MICROFINANCE: A Tool For Economic Justice

INTRODUCTION

• Income inequality is often linked to economic and social factors:1. Educational Opportunities

2. Training Opportunities 3. Job Availability 4. Wage Rates 5. Social Mobility 6. Environmental Factors

Recent Advances in the Theory of Economic Development

• The Mystery of Capital by Hernando de Soto

--Informal Economy --Capital as the Key to Economic Development

• Banker to the Poor by Muhammad Yunus

--Poor are outside of Banking System --No Collateral --No Access to Credit

I.

Microfinance: Its Origins and Current Operations in LDCs

The Origins of the Grameen Bank

• Prior to the 1970s, economic growth and development defined by the increase in GNP

1. Credit Assigned a Passive Role

2. Credit = Facilitator of Trade and Commerce

3. Credit = Tool of the Formal Business Sector

The Poor in Bangladesh before Yunus

• Poor in the Villages of Bangladesh involved in Small Business—i.e., Entrepreneurs

• Outside of the Formal Banking System

• No Access to Loans or Credit

Muhammad Yunus: “Credit is a Powerful Weapon”

Key Features of the Grameen System• Peer Lending Model• Loans for One Year—Installments Paid Weekly• Interest Rate of 20%• Repayment = 2% of the Loan per Week• Contribute to the Group Fund = 5% of Loan

Amount• Member = Savers + Borrowers

Microenterprise in Uganda

Success of the Grameen Bank

• Over $3.8 Billion in Loans have been provided• 2.4 Million Families in Rural Bangladesh have

been served• 98% Repayment rate• Microfinance Initiatives have been started in

100 countries worldwide• Global Movement embraced by Governments,

NGOs, and International Organizations

Mission of a Grameen Bank

Other Models of Microfinance in LDCs

• Rotating Savings and Credit Associations (ROSCA)

1. Members contribute a regular amount of savings each week 2. Members take turns borrowing the funds at no or low interest rates

Women’s Entrepreneurial Group--Uganda

Women’s Businesses--Uganda

Other Microfinance Models (cont.)

• Village Bank Model 1. Community-Managed Credit and Savings Associations 2. Sponsoring Agency will lend Seed Capital 3. Seed Capital becomes the Funds used for Loans 4. All Members Collectively Guarantee the loan

Village Bank in Uganda

Prominent Microfinance Organizations• ACCION International (Americans for

Community Cooperation in Other Nations 1. Private, nonprofit organization 2. Peer-Lending Approach 3. Narrow focus—primary emphasis in on loans to micro-entrepreneurs 4. Minimal Training and Advise 5. Transitioning to Self-Sustaining Business

SEWA • SEWA (Self-Employed Women’s Association) 1. Established in India in 1972 as a workers’ cooperative 2. Provides credit through a village bank model 3. Also provides business training to women 4. Key focus: Women’s Social Development and Collective Empowerment

FINCA • FINCA (Foundation for International

Community Assistance) 1. Pioneered the Village Bank Model 2. Loans provided to help members start and sustain business activities 3. Group loan guarantees substitute for collateral 4. Seed capital comes primarily from USAID

II. Theory of Microfinance in the United States

• Migration of Ideas in Public Finance Usually Begin in Developed Countries and Spread to LDCs

1. Microfinance was a break with this pattern 2. Idea of Microfinance was born in Bangladesh and migrated to U.S.

“The Third Way”

• Microfinance Emerged at a time of a Paradigm shift

• Commitments to: 1. Fiscal Discipline 2. Deregulation 3. Privatization 4. Free Trade 5. Market-Oriented Approaches

“The Third Way” (cont.)

• The Third Way Approach to poverty reduction 1. Market Involvement 2. Foster Community Development• Robert Reich: “. . . The idea is to make it

easier for them (i.e., poor) to obtain good jobs and thus become economic winners.”

• Capital Investment Welfare State• Private-Investment Solutions to Social Welfare

Characteristics of Microfinance in the U.S.

• First Programs = Modeled after Grameen Bank and Group Lending Concept

• Shift to Individual Lending• Emphasis on Training and Skills Development• Mentoring and advice• Goals of Microfinance in U.S.: 1. Job Creation and Income Generation 2. Individual and Community Empowerment 3. Relationship Building and Community Development

II. Major U.S. Microfinance Programs

• ACCION U.S. 1. Focus on Lending and Loans 2. Lent $100 million to 10,000 people in 33 communities 3. 80% of borrowers are minorities; 50% are women 4. Lends to persons with a proven track record 5. No Training

Microfinance Programs in U.S. (cont.)

• Southern Good Faith Fund (SGFF): 1. Nonprofit affiliate of Southern Bancorp 2. Originally modeled after Grameen Bank but has shifted focus overtime 3. Three Primary Areas of Focus: a) Asset Builders Program b) Business Development Center c) Career Pathways Program

Microfinance Programs in U.S. (cont.)

• Women’s Initiative 1. Economic Empowerment of Women 2. Training-led Organization 3. Foster a Relationship between the Borrower and Business Consultant 4. Expert Business Advice

Microfinance Programs in U.S. (cont.)

• Working Assets 1. Credit as a means of community empowerment 2. Peer-Lending Initiative 3. Focus on Self-Employed 4. Emphasizes the Relationship within Lending Groups 5. Social Capital

Microfinance Programs in U.S. (cont.)

• ShoreBank Corporation 1. Chicago-Based Bank 2. Leader in Microfinance 3. Loans to NGOs; in turn, lend to individuals

Problems Facing Microfinance in the U.S.

• Funding--Donors• Sustainability• Complexity of the Economy• Underclass of Self-Employed• Poor Need Savings Not Credit• Route Out of Poverty = Education and Wage

Jobs

Direction of Microfinance in U.S.

• Social Capital/Networking• Individual and Community Empowerment• Savings• Alternatives to Predatory Lending• Credit/Loans for Small Enterprises• Training/Skills• Partnerships with Mainstream Banking

Institutions

IV. Policy Proposals

• Create Peer Saving/Lending Circles

• “Culture of Savings” and Individual Development Accounts

• Low-Cost Banking Services a la Good Faith Fund