Recent development
- 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.
- 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.
Asia
- 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.
- 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.
- 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.
Latin America
- 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.
Africa
- 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.
- 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.
