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B. Characteristics and recent successes of microcredit programmes
8. Informal and small-scale lending arrangements have long existed in many parts of the world, especially in the rural areas, and they still survive. Good examples are schemes in Ghana, Kenya, Malawi and Nigeria ("merry-go-rounds", "esusus" etc.). They provide the rural population with access to savings within the local area and with a certain cushion against economic fluctuations, and they encourage a cooperative and community feeling. The groups formed provide joint collateral and serve as instruments for spreading valuable information that is useful for economic and social progress.
9. All economies rely upon the financial intermediary function to transfer resources from savers to investors. In market economies, this function is performed by commercial banks and the capital markets. More widespread financial intermediation, as well as increasing depth and variety, are a hallmark of advancing development. But in many developing countries, capital markets are still at a rudimentary stage, and commercial banks are reluctant to lend to the poor largely because of the lack of collateral and high transaction costs. The poor would borrow relatively small amounts, and the processing and supervision of lending to them would consume administrative costs that would be disproportionate to the amount of lending. A study by the International Fund for Agricultural Development (IFAD) has confirmed that complicated loan procedures and paperwork, combined with a lack of accounting experience, limit poor people's access to formal sources of credit. Other reports cite the fact that commercial lenders in rural areas prefer to deal mainly with large-scale farmers.
10. The absence of commercial banks has led to non-conventional forms of lending. The recent prominence given to microcredit owes much to the success of a relatively few microcredit programmes and their increasing scale. The Grameen Bank of Bangladesh, the most prominent of the successes, now reaches over 2 million people, with cumulative lending of about $2.1 billion. Similar successful examples are known in Latin America (e.g., Banco Solidario in Bolivia), less so in Africa (the Kenya Rural Enterprise Programme is a good example). Progress has also been recorded in several transition economies, mixed in some cases. Such institutions have not only achieved a degree of success, but they have also managed to attract donor support and press attention.
11. These schemes are characterized by relatively small loans, a few hundred dollars at most. The repayment period is relatively short, about a year or so. Women are a major beneficiary of their activities, and the destination of the funds primarily includes agriculture, distribution, trading, small craft and processing industries. The administrative structure is generally light and the entire process is participatory in nature. The impact of microcredit lending varies widely between rural areas and urban areas.
12. In many developing countries, overall interest rates are relatively high to begin with, so that rates charged by microlending schemes are quite high when the risk premium is added. Many of these micro-institutions claim a high rate of repayment. This is attributable to the informal participatory structures, which create an atmosphere in which debtors respect their obligations. While this phenomenon is certainly true of the better-run institutions, it is not possible to verify whether this is a universal feature. There is little by way of "global" research in this area, even though the literature on microcredit has proliferated in recent years.
13. It should be noted that although a large number of studies undertaken so far on the impact of microcredit programmes on household income show that participants of such programmes usually have higher and more stable incomes than they did before they joined the programmes, some practitioners still have reservations about the findings of those studies. Moreover, not many microcredit programmes can afford to undertake impact assessments because they are generally expensive and time-consuming. There are serious disagreements among experts on the validity of methodologies used in some of the published studies. In some cases, even the more rigorous studies have produced inconclusive results. Some studies show that there are limits to the use of credit as an instrument for poverty eradication, including difficulties in identifying the poor and targeting credit to reach the poorest of the poor. Added to this is the fact that many people, especially the poorest of the poor, are usually not in a position to undertake an economic activity, partly because they lack business skills and even the motivation for business.
14. Furthermore, it is not clear if the extent to which microcredit has spread, or can potentially spread, can make a major dent in global poverty. The actual use of this kind of lending, so far at least, is rather modest: the overall portfolio of the World Bank, for example, is only $218 million. In recent international meetings, it has been stated that a target to reach 100 million families by the year 2005 would require an additional annual outlay of about $2,5 billion. This should be compared to the total gross domestic product (GDP) of all developing countries, which is now about $6 trillion. A certain sense of proportion regarding microcredit would seem to be in order.
15. In addition, the administrative structures governing these institutions are commonly either fragile or rudimentary, and often involve large transaction costs. A study by the Organisation for Economic Cooperation and Development (OECD), for example, found that many specialized agricultural institutions were not designed to serve as financial intermediaries. The success of financial intermediation at any time depends significantly on how efficiently the transaction is completed. If the transaction costs, combined with high interest rates, require that the operation in question generate profit margins of the order of 30 to 50 per cent, it is not clear that this would be economically beneficial. It is not surprising that in many microlending operations, trading activity - with quick turnover and large profit margins - dominates.
16. In many cases, microcredit programmes have been stand-alone operations. There is now considerable consensus that lending to the poor can succeed provided it is accompanied by other services, especially training, information and access to land. An OECD study, for example, emphasized that credit needs to be supplemented with access to land and appropriate technology. But such activities require strong support from the public sector. In some of the lowest-income countries, lack of access to land is the most critical single cause of rural poverty, which dominates the poverty situation in those countries. Yet, few countries have substantial land reform programmes.
17. Moreover, in the proliferation of microlending institutions, non-governmental organizations and foreign donors have played an increasing role. Non-governmental organizations vary in quality and strength. The best results are produced, research shows, when developing country Governments and non-governmental organizations work hand in hand. While donor participation can be positive, it should be noted that total official development assistance (ODA) has declined in recent years.
18. Over the past decade, microfinance institutions have adopted innovative ways of providing credit and savings services to the entrepreneurial poor. Two approaches have been advocated on the role of credit in poverty reduction. While supporters of the income-generation approach maintain that credit should be provided mainly to the entrepreneurial poor to enable them to finance specific private income-generating activities to increase their revenues, proponents of the so-called new minimalist approach argue that credit progammes would still be helping the poor fight poverty by giving credit to any poor person who is able to repay a loan without dictating to that person how and on what the loan should be used. Some studies have pointed out that the problem of the non-productive use of credit, as advocated by the minimalist approach, lies in the fact that by consuming rather than investing their loans, the actions of such borrowers, if imitated by other poor people, could produce a negative impact on the future growth of microcredit.
19. Several microfinance institutions have succeeded in reaching the poorest of the poor by devising innovative strategies. These include the provision of small loans to poor people, especially in rural areas, at full-cost interest rates, without collateral, that are repayable in frequent installments. Borrowers are organized into groups, which reduces the risk of default. These are also effective mechanisms through which to disseminate valuable information on ways to improve the health, legal rights, sanitation and other relevant concerns of the poor. Above all, many microcredit programmes have targeted one of the most vulnerable groups in society - women who live in households that own little or no assets. By providing opportunities for self-employment, many studies have concluded that these programmes have significantly increased women's security, autonomy, self-confidence and status within the household.
20. Microlending has progressed to the greatest extent in the Asian region. An innovative approach that has been used successfully by Grameen Bank's credit-delivery system is "peer-group monitoring" to reduce lending risk, although some studies have suggested that the reason for the Grameen Bank's high repayment rates is also partly due to the practice of weekly public meetings - at which attendance is compulsory - for the repayment of loan installments and the collection of savings. It is reported that the meetings reinforce a culture of discipline, routine repayments and staff accountability. Not all microfinance institutions use peer-group monitoring. Other institutions such as the Bank Rakyat of Indonesia, which serves 2.5 million clients and 12 million small savers, rely on character references and locally recruited lending agents in place of physical collateral.
21. Thailand's Bank of Agriculture and Agricultural Cooperatives serves approximately 1 million microborrowers and 3.6 million micro-savers. Newcomers such as the Association for Social Advancement of Bangladesh, with half a million clients, and the People's Credit Funds of Viet Nam, with more than 200,000 members or clients, are other examples of the potential for growth in the industry. Other institutions such as the Association of Cambodia Local Economic Development Agencies, Buro-Tangail of Bangladesh, the Self-Employed Women's Association Bank of India, and Amanah Ikhtiar Malaysia are also reported to be making good progress.
22. Various institutions are involved in the delivery of microfinance services. They include formal commercial banks, rural banks, cooperative institutions, credit unions and non-governmental organizations. Their methods of doing business range from Grameen Bank-style solidarity groups and institutions dealing with individual clients to self-managed self-help groups. Reports indicate that some institutions have gone beyond credit to offer insurance and other financial services. Both the Grameen Bank and the Bangladesh Rural Advancement Committee offer non-financial services, such as retail outlet facilities for products of their clients.
23. In Latin America, Accion Internacional, a non-profit development agency, and its affiliates was reported to have disbursed in the past five years $1 billion in loans to poor microentrepreneurs. Its first-time loans are between $100 and $200, and the overall repayment rate is above 98 per cent. Its network of 19 affiliates in Latin America and North America provides $300 million a year in loans to poor entrepreneurs (56 per cent of whom are women). Since 1987, Accion's network has grown from 13,000 to more than 285,000 active borrower clients. The six largest affiliates now provide $1 million per month in loans. Banco Solidario of Bolivia, which has grown from a credit-providing non-governmental organization to a fully licensed commercial bank, provides financial services to 67,000 people, more than one half of the total number of clients in the entire Bolivian banking system. The Association for the Development of Micro-Entreprises of the Dominican Republic and Accion Comunitaria del Peru are reported to have achieved sustainability.
24. In West Africa, where microfinance institutions are still in their infancy, a World Bank case study of nine microfinance programmes - the Pride, Credit rural and credit mutuel de Guinee; Credit mutuel du Senegal and Village Banks Nganda of Senegal; Reseau des caisses populaires and Sahel Action Project de promotion du petit credit rural of Burkina Faso; and Caisses villageoises du pays dogon and Kafo Jiginew of Mali - concluded that all nine of these programmes are very much in the mainstream of best practice in the field of microfinance. In terms of sustainable lending to microentrepreneurs, the study gave high marks to the programmes on the following basis: all nine programmes are located near their clients and in the largest catchment areas possible; they use lending technologies that are simple, well-tailored to the cultural environment and inexpensive for both lender and client; they have employed effective techniques for obtaining high repayment rates; most include savings, which meet a critical need of many people, and they price their loans far above commercial lending rates, though not at full cost recovery.
25. A recent study of 11 major microentreprise finance programmes - Agence de credit pour l'entreprise privee of Senegal, Asociacion Dominicana para el Desarrollo de la Mujer of the Dominican Republic, Banco Solidario of Bolivia, Badan Kredit Desa, Bank Rakyat Indonesia and Lembaga Perkreditan Desas of Indonesia, Bankin Raya Karkara of the Niger, Corporacion de Accion Solidaria of Colombia, Fondacion Integral Campesina of Costa Rica, Grameen Bank of Bangladesh, and the Kenya Rural Enterprise Programme - showed that 10 of the programmes were operationally efficient. Five institutions were fully profitable, generating inflation-adjusted positive returns on assets. It was reported that, in 1993, the Agence de credit pour l'entreprise privee of Senegal, Banco Solidario of Bolivia and Lembaga Perkreditan Desas of Indenosia had covered 100, 103 and 137 per cent of their costs, respectively. In view of the growing popularity of microfinance institutions, some of which now explore the possibility of deposit mobilization or leverage commercial capital, it is reported that bank regulators in such countries as Bolivia, Ghana, Kenya and Peru, and other countries, are creating laws or special regulations for this new breed of institutions. In Bolivia, it is reported that Banco Solidario, a private commercial microenterprise bank, is regulated by the Superintendency of Banks, with the same financial and reporting requirements as traditional banks, but with simpler loan documentation and risk classification rules. In the case of Bolivia, which seeks to encourage new microfinancial institutions, it is reported that the Government has begun licensing a new class of intermediaries, known as private financial funds, subject to the same solvency and reserve requirements as banks, but with lower minimal capital requirements.