Microfinance

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Community-based savings bank in Cambodia. There is a rich variety of financial institutions serving poor people.

Microfinance is the provision of financial services to low-income clients or solidarity lending groups including
consumers and the self-employed, who traditionally lack access to banking and related services.

More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as
possible have permanent access to an appropriate range of high quality financial services, including not just
credit but also savings, insurance, and fund transfers."[1] Those who promote microfinance generally believe
that such access will help poor people out of poverty.

Microfinance is a broad category of services, which include microcredit. Microcredit can be defined as the
provision of credit services to poor clients. Although microcredit by definition can achieve only a small portion of
the goals of microfinance, conflation of the two terms is endemic in public discourse. In other words, critics
attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad
range of microfinance services, it is difficult to assess impact, and no studies to date have done so.

Contents
[hide]

• 1 Challenges

• 2 Boundaries and principles

• 3 Debates at the boundaries

• 4 Financial needs of poor people

 • 5 Ways in which poor people manage their

money

• 6 Current scale of microfinance operations

• 7 "Inclusive financial systems"

• 8 Microcredit and the web

• 9 Evidence for reducing poverty

• 10 Microfinance and social interventions

• 11 Other criticisms

• 12 Bibliography

• 13 See also

• 14 Notes

• 15 External links

[edit]Challenges

Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income.
Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved.
For example, although the total gross revenue from delivering one hundred loans worth $1,000 each will not
differ greatly from the revenue that results from delivering one loan of $100,000, it takes nearly a hundred times
as much work and cost to manage a hundred loans as it does to manage one. The fixed cost of
processing loans of any size is considerable as assessment of potential borrowers, their repayment prospects
and security; administration of outstanding loans, collecting from delinquent borrowers, etc., has to be done in
all cases. There is a break-even point in providing loans or deposits below which banks lose money on
each transaction they make. Poor people usually fall below that breakeven point. A similar equation resists
efforts to deliver other financial services to poor people.

In addition, most poor people have few assets that can be secured by a bank as collateral. As documented
extensively by Hernando de Soto and others, even if they happen to own land in thedeveloping world, they may
not have effective title to it.[2] This means that the bank will have little recourse against defaulting borrowers.

Seen from a broader perspective, the development of a healthy national financial system has long been viewed
as a catalyst for the broader goal of national economic development (see for exampleAlexander
Gerschenkron, Paul Rosenstein-Rodan, Joseph Schumpeter, Anne Krueger ). However, the efforts of national
planners and experts to develop financial services for most people have often failed in developing countries, for
reasons summarized well by Adams, Graham & Von Pischke in their classic analysis 'Undermining Rural
Development with Cheap Credit'.[3]

Because of these difficulties, when poor people borrow they often rely on relatives or a local moneylender,
whose interest rates can be very high. An analysis of 28 studies of informal moneylending rates in 14 countries
in Asia, Latin America and Africa concluded that 76% of moneylender rates exceed 10% per month, including
22% that exceeded 100% per month. Moneylenders usually charge higher rates to poorer borrowers than to
less poor ones.[4] While moneylenders are often demonized and accused of usury, their services are convenient
and fast, and they can be very flexible when borrowers run into problems. Hopes of quickly putting them out of
business have proven unrealistic, even in places where microfinance institutions are active.[citation needed]

Over the past centuries practical visionaries, from the Franciscan monks who founded the community-
oriented pawnshops of the 15th century, to the founders of the European credit union movement in the 19th
century (such as Friedrich Wilhelm Raiffeisen) and the founders of the microcredit movement in the 1970s
(such as Muhammad Yunus) have tested practices and built institutions designed to bring the kinds of
opportunities and risk-management tools that financial services can provide to the doorsteps of poor people.
[5]
While the success of the Grameen Bank (which now serves over 7 million poor Bangladeshi women) has
inspired the world, it has proved difficult to replicate this success. In nations with lower population densities,
meeting the operating costs of a retail branch by serving nearby customers has proven considerably more
challenging. Hans Dieter Seibel, board member of the European Microfinance Platform, is in favour of the
group model. This particular model (used by many Microfinance institutions) makes financial sense, he says,
because it reduces transaction costs. Microfinance programmes also need to be based on local funds. Local
Roots

Although much progress has been made, the problem has not been solved yet, and the overwhelming majority
of people who earn less than $1 a day, especially in the rural areas, continue to have no practical access to
formal sector finance. Microfinance has been growing rapidly with $25 billion currently at work in microfinance
loans.[6] It is estimated that the industry needs $250 billion to get capital to all the poor people who need it.
[6]
The industry has been growing rapidly, and concerns have arisen that the rate of capital flowing into
microfinance is a potential risk unless managed well.[7]

[edit]Boundaries and principles

Poor people borrow from informal moneylenders and save with informal collectors. They receive loans
and grants from charities. They buy insurance from state-owned companies. They receive funds transfers
through formal or informal remittance networks. It is not easy to distinguish microfinance from similar activities.
It could be claimed that a government that orders state banks to open deposit accounts for poor consumers, or
a moneylender that engages in usury, or a charity that runs a heifer pool are engaged in microfinance.
Ensuring financial services to poor people is best done by expanding the number of financial institutions
available to them, as well as by strengthening the capacity of those institutions. In recent years there has also
been increasing emphasis on expanding the diversity of institutions, since different institutions serve different
needs.

Some principles that summarize a century and a half of development practice were encapsulated in 2004
by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at the G8
Summit on June 10, 2004:[5]

1. Poor people need not just loans but also savings, insurance and money
transfer services.

2. Microfinance must be useful to poor households: helping them raise

income, build up assets and/or cushion themselves against external
shocks.

3. "Microfinance can pay for itself."[8] Subsidies from donors and

government are scarce and uncertain, and so to reach large numbers of
poor people, microfinance must pay for itself.

4. Microfinance means building permanent local institutions.

5. Microfinance also means integrating the financial needs of poor people

into a country's mainstream financial system.

6. "The job of government is to enable financial services, not to provide

them."[9]

7. "Donor funds should complement private capital, not compete with it."[9]

8. "The key bottleneck is the shortage of strong institutions and

managers."[9] Donors should focus on capacity building.

9. Interest rate ceilings hurt poor people by preventing microfinance

institutions from covering their costs, which chokes off the supply of
credit.

10. Microfinance institutions should measure and disclose their performance

– both financially and socially.

Microfinance is considered as a tool for socio-economic development,and can be clearly distinguished from
charity. Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to
repay a loan, should be recipients of charity. Others are best served by financial institutions.

[edit]Debates at the boundaries

There are several key debates at the boundaries of microfinance.

Practitioners and donors from the charitable side of microfinance frequently argue for restricting microcredit to
loans for productive purposes–such as to start or expand a microenterprise. Those from the private-sector side
respond that because money is fungible, such a restriction is impossible to enforce, and that in any case it
should not be up to rich people to determine how poor people use their money.

Perhaps influenced by traditional Western views about usury, the role of the traditional moneylender has been
subject to much criticism, especially in the early stages of modern microfinance. As more poor people gained
access to loans from microcredit institutions however, it became apparent that the services of moneylenders
continued to be valued. Borrowers were prepared to pay very high interest rates for services like quick loan
disbursement, confidentiality and flexible repayment schedules. They did not always see lower interest rates as
adequate compensation for the costs of attending meetings, attending training courses to qualify for
disbursements or making monthly collateral contributions. They also found it distasteful to be forced to pretend
they were borrowing to start a business, when they were often borrowing for other reasons (such as paying for
school fees, dealing with health costs or securing the family food supply).[10] The more recent focus on inclusive
financial systems (see section below) affords moneylenders more legitimacy, arguing in favour of regulation
and efforts to increase competition between them to expand the options available to poor people.

Modern microfinance emerged in the 1970s with a strong orientation towards private-sector solutions. This
resulted from evidence that state-owned agricultural development banks in developing countries had been a
monumental failure, actually undermining the development goals they were intended to serve (see the
compilation edited by Adams, Graham & Von Pischke).[3] Nevertheless public officials in many countries hold a
different view, and continue to intervene in microfinance markets.

There has been a long-standing debate over the sharpness of the trade-off between 'outreach' (the ability of a
microfinance institution to reach poorer and more remote people) and its 'sustainability' (its ability to cover its
operating costs—and possibly also its costs of serving new clients—from its operating revenues).[11] Although it
is generally agreed that microfinance practitioners should seek to balance these goals to some extent, there
are a wide variety of strategies, ranging from the minimalist profit-orientation of BancoSol in Bolivia to the highly
integrated not-for-profit orientation of BRAC inBangladesh. This is true not only for individual institutions, but
also for governments engaged in developing national microfinance systems.

Microfinance experts generally agree that women should be the primary focus of service delivery. Evidence
shows that they are less likely to default on their loans than men. Industry data from 2006 for 704 MFIs
reaching 52 million borrowers includes MFIs using the solidarity lending methodology (99.3% female clients)
and MFIs using individual lending (51% female clients). The delinquency rate for solidarity lending was 0.9%
after 30 days (individual lending—3.1%), while 0.3% of loans were written off (individual lending—0.9%).
[12]
Because operating margins become tighter the smaller the loans delivered, many MFIs consider the risk of
lending to men to be too high. This focus on women is questioned sometimes, however. A recent study of
microenterpreneurs from Sri Lanka published by the World Bank found that the return on capital for male-
owned businesses (half of the sample) averaged 11%, whereas the return for women-owned businesses was
0% or slightly negative.[13]

Microfinancial services may be needed everywhere, including the developed world.[citation needed] However, in
developed economies intense competition within the financial sector, combined with a diverse mix of different
types of financial institutions with different missions, ensures that most people have access to some financial
services.[citation needed] Efforts to transfer microfinance innovations such as solidarity lending from developing
countries to developed ones have met with little success.[14]

[edit]Financial needs of poor people

Financial needs and financial services.

In developing economies and particularly in the rural areas, many activities that would be classified in the
developed world as financial are not monetized: that is, money is not used to carry them out. Almost by
definition, poor people have very little money. But circumstances often arise in their lives in which they need
money or the things money can buy.

In Stuart Rutherford’s recent book The Poor and Their Money, he cites several types of needs:[15]

 Lifecycle Needs: such as weddings, funerals, childbirth, education,

homebuilding, widowhood, old age.

 Personal Emergencies: such as sickness, injury, unemployment, theft,

harassment or death.
  Disasters: such as fires, floods, cyclones and man-made events like war or
bulldozing of dwellings.

 Investment Opportunities: expanding a business, buying land or equipment,

improving housing, securing a job (which often requires paying a large bribe),
etc.

Poor people find creative and often collaborative ways to meet these needs, primarily through creating and
exchanging different forms of non-cash value. Common substitutes for cash vary from country to country but
typically include livestock, grains, jewelry, and precious metals.

As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that "microfinance
could provide large-scale outreach profitably," and in the 1990s, "microfinance began to develop as an
industry" (2001, p. 54). In the 2000s, the microfinance industry's objective is to satisfy the unmet demand on a
much larger scale, and to play a role in reducing poverty. While much progress has been made in developing a
viable, commercial microfinance sector in the last few decades, several issues remain that need to be
addressed before the industry will be able to satisfy massive worldwide demand. The obstacles or challenges
to building a sound commercial microfinance industry include:

 Inappropriate donor subsidies

 Poor regulation and supervision of deposit-taking MFIs

 Few MFIs that meet the needs for savings, remittances or insurance

 Limited management capacity in MFIs

 Institutional inefficiencies

 Need for more dissemination and adoption of rural, agricultural microfinance

methodologies
[edit]Ways in which poor people manage their money
Saving up

Rutherford argues that the basic problem poor people as money managers face is to gather a 'usefully large'
amount of money. Building a new home may involve saving and protecting diverse building materials for years
until enough are available to proceed with construction. Children’s schooling may be funded by buying chickens
and raising them for sale as needed for expenses, uniforms, bribes, etc. Because all the value is accumulated
before it is needed, this money management strategy is referred to as 'saving up'.[citation needed]

Often people don't have enough money when they face a need, so they borrow. A poor family might borrow
from relatives to buy land, from a moneylender to buy rice, or from a microfinance institution to buy a sewing
machine. Since these loans must be repaid by saving after the cost is incurred, Rutherford calls this 'saving
down'. Rutherford's point is that microcredit is addressing only half the problem, and arguably the less
important half: poor people borrow to help them save and accumulate assets. Microcredit institutions should
fund their loans through savings accounts that help poor people manage their myriad risks.[citation needed]

Saving down

Most needs are met through mix of saving and credit. A benchmark impact assessment of Grameen Bankand
two other large microfinance institutions in Bangladesh found that for every $1 they were lending to clients to
finance rural non-farm micro-enterprise, about $2.50 came from other sources, mostly their clients' savings.
[16]
This parallels the experience in the West, in which family businesses are funded mostly from savings,
especially during start-up.

Recent studies have also shown that informal methods of saving are unsafe. For example a study by Wright
and Mutesasira in Uganda concluded that "those with no option but to save in the informal sector are almost
bound to lose some money – probably around one quarter of what they save there."[17]

The work of Rutherford, Wright and others has caused practitioners to reconsider a key aspect of the
microcredit paradigm: that poor people get out of poverty by borrowing, building microenterprises and
increasing their income. The new paradigm places more attention on the efforts of poor people to reduce their
many vulnerabilities by keeping more of what they earn and building up their assets. While they need loans,
they may find it as useful to borrow for consumption as for microenterprise. A safe, flexible place to save
money and withdraw it when needed is also essential for managing household and family risk.[citation needed]

[edit]Current scale of microfinance operations

No systematic effort to map the distribution of microfinance has yet been undertaken. A useful recent
benchmark was established by an analysis of 'alternative financial institutions' in the developing world in 2004.
[18]
The authors counted approximately 665 million client accounts at over 3,000 institutions that are serving
people who are poorer than those served by the commercial banks. Of these accounts, 120 million were with
institutions normally understood to practice microfinance. Reflecting the diverse historical roots of the
movement, however, they also included postal savings banks (318 million accounts), state agricultural
and development banks (172 million accounts), financial cooperatives and credit unions (35 million accounts)
and specialized rural banks (19 million accounts).

Regionally the highest concentration of these accounts was in India (188 million accounts representing 18% of
the total national population). The lowest concentrations were in Latin American and theCaribbean (14 million
accounts representing 3% of the total population) and Africa (27 million accounts representing 4% of the total
population, with the highest rate of penetration in West Africa, and the highest growth rate in Eastern and
Southern Africa [19] ). Considering that most bank clients in the developed world need several active accounts to
keep their affairs in order, these figures indicate that the task the microfinance movement has set for itself is
still very far from finished.

By type of service "savings accounts in alternative finance institutions outnumber loans by about four to one.
This is a worldwide pattern that does not vary much by region."[20]

An important source of detailed data on selected microfinance institutions is the MicroBanking Bulletin, which is
published by Microfinance Information Exchange. At the end of 2009 it was tracking 1,084 MFIs that were
serving 74 million borrowers ($38 billion in outstanding loans) and 67 million savers ($23 billion in deposits).[21]

As yet there are no studies that indicate the scale or distribution of 'informal' microfinance organizations
like ROSCA's and informal associations that help people manage costs like weddings, funerals and sickness.
Numerous case studies have been published however, indicating that these organizations, which are generally
designed and managed by poor people themselves with little outside help, operate in most countries in the
developing world.[22]

Help can come in the form of more and better qualified staff, thus higher education is needed for microfinance
institutions. This has begun in some universities, as Oliver Schmidt describes. Mind the management gap

[edit]"Inclusive financial systems"

The microcredit era that began in the 1970s has lost its momentum, to be replaced by a 'financial systems'
approach. While microcredit achieved a great deal, especially in urban and near-urban areas and
with entrepreneurial families, its progress in delivering financial services in less densely populated rural areas
has been slow.

The new financial systems approach pragmatically acknowledges the richness of centuries of microfinance
history and the immense diversity of institutions serving poor people in developing world today. It is also rooted
in an increasing awareness of diversity of the financial service needs of the world’s poorest people, and the
diverse settings in which they live and work.

Brigit Helms in her book 'Access for All: Building Inclusive Financial Systems', distinguishes between four
general categories of microfinance providers, and argues for a pro-active strategy of engagement with all of
them to help them achieve the goals of the microfinance movement.[23]

Informal financial service providers

These include moneylenders, pawnbrokers, savings collectors, money-

guards, ROSCAs, ASCAs and input supply shops. Because they know
each other well and live in the same community, they understand each
other’s financial circumstances and can offer very flexible, convenient and
fast services. These services can also be costly and the choice of
financial products limited and very short-term. Informal services that
involve savings are also risky; many people lose their money.

Member-owned organizations

These include self-help groups, credit unions, and a variety of hybrid

organizations like 'financial service associations' and CVECAs. Like their
informal cousins, they are generally small and local, which means they
have access to good knowledge about each others' financial
circumstances and can offer convenience and flexibility. Since they are
managed by poor people, their costs of operation are low. However, these
providers may have little financial skill and can run into trouble when the
economy turns down or their operations become too complex. Unless
they are effectively regulated and supervised, they can be 'captured' by
one or two influential leaders, and the members can lose their money.

NGOs

The Microcredit Summit Campaign counted 3,316 of these MFIs

and NGOs lending to about 133 million clients by the end of 2006.[24] Led
by Grameen Bank and BRAC in Bangladesh, Prodem inBolivia,
and FINCA International, headquartered in Washington, DC, these NGOs
have spread around the developing world in the past three decades;
others, like the Gamelan Council, address larger regions. They have
proven very innovative, pioneering banking techniques like solidarity
lending, village banking and mobile banking that have overcome barriers
to serving poor populations. However, with boards that don’t necessarily
represent either their capital or their customers, their governance
structures can be fragile, and they can become overly dependent on
external donors.

Formal financial institutions

In addition to commercial banks, these include state banks, agricultural

development banks, savings banks, rural banks and non-bank financial
institutions. They are regulated and supervised, offer a wider range of
financial services, and control a branch network that can extend across
the country and internationally. However, they have proved reluctant to
adopt social missions, and due to their high costs of operation, often can't
deliver services to poor or remote populations. The increasing use
of alternative data in credit scoring, such as trade credit is increasing
commercial banks' interest in microfinance.[25]

With appropriate regulation and supervision, each of these

institutional types can bring leverage to solving the
microfinance problem. For example, efforts are being made
to link self-help groups to commercial banks, to network
member-owned organizations together to achieve
economies of scale and scope, and to support efforts by
commercial banks to 'down-scale' by integrating mobile
banking and e-payment technologies into their extensive
branch networks.

[edit]Microcredit and the web

Due to the unbalanced emphasis on credit at the expense

of microsavings, as well as a desire to link Western
investors to the sector, peer-to-peer platforms have
developed to expand the availability of microcredit through
individual lenders in the developed world. The volume
channeled through Kiva's peer-to-peer platform is about
$100 million as of November 2009 (Kiva facilitates
approximately $5M in loans each month). In comparison,
the needs for microcredit are estimated about 250 bn USD
as of end 2006.[26] Rang De is another organization that
gives microcredit loans and was started in India in 2008.
Still in its nascent stage, Rang de has made social
investments of more than $600,000.[citation needed]

Most experts agree that these funds must be sourced

locally in countries that are originating microcredit, to
reduce transaction costs and exchange rate risks.

There have been problems with disclosure on peer-to-peer

sites, with some reporting interest rates of borrowers using
the flat rate methodology instead of the familiar
banking Annual Percentage Rate.[27] The use of flat rates,
which has been outlawed among regulated financial
institutions in developed countries, can confuse individual
lenders into believing their borrower is paying a lower
interest rate than, in fact, they are.[citation needed]

[edit]Evidence for reducing poverty

Some proponents of microfinance have asserted, without

offering credible evidence, that microfinance has the power
to single-handedly defeat poverty.[citation needed] This assertion
has been the source of considerable criticism.[28] 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.[29] At the
2008 Innovations for Poverty Action/Financial Access
Initiative Microfinance Research conference, economist
Jonathan Morduch of New York University noted there are
only one or two methodologically sound studies of
microfinance's impact.[30]

The BBC Business Weekly program reported that much of

the supposed benefits associated with microfinance, are
perhaps not as compelling as once thought. In a radio
interview with Professor Dean Karlan of Yale University, a
point was raised concerning a comparison between two
groups: one African, financed through microcredit and one
control group in the Philippines. The results of this study
suggest that many of the benefits from microcredit are in
fact loaned to people with existing business, and not to
those seeking to establish new businesses. Many of those
receiving microcredit also used the loans to supplement the
family income. The income that went up in business was
true only for men, and not for women. This is striking
because one of the supposed major beneficiaries of
microfinance is supposed to be targeted at women.
Professor Karlan's conclusion was that whilst microcredit is
not necessarily bad and can generate some positive
benefits, despite some lenders charging interest rates
between 40-60%, it isn't the panacea that it is purported to
be. He advocates rather than focusing strictly on
microcredit, also giving citizens in poor countries access to
rudimentary and cheap savings accounts.[31]

To further the point stated by Prof Karlan, microfinancing

begets the general tendency of a small business initially
supported on credit to gain profits with time and generate
micro savings. In his latest study, the famous two time
pulitzer prize winner, Nicholas Donabet Kristof states that
there is no evidence of any negative influence of micro
financing but countless examples of people now looking at
the bigger picture and saving for better things have
surfaced. The example of BancoSol(Bolivia), where the
number of savers has grown to twice as much as the
number of borrowers, further strengthens his theory.[32][33]

Sociologist Jon Westover found that much of the evidence

on the effectiveness of microfinance for alleviating poverty
is based in anecdotal reports or case studies. He initially
found over 100 articles on the subject, but included only the
6 which used enough quantitative data to be representative,
and none of which employed rigorous methods such as
randomized control trials similar to those reported
by Innovations for Poverty Action and the M.I.T. Jameel
Poverty Action Lab. One of these studies found that
microfinance reduced poverty. Two others were unable to
conclude that microfinance reduced poverty, although they
attributed some positive effects to the program. Other
studies concluded similarly, with surveys finding that a
majority of participants feel better about finances with some
feeling worse.[34]

[edit]Microfinance and social

interventions

There are currently a few social interventions that have

been combined with micro financing to increase awareness
of HIV/AIDS. Such interventions like the "Intervention with
Microfinance for AIDS and Gender Equity" (IMAGE) which
incorporates microfinancing with "The Sisters-for-Life"
program a participatory program that educates on different
gender roles, gender-based violence, and HIV/AIDS
infections to strengthen the communication skills and
leadership of women [35] "The Sisters-for-Life" program has
two phases where phase one consists of ten one-hour
training programs with a facilitator with phase two
consisting of identifying a leader amongst the group, train
them further, and allow them to implement an Action Plan to
their respective centres.

Microfinance has also been combined with business

education and with other packages of health interventions.
[36]
A project undertaken in Peru by Innovations for Poverty
Action found that those borrowers randomly selected to
receive financial training as part of their borrowing group
meetings had higher profits, although there was not a
reduction in "the proportion who reported having problems
in their business".[37]

[edit]Other criticisms

Most criticisms of microfinance have actually been

criticisms of microcredit, delivered in the absence of other
microfinance services such as savings, remittances,
payments and insurance.

For example, there has been much criticism of the high

interest rates charged to borrowers. The real average
portfolio yield cited by the sample of 704 microfinance
institutions that voluntarily submitted reports to the
MicroBanking Bulletin in 2006 was 22.3% annually.
However, annual rates charged to clients are higher, as
they also include local inflation and the bad debt expenses
of the microfinance institution.[38] Muhammad Yunus has
recently made much of this point, and in his latest
book[39] argues that microfinance institutions that charge
more than 15% above their long-term operating costs
should face penalties.

Milford Bateman, the author of Why Doesn't Microfinance

Work?, argues that microcredit offers only an "illusion of
poverty reduction". "As in any lottery or game of chance, a
few in poverty do manage to establish microenterprises that
produce a decent living," he argues, but "these isolated and
often temporary positives are swamped by the largely
overlooked negatives." Bateman concludes that "The
international development community is now faced with the
reality that, overall, microfinance has been a development
policy blunder of quite historic proportions."[40] Here
Bateman, like many writers, confuses microfinance as a
broad sector with microcredit, a single microfinance
intervention (see delineation above).

The role of donors has also been questioned. The

Consultative Group to Assist the Poor (CGAP) recently
commented that "a large proportion of the money they
spend is not effective, either because it gets hung up in
unsuccessful and often complicated funding mechanisms
(for example, a government apex facility), or it goes to
partners that are not held accountable for performance. In
some cases, poorly conceived programs have retarded the
development of inclusive financial systems by distorting
markets and displacing domestic commercial initiatives with
cheap or free money."[41]

There has also been criticism of microlenders for not taking

more responsibility for the working conditions of poor
households, particularly when borrowers become quasi-
wage labourers, selling crafts or agricultural produce
through an organization controlled by the MFI. The desire of
MFIs to help their borrower diversify and increase their
incomes has sparked this type of relationship in several
countries, most notably Bangladesh, where hundreds of
thousands of borrowers effectively work as wage labourers
for the marketing subsidiaries of Grameen Bank or BRAC.
Critics maintain that there are few if any rules or standards
in these cases governing working hours, holidays, working
conditions, safety or child labour, and few inspection
regimes to correct abuses.[42] Some of these concerns have
been taken up by unions and socially responsible
investment advocates.

For example, BusinessWeek reported that some Mexicans

are stumbling with terms of newly available funding.[43][44]

Other criticism was raised by the IPO (Initial Public

Offering) of a Mexican MFI Banco Compartamos in 2007.
As the company put its shares on Mexican Stock Exchange
it was able to generate very high profits that were achieved
by rising interest rates on their micro-loans that at some
point reached 86% per year.[45] In July 2010 India's biggest
MFI, SKS Microfinance also went public. In both
instances Muhammad Yunus publicly stated his
disagreement, saying that the poor should be the only
beneficiaries of microfinance.[46][47]

Microcredit has been blamed for many suicides in India:

aggressive lending by microcredit companies in Andra
Pradesh is said to have resulted in over 80 deaths in 2010.
[48]

The problems with the microcredit is documented in a film

of the Danish journalist Tom Heinemann which was shown
on Norwegian National Television in December 2010 and in
Danish National Television January 31, 2011 [49]. In 1997
the Norwegian authorities discovered that 608 million
kroner (US$ 100 Million approximately) aid from Norway
and other countries contributed to the Grameen Bank was
being diverted by Mohammed Yunus and his closest
associates to a company that was engaged in an entirely
different sector.

When the Norwegian Embassy raised the alarm about the

relationship in 1998, more than 50 million aid money had
already been transferred to the For-Profit company
Grameen Phone in which Norway’s Telenor is the largest
shareholder. The whole matter had been kept a secret until
now.

The Norwegian Foreign Affairs committee in Norway’s

Parliament has reacted strongly to the information
presented in the documentary and under a third of the
missing money was later returned to the original account.
Mohammed Yunus mention in his letters to his closest
associates that the reason for the transfer was to not pay
tax. Most of the money are still missing or not accounted
for.

The film documents that money was taken aside by the

very most central person of microloan making a secret
company in order to not pay tax - documented with letters
written by himself [50]. The film also documents that when
Hillary Clinton visited a village in Bangladesh women from
outside were transported into the village and that the 50-80
people in the village who had received microloan never
were asked about their views regarding microloans.
Actually only 3-4 of the people in the village had been able
to build a house because of succes with microloan and a
man in the village had even had the thoughts of making
suicide. Also the film documents that the house which
Hillary Clinton was shown to be a result of a microloan
success was actually a house irrelevant for this topic. The
Danish journalist travelled to Mexico, Nigeria, India and
Bangladesh, even visiting the same places with two years
interval, and found the same results, namely that the
majority of people got worse because of the high interests
and mafia like ways of trying to get those interest money
from the poor. The film has also an interview with the
mother of a girl who put fire on herself and died of suicide
after her sewing machine was taken from her.

The documentary film maker Tom Heinemann, also

revealed that Prof Mohammed Yunus refused to speak to
him during the making of the documentary despite repeated
attempts to get his version of the story.

The documentary also looks at the effectiveness of

Grameen Bank along with it’s miracle stories of
transforming people’s lives and concludes that it has had
little impact on poverty in all these years. In one segment
Heinemann visits the home of the celebrated original
grameen loan-taker – Sufiya Begum in Jobra village.
Celebrated in grameen folklore that is. He finds some very
uncomfortable stories and comes to know that she died in
poverty and all her daughters today are beggars. This story
is disputed, since documentary maker Gayle Ferraro found
the woman alive and well, confirming the original Grameen
story[51].
Documentary broadcasting in the Danish Radio DR also
documented that people receiving microloan often end in a
spiral of debt [52] because the interest rate often is 100% a
year [53].

[54]
.

[edit]Bibliography

 Adams, Dale W., Douglas H. Graham & J. D. Von

Pischke (eds.). Undermining Rural Development with
Cheap Credit. Westview Press, Boulder & London,
1984.

 de Aghion, Beatriz Armendáriz & Jonathan

Morduch. The Economics of Microfinance, The MIT
Press, Cambridge, Massachusetts, 2005.

 Branch, Brian & Janette Klaehn. Striking the Balance in

Microfinance: A Practical Guide to Mobilizing Savings.
PACT Publications, Washington, 2002.

 Christen, Robert Peck, Jayadeva, Veena & Richard

Rosenberg. Financial Institutions with a Double Bottom
Line. Consultative Group to Assist the Poor,
Washington 2004.

 Dichter, Thomas and Malcolm Harper (eds). What’s

Wrong with Microfinance? Practical Action, 2007.

 Dowla, Asif & Dipal Barua. The Poor Always Pay Back:
The Grameen II Story. Kumarian Press Inc.,
Bloomfield, Connecticut, 2006.

 Gibbons, David. The Grameen Reader. Grameen

Bank, Dhaka, 1992.

 Helms, Brigit. Access for All: Building Inclusive

Financial Systems. Consultative Group to Assist the
Poor, Washington, 2006.
 Hirschland, Madeline (ed.) Savings Services for the
Poor: An Operational Guide. Kumarian Press Inc.,
Bloomfield CT, 2005.

 Khandker, Shahidur R. Fighting Poverty with

Microcredit, Bangladesh edition, The University Press
Ltd, Dhaka, 1999.

 Ledgerwood, Joanna and Victoria White. Transforming

Microfinance Institutions: Providing Full Financial
Services to the Poor. World Bank, 2006.

 Mas, Ignacio and Kabir Kumar. Banking on mobiles:

why, how and for whom? CGAP Focus Note #48, July,
2008.

 Raiffeisen, FW (translated from the German by Konrad

Engelmann). The Credit Unions. The Raiffeisen
Printing & Publishing Company, Neuwied on the Rhine,
Germany, 1970.

 Rutherford, Stuart. The Poor and Their Money. Oxford

University Press, Delhi, 2000.

 Wolff, Henry W. People’s Banks: A Record of Social

and Economic Success. P.S. King & Son, London,
1910.

 Sapovadia, Vrajlal K., Micro Finance: The Pillars of a

Tool to Socio-Economic Development. Development
Gateway, 2006.

 Maimbo, Samuel Munzele & Dilip Ratha

(eds.) Remittances: Development Impact and Future
Prospects. The World Bank, 2005.

 Wright, Graham A.N. Microfinance Systems: Designing

Quality Financial Services for the Poor. The University
Press, Dhaka, 2000.

 United Nations Department of Economic Affairs and

United Nations Capital Development Fund. Building
 Inclusive Financial Sectors for Development. United
Nations, New York, 2006.

 Yunus, Muhammad. Creating a World Without Poverty:

Social Business and the Future of
Capitalism. PublicAffairs, New York, 2008.
[edit]See also

Sustainable development portal

 Alternative data

 Bank

 Credit union

 Crowdfunding

 Microcredit

 Microfinance in China

 Microfinance in Tanzania

 Microinsurance

 Microfinance organizations

 Opportunity finance

 Pawnbroker

 ROSCA

 Savings bank
[edit]Notes

1. ^ Robert Peck Christen, Richard Rosenberg & Veena

Jayadeva. Financial institutions with adouble-bottom

line: implications for the future of

microfinance. CGAP Occasional Paper, July 2004,

pp. 2-3.

2. ^ Hernando de Soto. The Other Path: The Invisible

Revolution in the Third World. Harper & Row

Publishers, New York, 1989, p. 162.

3. ^ a b Adams, Dale W., Douglas H. Graham & J. D.
Von Pischke (eds.). Undermining Rural Development

with Cheap Credit. Westview Press, Boulder &

London, 1984.

4. ^ Marguerite Robinson. The Microfinance

Revolution: Sustainable Finance for the Poor World

Bank, Washington, 2001, pp. 199-215.

5. ^ a b Helms, Brigit (2006). Access for All: Building

Inclusive Financial Systems. Washington, D.C.:The

World Bank. ISBN 0821363603.

6. ^ a b Microfinance: An emerging investment

opportunity. Deutsche Bank Dec 2007

7. ^ http://www.citigroup.com/citigroup/microfinance/dat
a/news080303b.pdf

8. ^ Helms (2006), p. xi

9. ^ a b c Helms (2006), p. xii

10. ^ Robert Peck Christen. What microenterprise credit

programs can learn the moneylenders, Accion

International, 1989

11. ^ See for example Adrian Gonzalez & Richard

Rosenberg. The state of microfinance: outreach,

profitability and poverty, Consultative Group to Assist

the Poor, 2006.

12. ^ Microfinance Information Exchange, Inc. (2007-08-

01). "MicroBanking Bulletin Issue #15, Autumn, 2007,

pp. 46,49". Microfinance Information Exchange, Inc..

Retrieved 2010-01-15.

13. ^ McKenzie, David (2008-10-17). "Comments Made

at IPA/FAI Microfinance Conference Oct. 17 2008".

Philanthropy Action. Retrieved 2008-10-17.

14. ^ See for example Cheryl Frankiewicz Calmeadow
Metrofund: a Canadian experiment in sustainable

microfinance, Calmeadow Foundation, 2001.

15. ^ Stuart Rutherford. The Poor and Their Money.

Oxford University Press, New Delhi, 2000, p. 4. isbn

=019565790X

16. ^ Khandker, Shahidur R. Fighting Poverty with

Microcredit, Bangladesh edition, The University

Press Ltd, Dhaka, 1999, p. 78.

17. ^ Graham A.N. Wright and Leonard Mutesasira. The

relative risks to the savings of poor people, Micro-

Save Africa, January, 2001.

18. ^ Robert Peck Christen, Richard Rosenberg & Veena

Jayadeva. Financial institutions with a double-bottom

line: implications for the future of microfinance.

CGAP Occasional Paper, July 2004.

19. ^ MFW4A - Microfinance (2010-11-05). "MFW4A -

Microfinance".

20. ^ Christen, Rosenberg & Jayadeva. Financial

institutions with a double-bottom line, pp. 5-6

21. ^ Microfinance Information Exchange, Inc. (2009-12-

01). "MicroBanking Bulletin Issue #19, December,

2009, pp. 49". Microfinance Information Exchange,

Inc..

22. ^ See for example Joachim de Weerdt, Stefan

Dercon, Tessa Bold and Alula

Pankhurst,Membership-based indigenous insurance

associations in Ethiopia and Tanzania For other

cases see ROSCA.

23. ^ Brigit Helms. Access for All: Building Inclusive

Financial Systems. CGAP/World Bank, Washington,

2006, pp. 35-57.

24. ^ State of the Microcredit Summit Campaign Report
2007, Microcredit Summit Campaign, Washington,

2007.

25. ^ Turner, Michael, Robin Varghese, et al. Information

Sharing and SMME Financing in South

Africa, Political and Economic Research

Council (PERC), p58.

26. ^ Deutsche Bank research, Microfinance: An

emerging investment opportunity, December

0207,http://www.dbresearch.com/PROD/DBR_INTE

RNET_EN-PROD/PROD0000000000219174.pdf

27. ^ See the recent technical paper "Why we need

transparent pricing in microfinance" on the problems

with flat rate disclosure

28. ^ Dichter, T.. "Hype and Hope: The Worrisome State

of the Microcredit Movement". Consultative Group to

Assist the Poor (CGAP).

29. ^ Littlefield, Elizabeth; Morduch, Jonathan and

Hashemi, Syed (2003-01-01). "Is Microfinance an

Effective Strategy to Reach the Millennium

Development

Goals?" (PDF). FocusNote(Consultative Group to

Assist the Poor) (24). Archived from the original on

2007-02-03. Retrieved 2007-03-27.

30. ^ Morduch, Jonathan (2008-10-17). "Comments

Made at IPA/FAI Microfinance Conference Oct. 17

2008". Philanthropy Action. Retrieved 2008-10-17.

31. ^ BBC.co.uk

32. ^ Kristof, Nicholas (2009-12-28). "The Role of

Microfinance". The New York Times.

33. ^ [1]

34. ^ Westover J. (2008). The Record of Microfinance:

The Effectiveness/Ineffectiveness of Microfinance
 Programs as a Means of Alleviating

Poverty. Electronic Journal of Sociology.

35. ^ Kim, J.C., Watts, C. H., Hargreaves, J. R., Ndhlovu,

L. X., Phetla, G., Morison, L. A., et al. (2007).

Understanding the impact of a microfinance-based

intervention of women's empowerment and the

reduction of intimate partner violence in South Africa.

American Journal of Public Health.

36. ^ Stephen C. Smith, "Village Banking and Maternal

and Child Health: Evidence from Ecuador and

Honduras," World Development, 30, 4, 707 723, April

2002

37. ^ Karlan D, Valdivia M. (2009). Teaching

Entrepreneurship: Impact of Business Training on

Microfinance Clients and Institutions. Forthcoming

March 2010, Review of Economics and Statistics.

38. ^ Microfinance Information Exchange, Inc. (2007-08-

01). "MicroBanking Bulletin Issue #15, Autumn, 2007,

pp. 48". Microfinance Information Exchange, Inc..

39. ^ Muhammad Yunus and Karl Weber. Creating a

World Without Poverty: Social Business and the

Future of Capitalism. PublicAffairs, New York, 2007

40. ^ "The illusion of poverty reduction". Red Pepper

magazine. 2010-09-01.

41. ^ Brigit Helms. Access for All: Building Inclusive

Financial Systems. CGAP/World Bank, Washington,

2006, p. 97.

42. ^ Farooque Chowdhury. The metamorphosis of the

micro-credit debtor New Age, June 24, 2007.

43. ^ Businessweek, The Ugly Side of Microlending

44. ^ Mexican microlending bank surges in market debut

 45. ^ CGAP, "Banco Compartamos: Interest Rates,
Profits, and an Initial Public

Offering"http://www.cgap.org/p/site/c/template.rc/1.26

.4905/

46. ^ Businessweek, "Online Extra: Yunus Blasts

Compartamos"http://www.businessweek.com/magazi

ne/content/07_52/b4064045920958.htm

47. ^ ABCNews, SKS Launches India's First

Microfinance

IPOhttp://abcnews.go.com/Business/wireStory?

id=11270209

48. ^ "India's micro-finance suicide epidemic". BBC

News. 2010-12-16.

49. ^ Tom Heinemann: "Fanget i Mikrogæld"

50. ^ http://indiamicrofinance.com/grameen-bank-secret-
documents-norway.html

51. ^ David Roodman's Microfinance Open Book Blog

52. ^ P1 orientering 12-Dec-2010

53. ^ DR Nyheder 12-Dec-2010

54. ^ NY Times "Banks Making Big Profits From Tiny

Loans"

[edit]External links
 Microfinance at the Open Directory Project

Categories: Development | Microfinance | Poverty | Social

economy

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