economist for putting on spotlight on this particular problem, the article fails to provide readers with the bigger picture.

Fortunately, CGAP just released last week a more thorough analysis of the potential impacts of the crisis on microfinance. The Focus Note reviews not only the challenges of the institutions, but also those of the clients that frequent these institutions to gain capital for their micro-business or, in many cases, borrow to smooth consumption over time. Essentially, the Note paints a relatively more nuanced picture of the crisis on the microfinance industry and tempers its optimism that the industry is "insulated from the problems of the global economy" (as is speculated in the Economist). On the other hand, CGAP does share my view that this crisis will bring opportunities that could result in a better functioning industry, with potentially better outcomes for the poor.

In my opening remarks at the March 16 USAID panel on Microfinance and the Financial Crisis, I also outlined a number of challenges I either currently see or envision for the industry as the global crisis unfolds, many of which are reflected to some extent in the articles mentioned above, including decreased capital, weakening consumer confidence, increased pressure for tougher regulation, etc.. However, I foresee as serious opportunities for the industry. (Call me hopelessly optimistic, but I prefer to concentrate on opportunities whenever possible, particularly in troubling times.)

First, a debt-led global recession is indeed spurring some to cast a critical eye on debt-led poverty reduction like micro-credit. While this may be understandably worrisome for particular institutions, it's a huge opportunity for the microfinance field in general. The backlash against credit and subprime lending could very well lend itself to a microfinance industry whose health is dependent on a more diverse and balanced portfolio, particularly with an emphasis on savings. In fact, deposit-taking MFIs (who are less dependent on capital investments) are indeed the very institutions most insulated from the crisis so far. Next, the spotlight on savings is not limited to acknowledging the need for deposit-taking for an institutions fiscal health. The microfinance field as a whole is now paying long overdue attention to the other critical financial needs of the poor, namely access to effective and safe savings services. Finally, there is a growing recognition that all people, chief among them the poor and the vulnerable, need to save and create a safety net against economic shocks, rather than relying on credit alone. This is a lesson the US learned too late, but for the microfinance field, it's a very real opportunity to look at economic opportunity and resiliency in a whole new way.

(Transcripts and materials from the March 16 event, including perspectives from other panelists on this issue, can be found on the Microlinks site.)

Foreign Aid-- Dead, or in Need of Resuscitation?

Leila Seradj — Tue, 10 Mar 2009 18:45:00 -0400

Dubbed "the Anti-Bono" by the New York Times, Zambian-born Dambisa Moyo is generating buzz. In her recently published book Dead Aid, she maintains that foreign aid is largely holding Africa back. And despite the fact that billions of dollars of aid have been poured into the continent, poverty rates continue to escalate. In an interview with the New York Times Magazine:

"You get the corruption - historically, leaders have stolen the money without penalty - and you get the dependency, which kills entrepreneurship. You also disenfranchise African citizens, because the government is beholden to foreign donors and not accountable to its people."

While it doesn't take a rocket scientist to figure out that foreign assistance has been problematic in reducing poverty rates, Moyo's alternatives caught my eye, among which are: bonds, dealing more with China, and cutting all aid in the next five years (arguably her most controversial proposal), more microfinance, and remittances.

Her call for cutting all aid to Africa in five years made me think: what about reforming aid so that it takes more of a bottom-up approach? Is it simply aid that's to blame, or how it's being used? If it's the latter, then what about re-thinking aid such that it reflects the very alternatives that Moyo proposes-- such as smart ways of channelling remittances, and harnessing the power of microfinance, including increasing access to savings and asset-building?

On remittances: everyone knows that global remittance flows exceed foreign aid worldwide, and that their potential to aid in development is enormous. What about thinking about how to better utilize remittances, the way that Banco ADOPEM has in the Dominican Republic? (ADOPEM has designed a product linking remittances to asset-building products for clients in recipient countries; see my blog post for more on this topic). As for microfinance, here's what Moyo had to say in her New York Times Magazine interview:

If people want to help out, what do you think they should do with their money if not make donations?
Microfinance. Give people jobs.

But what if you just want to donate, say, $25?
Go to the Internet and type in Kiva.org, where you can make a loan to an African entrepreneur.

This is all well and good, but I can't help but also point out that while access to credit is important, it's not a panacea. And what's oftentimes lost in the conversation of access to finance is increasing households' access to a safe place to safe, where they can build assets and guard against the risks to which poor households are most vulnerable.

So when she mentioned Kiva.org, what immediately came to mind is WOCCU's recent initiative, matchsavings.org. Similar to Kiva, it allows everyday citizens to make contributions to match the savings of individuals living in remote communities with no access to savings accounts (presently, the launch phase is being conducted in Veracruz, Mexico).

Seemingly a lone young African female voice amongst a sea of middle-aged white males, Moyo's uniqueness and outspoken nature has forced those in the field of development -- from Africa, to Europe, to the U.S.--to take notice. It seems an opportune moment, then, to consider alternatives to foreign aid that takes into consideration the crucial role of savings and assets in poverty alleviation.

E-mail, Mobile Phones-- and Microfinance?

Leila Seradj — Wed, 18 Feb 2009 16:43:00 -0500

E-mail, the internet, mobile phones, and microfinance. At first glance, you might think I'm playing Sesame Street's "Three of these things belong together" game. But I assure you that, despite my love for the Cookie Monster, I'm not. It turns out that these four innovations, along with 26 others, have been named the Top 30 Innovations of the Last 30 Years by PBS's Nightly Business Report.

To some, lumping microfinance-- a relatively new concept to much of the world's inhabitants, especially after Muhammed Yunus and his Grameen Bank won the Nobel Peace Prize in 2006-- with such staples of our modern life might seem puzzling.

But it's heartening to see that more are sitting up and taking notice that innovations in poverty alleviation are, in fact, a very modern thing. If we could start seeing the the world's financially disadvantaged beyond the sad faces flickering on the nightly news, and instead as protagonists of their own development through such innovations as microfinance, we might be on to a more sustainable means toward bringing about prosperity for all, in all senses of the word. Leveling the playing field, I'd venture to assert, is one of the key elements of modernity in a world where it's becoming increasingly obvious that the disadvantage of the part is to the detriment of the whole.

"Leveling the playing field," therefore, includes extending access to financial services to all. While microfinance has popularly become synonymous with giving out small loans, in more recent years, it's come to encompass providing all types of financial services for the poor. This includes access to a bank account, to a safe place to save, financial education, and other services that many of us take for granted. And in light of the recent global financial crisis, these services are now more crucial than ever.

There are some exciting developments with regards to using technology to facilitate access to financial services (see my recent post for news on the new DFID-funded three-year project in Africa and Asia, FAST). In a world where more individuals in the developing world have access to a cell phone than to a bank account, mobile banking is one promising way to link technology with innovations in poverty alleviation.

So it looks like the Nightly Business Report has hit the nail on its head this time. And here's to hoping that in thirty years, microfinance and financial services for the poor will seem as novel as color television and sliced bread.

(Photo courtesy of the World Bank Photo Collection)