Tag Archives: microfinance

Should we just give money to the poor?

Have you ever been around a development program that was gradually getting more and more complicated? Maybe something that started out helping to improve education had become a program filled with underused administrators and layers of reporting and bureaucracy that never trickled down to benefit the students?

Just Give Money to the Poor by Joseph Hanlon, Armando Barrientos, and David Hulme, suggests a much simpler method of reducing poverty. How about we skip the complex programs and just transfer money directly to the poorest in our country? Already there are around 45 countries that have cash transfer programs, including South Africa, Malawi, China, Bolivia, and Mexico, and they become the basis for the argument in this book.

However, setting up and running a cash transfer program isn’t as easy as “driving through the countryside throwing $10 bills or 10 peso notes out of a car window” (p. 11). And as the protagonists in Dave Eggers’ novel You Shall Know Our Velocity quickly find out as they set out to do just that, questions soon arise: What’s the point of the money, what’s expected of the recipients, and who is most deserving of the money?

Just Give systematically discusses similar questions, using examples from already established cash transfer programs in the “Global South,” which can take many different forms depending on the local context and the current political and economic situation. Perhaps the two most important points to consider when designing a cash transfer program are: who are the beneficiaries and what are the goals of the program. Aims for such programs can range from development and economic growth, to social security, to rights and equality (including access to food and education) within the society (p. 47-48).

Deserving vs Undeserving

The longevity of a program depends not just on continued finances (most often from taxes and some external funding) but also the popularity of the program among the general population, and this is where the notion of “deserving” and “undeserving” poor comes into the decision-making process.

For example, in Malawi, elites blamed the poor for their poverty and worried about cash transfers leading to dependency and lack of will on the part of the poor to change their situation, and so their cash transfer program takes the form of a fertilizer subsidy, targeting “only the labor-constrained ultra-poor” (p.168). In Brazil, where only 1% of the elites interviewed blamed the poor for their poverty, cash transfers are much more widespread and politically popular.

Perhaps the largest populations that are exempt from the “undeserving” label, and hence the most common cash transfer recipients, are the elderly and children. These populations of beneficiaries have the added benefit of being relatively simple populations to define and target; people know who the elderly are and all people will hopefully fall in both categories in their lifetime (p. 92). In the future, programs to provide national identity cards and innovations in biometrics and identification technology may help make more kinds of populations easier to define and segment.

Evaluation

Once there is a program in place, how can its effectiveness be evaluated? Unfortunately, as with all evaluation, it is not a straightforward endeavour. Some indicators of impact might be measuring the amount and quality of food consumed, local investment and entrepreneurship, and school attendance.

Ultimately, the authors seemed to deem a program successful if it reached the intended population and remained politically popular. Further research (or perhaps it’s already out there) might compare the impact of cash grants to low-interest loans or other financial development programs.

In the end, I’d recommend reading Egan’s You Shall Know Our Velocity side-by-side with this book, to bring alive the debates about benefits and challenges of just giving money to the poor. I’d also like to see a discussion comparing Just Give Money and David Roodman’s Due Diligence on the topic of micro-finance versus cash transfer programs.

On the other hand, if you have the opportunity of working with a government to implement a cash transfer program, this book alone will provide useful examples of other successful and not-so-successful programs already in action around the world.

Building financial literacy in the Pacific with CUFA’s Executive Officer Peter Mason | AidWorks

CUFA’s Executive Officer, Peter Mason in Laos visiting representatives of the Bank of Lao P.D.R. Image credit: CUFA

This year, 2012, is the UN International Year of the Cooperatives. It is aimed at increasing awareness of alternative business models that are often highly successful. The Australian Credit Union movement’s development arm is CUFA. AidWorks speaks with CUFA’s Executive Officer, Peter Mason, about how poor people can still save and benefit from financial literacy and services. CUFA work in partnerships with communities and credit unions primarily in the Pacific region, to help build financial literacy and understanding as well as provide micro finance services, but not micro loans. They instead work towards savings and other credit union co-operative based directions.

Duration: 17 minutes

 

Micro-loans or micro-savings: what works?

“Is there any one member of this group going for a loan from FINCA again? No! No! Is there any member who is going for micro-loan? No!” Such was the dialog I heard in Malawi from a local savings and loans group (called MAVISALO) discussing micro-loans. Where I had expected to hear great stories of micro-loan organisations empowering people and solving problems, instead I heard tones of disgust. David Roodman’s Due Diligence: An impertinent inquiry into microfinance finds little compelling evidence that micro-loans alleviate poverty or empower people, two of the most common themes in micro-credit marketing.

In one of the appendices, Roodman poses a critical question, “how far should nonprofits go in misrepresenting what they do in order to fund it? It is not an easy question: what if honesty reduces funding?” (loc. 3859). The marketing success of microfinance, and the surge of commercial, governmental, and individual financing that follows, clearly clashed with my experiences in Malawi.

The marketing of micro-credit succeeds for a number of reasons. On one hand is the appeal, especially in North America, of stories of individual “bootstrap” entrepreneurship. These stories are fed to us through loan agents who are trained to create stories of everyone being an entrepreneur and single loans that lead to successful businesses. On the other hand, the micro-credit fundraising model creates an impression of an “unmediated” loan (loc. 3434), where donors/investors feel they are making a one-to-one, direct human connection.

“If people continue to channel billions to the best storytellers,” Roodman says of investors, “they will continue to distort the very thing they mean to support. But if they recognize how their choices have been part of the problem, then they can become part of the solution” (loc. 3456). Can NGOs use the stories as part of a solution that both accurately represents their relationships with aid recipients and also provides assistance that is beneficial?

Throughout the book, Roodman points to the potential of micro-savings to address the financial needs of the poor, especially for protection against financial shock. Indeed, saving seems to emerge as a bright spot in the midst of tepid evaluations of micro-credit, especially considering that “Whatever credit can do, savings can, too. Both can finance investment, pay for consumption, and help a family through health crises” (loc. 1382). While Roodman’s examination of micro-credit research shows benefits only in very specific situations, “the one high-quality study of micro-savings does find economic gains” (loc. 1857). It seems, then, that micro-savings has the potential to both provide a better poverty-reducing vehicle to the poor and tell a better story to donors.

Let’s consider how can we take the elements of successful micro-credit marketing and begin to market self-help and village savings groups. To start, we have to acknowledge that savings programs have an inherently different narrative from micro-credit; it’s not a story of giving a loan or other object directly to another person. Most likely, the NGO costs for establishing and supporting savings groups are paying for infrastructure to keep money safe, and salaries of savings agents. Yet, several aspects of micro-savings, especially when provided through self-help groups, seem poised to allow NGOs to tell the great “lifting out of poverty” narrative that has been applied to micro-credit with more accuracy. The work of micro-savings has less leeway for misrepresentation – either people are saving, or they aren’t – we don’t have to ever know how people spend their money or if their business is successful.

Here are some points gleaned from Roodman, which help craft an honest story about micro-savings that still lends itself to donor impulses:

  • Savings actually can reach the poorest of the poor (loc. 1190). One of the best lines of the book is a poor woman in rural Niger saying that micro-credit “is for rich people” (loc. 1205).
  • People want to save (loc. 3364) and don’t want to be in debt (loc. 1384). Giving people services that help them do what they want is better for them and a better story.
  • Savings programs seem to help women more than men (loc. 2233; 2809). Women are sympathetic story characters and are chosen for many loans programs.
  • Savings groups, which unlike micro-finance institutions (MFIs) can be flexible and reliable, are more likely to empower members (loc. 2476; 2820; 3616). Also empowering, self-help groups foster a sense of group ownership (loc. 2855).
  • Savings can improve the impact of micro-credit (loc. 1531), improving the stories told by MFIs that provide both services.

Of course, the reality of the world makes it unrealistic to expect that any single service will eliminate poverty. Part of the truth in marketing is not just telling a more real story but also sharing a more complex story. Promoting micro-savings programs and stories alongside the many narratives of micro-credit and entrepreneurs can subtly prod donors to consider a wider context of financial services and a wider understanding of life and economic needs of the global poor. While Roodman shares a discouraging overview of micro-credit, there is a more hopeful story of micro-savings as a way to protect against shock and, yes, cover business expenses for entrepreneurs. I came back from Malawi wary of micro-credit and large MFIs but enthusiastic about local groups cropping up to help people move away from loans and towards saving.

Paying it forward: micro-grants, not micro-loans

By Tanya Cothran, Executive Administrator at Spirit in Action.

It used to be common sense that micro-loans were the only way to ensure the sustainability of a micro-finance program and that the act of paying back the loan would instill the sense of “ownership” in the grant recipients. How could a micro-grant – labeled a “hand out” – do anything but create a sense of entitlement on the part of the grantee? We’ve thought that loans were better than grants because they promoted long-term, individual responsibility; but in some markets, loans wreak havoc with indebtedness, hostile payment collectors and inflexible repayment schedules. Grants, unlike loans, can create independence and cultivate sustainable development in a community.

In 2006, just as the Grameen Bank and Kiva were becoming household names, there was a rush to start new micro-finance organisations and benevolently provide money to the poor. Unfortunately, those funds come at a great cost and with inconclusive effects. Interest rates of 40-100% of the loan principle and travel costs to get to and from the bank mean that people are stuck from the moment they get the money.

Why grants?

A loan is just a financial arrangement in the business of making money for a bank, but a grant creates space for positive relationships and an empowered individual. Spirit in Action provides $150 micro-grants to groups of 3-5 people throughout communities on the African continent. Instead of a debt-collector, we have local coordinators who train grant recipients in business planning, marketing, and basic accounting. The grant cohort also forms a support group.

Receiving a $150 grant – rather than a loan – means that the first $150 in profit from their successful enterprise can help group members go to school, improve their house, or pay for medical care, and is not used to pay back donors. And through our program, some of the additional profits are gifted to others in the community, generating goodwill and further development on the local level.

We are Grant Recipients

Our model for micro-grant sustainability reflects our home-office organisational practices. We recognise that since Spirit in Action relies purely on donations from individuals for our funding, we also are grant recipients. Our supporters don’t ask us to pay them back – they ask us to pay the gift forward to help people as defined in our mission and programmatic plans. By asking our Small Business Fund grant recipients to pay it forward to a neighbor or community member rather than paying the organisation back, we are asking them to do only what we ourselves do. Paying it forward starts with our donors and passes on to many more throughout the world.

Becoming a Giver

Our paying it forward program, Sharing the Gift, suggests to grant recipients that they have received the gift of a grant from Spirit in Action and asks them, “How can you share this gift with others?” The actual form of sharing varies among groups, with input from the local coordinators. Some tithe a percentage of profits toward future groups, others contribute seeds or baby animals to a new group, and sometimes business groups come together to support a project that benefits the whole community.

After receiving a grant, people are empowered to be givers in their communities. Fundraisers know that people receive genuine happiness from giving to others; the Small Business Fund and Sharing the Gift enable people who have grown up with very little to have more to share with others and to be respected for their gifts to neighbors.

Unlike loans, which create an immediate indebtedness in the community, grants and a “paying it forward” mentality make development sustainable in the communities where we have funded small businesses. Even without additional grants, local growth comes from small business owners themselves. The development of their community originates with their desire to pay forward what they have received. Grants are not a hand out; they enable people to invest in their communities in a grassroots manner.

 

Tanya Cothran is Executive Administrator at Spirit in Action, an international micro-grant organisation working in eastern Africa. To learn more about Spirit in Action’s work, you can contact Tanya at admin AT godsspiritinaction DOT org. You can also follow her on the SIA blog.

whylinks

Our favourite links for the week:

Who is the ‘Development industry’ – Tobias Denskus at Aidnography

Providing a home to the neglected mentally illIndia News: Mental Health

What Do Donors Discriminate On? Evidence From Kiva.org – Preliminary research paper presented at the 2nd European Research Conference on Microfinance, June 16-18 2011.

The Places We Live – Jonas Bendiksen and Magnun Photos

The myth of temporary protection visas – Sue Hoffman, The Drum

Buy a half-gallon of sugar water at KFC, give a dollar to diabetes research – Jess Zimmerman, Grist

Happiness as Development – Charles Kenny, Center for Global Development

Banking on the poor in China

Earlier last week, it was announced by the central bank of Bangladesh that the Banker to the Poor, the Father of Microfinance, Professor Muhammad Yunus was being sacked. The details, motivations, and ramifications are unclear and it remains to be seen whether he will step down. It appears to be politically motivated and based on the legal technicality of retirement. It is the latest in a string of events that are shaking the very foundations of microfinance. If you want to catch up, I highly recommend following the Center for Global Development’s David Roodman.

Professor Muhammad Yunus, Bangladesh and India are synonymous with microfinance. The Microcredit Summit Campaign estimated as of 2006, over 3,100 microfinance institutions (MFIs) were providing financial services to more than 113 million poor people worldwide. Indeed, the Indian subcontinent accounts for the majority of the world’s MFIs and borrowers. However, where is the world’s largest microfinance market? Bangladesh? India?

It is well-known that the majority of the world’s poor now live in Middle Income Countries (MICs), most notably China and India. In 1990, about 93% of the world’s poor people lived in Low-Income Countries (LIC). However, recent research suggests that three-quarters of the world’s approximately 1.3 billion poor live in MICs and the remaining quarter, about 370 million people, live in the 39 LICs, which are largely in sub-Saharan Africa. It is not that they have moved, but that consistent and stellar economic growth rates have pulled countries such as China up the World Bank’s classification system.

Poverty in China is often overshadowed by average annual GDP growth rates of 9%. According to World Bank and UN statistics, around 200 million Chinese live on less than US$1.25/day; Bangladesh has a total population of 162 million. Furthermore, 482 million people live on less than US$2/day; greater than the populations of the US, Germany and UK put together. Although many are quick to point to the number of people lifted from poverty in China over the past few decades, poverty reduction is slowing down and a gap is opening up.The rural-urban divide is the new Great Wall and can certainly be seen from space. The average income of one of the 750 million who lives in rural China is less than 1/3 of that of a person living in an urban area. Then there is the 35 million, who have an average annual income of US$176. That is equivalent to the population of Canada living on about $0.48 a day. 66% of these extremely poor live in the Western Region and only %5 in the Eastern Region. This rural-urban divide can be found not only in wealth distribution and income, but also across human development indicators in education, health, and gender.

 

‘Microfinance must be an enormous sector in China’, I hear you saying. Think again.

Microfinance in China is an extremely underdeveloped and overlooked sector that deserves more attention than it is getting. Despite the numerical demand for microfinance services, China has only 22 microfinance institutions (MFIs) with approximately 1.6 million borrowers. China’s financial and banking regulation makes it difficult for entrepreneurs and small business owners to access loan credit, especially in rural China. This data would seemingly make a strong case for continued and targeted aid programs to China. However, DfiD, in light of its recent aid review, has cut aid to China, and Australia’s own aid review and program in China is relatively small.

Discussions of Australia’s aid review have been largely exclusive of China’s development challenges despite the above figures and Australia’s strong bilateral relations. Should Australia’s aid program be targeting pro-poor growth initiatives and poverty reduction strategies in China? In 2010-11, the total Official Development Assistance (ODA) to China will total about A$37 million or about 0.8% of the aid budget. The programmatic focus in China is predominately on health and environment. Not unsurprisingly, the overlooking of China’s rural poor by governments both east and west has created opportunities for social innovation from the non-government sector.

Gaps in the market, unseen opportunities and tough regulation spur innovation and entrepreneurship. Step in peer-to-peer (P2P) platforms in microfinance, which leverage online tools and global networks to connect contributors with borrowers. Some commentators on microfinance see P2P platforms on a precipice. It is predicted that by 2013, P2P lending will exceed US$5 billion. P2P microfinance was recognised in by Harvard Business Review as one of the top 20 breakthrough ideas of 2009. P2P has global demand, contributor confidence because of its transparency and accountability measures, lender interest and technological support through web architecture.

Such platforms are redefining where charity actually begins. Prior to advances in communications technology and globalisation, you could really only donate to organisations within your own community. Now, you can take matters of development assistance into your own hands and donate to organisations and projects across the world. Global communities, migration and social networks are also redefining where ‘home’ is. Wokai, a peer-to-peer microfinance platform for China, provides new architecture for mobilising people to decide how they want to address the world’s most pressing issues

Although largely benefiting from contributors outside of China, Wokai is in the process of establishing a partnership with a Chinese foundation that will enable it to scale-up, fundraise, advertise and leverage the potential of the Chinese market. More importantly, it will offer a South-to-South (or in China an east-to-west) model of development cooperation and participation, which mobilises civil society and enables Chinese to support China. Young Chinese professionals in Shanghai will be able to support low-income entrepreneurs in rural Sichuan, and watch online as businesses and well being grows. Such organisations and platforms offer a way to bypass traditional aid flows and channels, allowing everyone the opportunity to participate in development assistance and see the results.

This is a cross-post with Lowy Institute’s Interpreting the Aid Review

Borrowing from Facebook: new directions in microfinance

The microlending movement that was supposed to help lift millions of people in India out of poverty has in recent weeks fallen into chaos.

This was the lead for the Wall Street Journal’s feature article on the current microfinance crisis in India. The article goes on to shine a rather critical light on the microfinance sector, a sector which in recent times has enjoyed widespread support from both the international development and poverty alleviation professions and the public at large. This scrutiny is perhaps long overdue, as public contributions to microfinance become more and more available through innovative peer-to-peer platforms (P2P).

The Wall Street Journal article covers the situation unfolding in the southern Indian state of Andhra Pradesh. It is a clash of microfinance models, triggered by reports of suicides among over-indebted borrowers; a fight by between private for-profit microfinance organisations and government-backed ones for the debt of the poor. Growth in the microfinance sector has exploded in recent years in Andhra Pradesh, raising debt stress and threatening the sector nationally. There is already plenty of insightful and critical analysis out there, which will not be rehashed. Instead, I want to use these events to reflect on approaches to microfinance and start a conversation around new directions in microfinance.Efforts to map the distribution and reach of microfinance globally have not been undertaken as of yet. The Microcredit Summit Campaign estimated as of 2006, over 3,100 microfinance institutions (MFIs) were providing financial services to more than 113 million poor people worldwide. The highest concentration of MFIs are in India. However, the UN Capital Development Fund estimates that that between two and three billion people still lack access to a broad range of financial products and services on a sustainable basis. In an continually integrated and global economy, this exclusion makes them more vulnerable to economic shocks and fluctuations. However, has the inclusion of those wanting access to credit (and debt) achieved social and economic development goals? The success of microfinance depends on the question being asked.

David Roodman, of the Center for Global Development, asks a simple and poignant Sen-like question – does microfinance expand or contract freedom? “A simple question…led us onto a vast and variegated terrain. The root of much of this complexity, noted at the outset, is debt’s double aspect as a source of both possibility and obligation.” As a demand-led sector, what is microfinance supplying borrowers with? Possibility and/or obligation? Is it providing them with a loan to establish a sustainable livelihood? Is a business loan what people want?

Like all who use credit, poor people have complicated financial lives and need money for things besides business. Older research, since the 1980s when microcredit became available, generally found that it increased household incomes. More recently, the picture is changing. A survey in the Philippines of microfinance borrowers found that 46% of borrowers used a decent part of their business loan to pay down other debt and about 28% spent part of the money on a big household purchase. Fewer than 4% of people in either category ever admitted this to their bank. Richard Rosenberg, of CGAP, declares: “I think an honest appraisal of the current state of the evidence is that we simply do not know whether microcredit raises incomes and consumption.”

However, that may be irrelevant; the demand for microfinance services is high, and MFIs’ loan portfolios are becoming very large and profitable. Not-for-profit MFIs, such as Grameen Bank, are now self-sustaining while other smaller not-for-profits value transparency over the opacity of large transactions. Debate has sought to establish which whether for-profit or not-for-profit is the more effective and sustainable approach. This is also where the inherent value of microfinance lies; MFIs need very little ongoing public expenditure or resources where the sector is firmly established. Such demand, appeal and the increasing connectivity of global issues is driving social entrepreneurship around microfinance in places where you least expect it: China.

Microfinance in China is an extremely underdeveloped and overlooked sector that deserves more attention than it is getting. Poverty in China is often overshadowed by average annual GDP growth rates of 9%. According to World Bank and UN statistics, around 200 million Chinese live on less than US$1.25 a day. China’s financial and banking regulation makes it difficult for entrepreneurs and small business owners to access loan credit, especially in rural areas, where some 750 million people live. Whilst the government is geniunely supportive of microfinance efforts, a new peer-to-peer microfinancing platform, Wokai, is negotiating the Great Wall of Regulation (legally of course) and connecting international contributors with Chinese borrowers. The foundation of Wokai is accountability and transparency, as demanded by contributors. The platform is similar to that of Kiva and Vittana, but Wokai is the only one supporting sustainable livelihoods in China.

Some commentators on microfinance see P2P platforms on a precipice. It is predicted that by 2013, P2P lending volume will exceed US$ 5 billion. P2P microfinance was recognised in by Harvard Busness Review as one of the top 20 breakthrough ideas of 2009. P2P has global demand, contributor confidence because of its transparency and accountability measures, lender interest and technological support through web architecture. Ronald Ingram believes that official government sanction and endorsement of the P2P model could push an organisation over into the mass market.

In the context of the current crisis in the microfinance sector, are P2P platforms such as the one offered by Wokai, solutions to engendering a more participatory, transparent and accountable approach? I hope this article has asked more questions than answered, and I look forward to hearing your thoughts.

 

This article first appeared on Triple Pundit on 16 November 2010