Transcript Microfinance - Universitetet i Bergen

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Tobin
Tobin tax
Microfinance - presentation
Microfinance - overview
Microfinance - case: Grameen Bank
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Microfinance
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Microcredit - lending small sums to poor people to set up or
expand small businesses - is an effective way to alleviate
poverty.
The poor cannot usually borrow from commercial banks,
because they lack collateral. Loan sharks lend without security,
but often at interest rates of 10-20% a day. Hawkers who
borrow from sharks to buy a day’s stock often have to hand
over most of their profits. Failure to repay can result in broken
legs.
Since the 1970s, organisations, such as the Grameen Bank in
Bangladesh and Accion International in Latin America, have
encouraged poor borrowers to form groups to cross-guarantee
each other’s loans.
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Microfinance
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In the Grameen model, one of a group of rural
women takes out a microscopic loan, often as little
as $25, to start a business. Only when she repays it
can the next woman in the group borrow. Peer
pressure makes sure that default rates are minimal.
The idea has spread. All told, about 14m poor people
now borrow from microlenders
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What is microfinance?
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To most, microfinance means providing very poor families with
very small loans (microcredit) to help them engage in
productive activities or grow their tiny businesses.
Over time, microfinance has come to include a broader range
of services (credit, savings, insurance, etc.) as we have come
to realize that the poor and the very poor who lack access
to traditional formal financial institutions require a variety of
financial products.
Microcredit came to prominence in the 1980s, although early
experiments date back 30 years in Bangladesh, Brazil and a
few other countries.
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What is microfinance?
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The important difference of microcredit was that it avoided the
pitfalls of an earlier generation of targeted development
lending,
by insisting on repayment,
by charging interest rates that could cover the costs of credit
delivery,
and by focusing on client groups whose alternative source of
credit was the informal sector.
Emphasis shifted from rapid disbursement of subsidized loans
to prop up targeted sectors towards the building up of local,
sustainable institutions to serve the poor.
Microcredit has largely been a private (non-profit) sector
initiative that avoided becoming overtly political, and as a
consequence, has outperformed virtually all other forms of
development lending.
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…. between the 1950s and 1970s, governments and
donors focused on providing subsidized agricultural
credit to small and marginal farmers, in hopes of
raising productivity and incomes.
During the 1980s microenterprise credit
concentrated on providing loans to poor women to
invest in tiny businesses, enabling them to generate
and accumulate assets and raise household income
and welfare.
The success of some microenterprise credit
programs led to bold experiments …..
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These experiments resulted in the emergence of microfinance
institutions (MFIs), specialized financial institutions that serve
the poor.
MFIs are called "micro" because of the small size of their
transactions (with loans as small as US$50 and savings
deposits as small as US$5), and "finance" because they
provide safe and reliable financial services to the poor.
The world of MFIs is diverse—they exist in various legal forms,
including non-governmental organizations (NGOs), credit
unions, nonbank financial intermediaries, and commercial
banks.
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As microfinance has globalised, it has run into local problems.
Not all poor communities are as tight-knit as those in rural
Bangladesh. The urban poor, being more mobile, do not always
know their neighbours well enough to act as guarantors for them.
In the shanty towns of Africa and Latin America, something called
“stepped lending” often works better.
A would-be borrower puts up a little money of her own. The
microfinancier lends her roughly the same amount again.
If she repays promptly, she can raise a larger loan. The better her
credit record becomes, the more she can borrow.
The carrot of more credit discourages defaults as effectively as
peer pressure does in villages.
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Microfinance
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According to Accion International, perhaps 50 of the world’s
7,000-10,000 microlenders can cover their own operating and
financial costs unaided
In many poor countries, however, disease makes this difficult.
In Africa, AIDS often causes borrowers to default, either
because they are too ill to work, or because their family’s
medical bills have soared.
A survey of microborrowers in 14 African countries found that
95% had trouble paying medical bills, 77% had trouble paying
for funerals, and half had difficulties finding money to look
after orphans, usually the children of relations who had died of
AIDS.
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Microfinance and Poverty:
Questioning Conventional Wisdom
by Hege Gulli
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Are all microentrepreneurs poor?
Is the lack of access to credit the
biggest constraint facing
microenterprises?
Do high interest rates charged by
microlenders stunt these firms'
growth?
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http://www.cgap.org/
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The other government in Bangladesh
(The Economist, July 23rd 1998)
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BANGLADESH is probably the world leader in nongovernmental organisations, NGOs…..
The 20,000 or so NGOs there operate mainly in the country’s
86,000 villages, providing education, health, small loans and
agricultural development far more efficiently than the corrupt
and inefficient government. …….
Some fear the organisations are becoming a parallel state,
financed by foreigners and accountable to nobody.
Most of the foreign money (around $250m a year) goes to a
handful of famous NGOs such as the Grameen Bank ….
These are among the biggest rural-development organisations
in the world ……
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The other government in Bangladesh
(The Economist, July 23rd 1998)
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The Grameen Bank has pioneered small loans to the
poor.
Grameen organises borrowers into groups which
guarantee a loan to any member (exerting peer
pressure for repayment).
Its repayment rate is over 95%.
Other NGOs have followed this route, and now more
than 6m poor people (almost all women) have
obtained small loans for shops, sewing machines,
chicken farming and the like.
Micro-credit is one reason for the fall in poverty in
Bangladesh, from 59% of the population in 1991-92 to
53% in 1995-96.
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The other government in Bangladesh
(The Economist, July 23rd 1998)
By directing education, jobs
and credit at women, the NGOs
have created a social
revolution in a conservative
Muslim society.
 This is mainly why the fertility
rate in Bangladesh has
crashed from 6.1 births per
woman in 1980 to 3.4 births
today.
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 Left-wing critics accuse NGOs
of exploitative rates of interest:
Grameen up to 22%.
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http://www.grameen-info.org/
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