MICROFINANCE: The Little There Was May Have Peaked

By Sanjay Suri Reprint | | Print |

Sanjay Suri

LONDON, Aug 24 2005 (IPS) - The best years of microfinance may be over despite the attempted revival by the United Nations, a leading expert on microfinance says.

The best years of microfinance may be over despite the attempted revival by the United Nations, a leading expert on microfinance says.

The United Nations has declared 2005 the International Year of Microcredit. But the UN push may not be moving donors and lending institutions sufficiently, Kate Bird from the Overseas Development Institute (ODI), a leading independent group in London, told IPS.

Asked if the UN push may amount to artificial respiration for microfinance, Bird said: ”I think it is. The development world is full of fashions, and this particular thing is now somehow out of fashion.”

Microcredit may have become discredited a little ”because too much was expected of it,” Bird said. She added that it was ”a mistake to move away from it to the extent that donors and others have.”

The growth peaked around 2000, said Bird, who was earlier with the School of Public Policy at Birmingham University. ”I think in the late 90’s microfinance seemed very exciting, all the donors were very keen to get into microfinance projects. But the donors and others expected too much from microfinance and then associated it very strongly with poverty reduction.”

”There was a lack of awareness that the poorest individuals do not benefit from microfinance,” she said. ”You need to have sufficient assets to be able to use the microcredit that you receive. Very poor people present a greater risk, and also if a very poor household gets in arrears with loan repayments and begins to default, that is very bad for them. It means they are now worse off than they were before.”

Such poor families often have to deal with the social sanctions that go with becoming a defaulter in a group. ”If you are in a group lending scheme and you become a defaulter, your group will punish you in various ways,” Bird said. ”They will humiliate you, they may ostracise you, so you may find yourself in a worse position socially, and you might experience great shame, you’re mortified because you have let your colleagues down.”

The donors and others found that the poorest were either self-excluded from the microcredit scheme, and they were not signing up, or they found it a very uncomfortable experience, and did not sign up again. ”So donors found that credit is helping the less poor, people who are still poor but not the very poor.”

The Grameen model pioneered in Bangladesh has remained the most widely replicated, Bird said. This is a model where the loan is given to the group and the group is held responsible for repayment of the individual loan.

At some places NGOs delivering microfinance have provided individual loans instead. But difficulties have arisen here. ”In the absence of collateral the credit providers depend on the group mechanism making repayments smooth. So if you are lending to an individual, and the poor individual does not have land as collateral, you are basically providing unsecured loans.”

The Grameen model works well in Bangladesh partly because Bangladesh has a high population density which reduces the cost of delivering credit, Bird said. ”In some sub-Saharan African countries the population densities are lower, and so markets do not function so well. It is also difficult for credit officers from microcredit institutions to visit those areas.”

But there have been very successful forms of microfinance in sub-Saharan Africa, she said. ”In some parts of Africa Britain-based NGOs like Harvest Help and FARM Africa provide small loans in the form of goats. ”One scheme is that once your goat has a baby, you give the baby back to the NGO, and they will give that baby goat to another family. But there are different schemes, where you can keep the first baby and give back the second baby.”

There have been variations in microfinance products around things like interest rates, flexibility in providing a repayment holiday at the beginning, and flexibility in design of the schedule and in interest rates, with some charging lower than market rate, others the market rate or above, Bird said. But despite these developments ”there has not been as much variation as you might have hoped.”

NGOs have remained at the forefront of providing microfinance, Bird said. ”The private sector is not interested, particularly in providing microfinance in rural areas, so in the absence of the private sector the NGOs are the most appropriate,” she said.

”Where governments tried to get involved in delivering microfinance there have been big problems with government officials becoming selective in who will get microfinance,” she said. ”So government is not a good intermediary, the private sector is not commonly interested, which does not leave very much. So NGOs tend to become involved in microfinance.”