New studies argue that mobile technologies can be more effective than microcredit in promoting entrepreneurship and fighting poverty in developing countries, like Mauritania. Credit: Kristin Palitza/IPS

By Farangis Abdurazokzoda
WASHINGTON , May 31 2014 (IPS)

Mobile-finance and direct cash grants are revolutionary tools that can substitute for under-developed financial sectors and help reduce poverty and promote entrepreneurship in developing countries, according to researchers here.

Rodger Voorhies of the Bill & Melinda Gates Foundation and Christopher Blattman, a Columbia University political scientist, say these two potentially empowering mechanisms can help global efforts to provide needed assistance to vulnerable and poor populations.

In a teleconference hosted by the New York-based Council on Foreign Relations (CFR), one of the country’s most influential think tanks, the two men argued that mobile technologies can help poor people in developing countries manage their personal finances, including savings, insurance, credit, and cash transfers that many in the developed world take for granted.

Mobile technologies can help fill the gap by providing easy and free access to financial tools, according to an article published in CFR’s journal, ‘Foreign Affairs’, co-written by Voorhies and Jake Kendall, who also works at the Gates Foundation.

The article, ‘The Mobile Finance Revolution’, cites World Bank statistics showing that, on average, nearly nine out of every ten people living in a developing country have a cell-phone account, although some users may, of course, have multiple accounts.

Mobile technologies are more effective than much-lauded microcredit programmes in promoting entrepreneurship and fighting poverty, according to the article.

Among other advantages, they eliminate the bureaucracy and routine banking costs associated with in-person and cash transactions. In addition, mobile-finance clients generate data that can be further used by banks and investors as an alternative for the traditional credit scores, according to Voorhies and Kendall.

In a second article titled ‘Show Them the Money’, Blattman and Paul Niehaus, who teaches economics at the University of California San Diego, detail recent studies that show the effectiveness of cash grants and outline the comparative disadvantages of microloans and related programmes, such as donating money to buy cows, goats, seeds, beans, tools, and other agricultural inputs, as well as schoolbooks and clothing for poor families.

Not everybody wants a cow

Despite the fact that the microcredit movement brought significant positive results – recognised in 2006 when the Bangladesh-based Grameen Bank and its founder, Muhammad Yunus, were awarded with a Nobel Peace Prize – a series of more recent studies on the effects of microloans have put their success into question, according to Blattman and Niehaus.

In one study, the economist Abhijit Banerjee of the Massachusetts Institute of Technology (MIT) and a number of collaborators examined the case of the Indian non-profit Spandana that provided 250 dollar loans to women in Hyderabad at low-interest rates. Over three years, they found no measurable improvements in the education, health, poverty, or women’s empowerment among the recipients.

After collecting an additional 20 years of data on Spandana’s lending and their borrowers, Banerjee found “no evidence of large sustained consumption or income gains as a result of access to microcredit.”

As for the effectiveness of training programmes, economists David McKenzie and Christopher Woodruff reviewed the outcomes of the International Labour Organisation’s ‘Start and Improve your Business Programme’ that has provided training to over 4.5 million people in over 100 countries since 1977. They found that there was little lasting effect on the sales or profits of the business owners in the recipient countries.

“No wonder people in developing countries, when given the choice, don’t necessarily choose to invest in skills training,” write Blattman and Niehaus.

The two authors argue that providing cash grants to poor people directly is also preferable to supplying goods that will presumably be used by recipients to increase their income or skills.

They argue that poor people in developing countries often use the cash to buy the same things that aid organisations would provide, such as livestock, tools, or training, in any event, but giving people cash directly provides them with more flexibility.

“Not everyone, after all, wants a cow,” the authors write.

Blattman and Niehaus do not deny the benefits of aid, training programmes, and microloans but insist that significant improvements are possible depending on how the money is allocated.

In a study conducted in Uganda, 250 groups of 15-25 young adults were each given 400 dollars in cash to spend as they wished, so long as the purpose was to enhance their livelihood.

The study found that most of the money was spent on acquiring the physical tools and materials they needed to start working, and only ten percent was used for training. It turned out that over four years, the participants’ incomes rose by an average of 40 percent.

A similar study was conducted in Liberia, where unconditional 200 dollar grants were given to drug addicts and petty criminals. The recipients “did not waste the money,” but used it to fund legitimate enterprises.

“Fears that poor people waste cash are simply not borne out by the available data,” the authors write.

Cash or cell phones?

Blattman and Niehaus outline the benefits of cash transfers over traditional aid programmes. They emphasise the importance of money transfers in places where the population has been hit by unexpected crises – conflicts, natural disasters, or extended periods of political uncertainty.

“Think of Southeast Asia after [the] tsunami or the Middle East flooded with Syrian refugees, where the returns on capital after a recovery period are likely to be unusually high and the challenge of making smart investments without localised knowledge unusually large,” the authors write.

Further, cash transfers are essential to emerging markets that have relatively stable economies but where few firms offer jobs and where most workers, by necessity, are self-employed.

More specifically, the authors suggest that cash transfers better enable entrepreneurs to start businesses in countries where banks and other credit institutions are weak or under-developed.

Just as Blattman and Niehaus argue that cash transfers can be particularly helpful in emergency situations, Kendall and Voorhies insist that cell phones may actually prove more effective.

“A study in Niger by a researcher from Tufts University found that during a drought, allowing people to request emergency government support through their cell phones resulted in better diets for those people, compared with the diets of those who received cash handouts,” according to the authors.

In addition, studies have shown that cell phones encourage financial discipline and savings. In Malawi, for example, farmers were offered an option to have their harvest proceeds directly deposited into savings accounts. Those farmers who chose this option ended up investing 30 percent more in farm inputs and had a 22 percent increase in revenues compared to those who chose not to participate.

But while both articles articulate valid criticisms of how aid and microloan organisations operate, they fail to address important aspects. The most obvious are literacy rates, especially low financial literacy that is often prevalent in developing countries. The issues that need to be considered with mobile-finance are the access of affordable network providers as well as a very basic one – electricity.

A woman sits in front of a camp after receiving oil and wheat from a U.N. distribution centre in Peshawar. Sixty percent of Pakistan’s population lives below the poverty line. Credit: Ashfaq Yusufzai/IPS

By Carey L. Biron
WASHINGTON, Dec 18 2013 (IPS)

The World Bank has raised some 52 billion dollars, a record amount, for its fund for development in the world’s poorest countries, though some are expressing concerns over the terms under which some of this money is being offered by donor governments.

The bank made the announcement Tuesday in Moscow, where donors wrapped up a two-day pledging summit to top up funding for the International Development Association (IDA), the arm of the Washington-based development institution that focuses on boosting development among the poorest of the poor in 82 countries.“Global cuts to aid are costing lives, so the news that donors have made generous contributions to this fund for the world’s poorest is very welcome news." -- Nicolas Mombrial of Oxfam

World Bank Group President Jim Yong Kim called the effort a “success for the global community”, with the amount constituting around the midpoint of what bank officials had hoped to raise.

“The World Bank continues to show that it is very good at fundraising for IDA,” Scott Morris, a former U.S. Treasury official coordinating U.S. engagement with the World Bank and currently a visiting fellow at the Centre for Global Development, a think tank here, told IPS.

“The dollar amount is a big one and represents a strikingly positive outcome for such a tough budgetary environment for the largest donors.”

Because of the types of countries with which it works, IDA gives out around 20 percent of its funding in grants, with the rest reserved for low-interest loans. As such, the programme’s funding is used up and must be replenished by donor countries every few years.

The Moscow summit this week was the 17th such replenishment, and the funding raised during this round is expected to last for three years, after it is phased in around mid-2014. This timeframe will include the post-2015 period, when the world is slated to set new aims for global development in the aftermath of the Millennium Development Goals (MDGs).

The World Bank says the current replenishment will be used to increase focus on climate change and gender equality, as well as to boost efforts to ensure equitable growth.

The money should go for “electricity for an estimated 15-20 million people, life-saving vaccines for 200 million children, microfinance loans for more than one million women, and basic health services for 65 million people,” the bank says. “Some 32 million people will benefit from access to clean water and another 5.6 million from better sanitation facilities.”

Exceptional circumstances

IDA will now be at the vanguard of the World Bank’s new plan to end extreme poverty by 2030, as unveiled by Kim earlier this year.

Yet with the after-effects of the global economic crisis continuing to roil traditional donor governments, it was unclear whether they would meet bank expectations. Just 46 countries pledged funding in Moscow, for instance, down from 51 during the last replenishment, in 2010 (though this could change slightly in coming months).

In anticipation of constricted purse strings, bank officials this year tweaked traditional guidelines. While in the past donor governments have contributed to IDA only through grants, this year they were offered the option of making contributions through concessional loans.

A bank spokesperson told IPS this option was offered “to provide contributing countries a way to increase their contributions to IDA, and ultimately for IDA to increase its ability to finance more investments in the poorest countries.”

The spokesperson, who noted the decision was taken only due to current “exceptional circumstances”, said a bit more than four billion dollars was pledged as loans, which will eventually have to be paid back. Given that donors typically make up only around half of the total replenishment (other arms of the World Bank Group and repayment of previous IDA loans make up the rest), this four billion dollars is thus a significant portion of the new replenishment.

“Global cuts to aid are costing lives, so the news that donors have made generous contributions to this fund for the world’s poorest is very welcome,” Nicolas Mombrial, who heads the Washington office of Oxfam, a humanitarian group, said Tuesday. But he cautioned that the new funding approach “is acceptable in a context of economic crisis, it should be a temporary fix and not a permanent way of operating.”

The bank notes that concessional lending has always played an important part of its financing structure.

“IDA has traditionally offered countries both loans on highly concessional terms as well as grants,” the spokesperson said.

“The low interest rate charged, the long maturities, and use of a ‘grace period’ amount to a large subsidy from donors to IDA. Increasing the pool of available financing actually increases our ability to have a stronger impact in poor communities.”

Further, CGD’s Morris notes that donor governments have been “very attentive” that loans do not supplant the grants that continue to make up most of IDA’s funding. He also says that the new funding structure will allow for a balance in terms of the varying dynamics among the countries IDA is assisting, particularly in the context of growing middle-income economies.

“They’re at a point in time where they have a large group of low-income countries with compelling financing needs, but over the medium term we’ll also see graduations of some of these countries – for instance, India – that implies less need over time,” he says.

“In this way, they’re able to keep things roughly in balance for IDA. While on the one hand they’re mortgaging their future to some degree, they’re doing it smartly.”

Jim Kim has suggested that middle-income countries made up a significant portion of IDA’s new replenishment.

Civil society monitoring

Others are focusing new attention on how exactly the bank is planning on using some of this new funding. Ahead of the Moscow summit, civil society groups in several major donor countries warned that recent policy documents have suggested that the bank is planning to increase its focus on major energy infrastructure, including large-scale dams.

This runs in the face of strengthening calls by some development experts for multilateral funders to focus instead on alleviating poverty and increasing resilience through small, local energy-generation options.

“We will monitor closely whether the World Bank invests its IDA funds into projects that can reduce poverty, or in mega-dams and fossil fuel projects that destroy the environment and don’t benefit poor people,” Peter Bosshard, policy director at International Rivers, an advocacy group, told IPS.

“We will encourage national parliaments to hold the World Bank to account for its lending decisions under IDA 17, and to shift resources to institutions better placed to reduce poverty if the Bank continues to support destructive energy projects.”

Participants at the Fifth International Microfinance Forum in Caracas. Credit: Estrella Gutiérrez/IPS

By Estrella Gutiérrez
CARACAS, Jul 22 2013 (IPS)

Microfinance is essentially social, but its expansion and evolution towards diversified financial services for those who are excluded from the conventional system has compelled it to develop new codes and practices to reinforce the message that its goal is people – particularly the poor.

The Fifth International Microfinance Forum, held in the Venezuelan capital, studied the enforcement and monitoring of the new Universal Standards for Social Performance Management (USSPM) developed by the sector to ensure that internal practices and relations with clients are consistent with its mission of “changing lives.”

“Providing credit for people at the base of the social pyramid does not necessarily mean you are fulfilling a social mission. That is not enough, reality demands more,” Mario Medina, head of social assets projects for Mibanco in Peru, and one of the speakers at the forum, told IPS.

That extra mile “demands good practices in every activity, from collections and client support to how employees are treated,” said Medina, whose institution is one of the best known in Latin America for its support of microbusinesses, and which grants 90 percent of its loans without collateral.

“It was necessary to emphasise that social outcomes are also part of our income, a result, and that the returns are not only financial,” said Micaela McCandless, coordinator of USSPM activities for Accion, a global organisation that promotes financial inclusion based in Boston, Massachusetts.

McCandless told IPS that “the creation of clear universal standards to monitor social management puts the focus on people and makes all areas of the institution, including the financial area, think about the client, the services he or she needs, and also about employees who are very important within the concept of responsibility.”

The Forum was organised by Bangente, a Venezuelan microcredit organisation that serves people whose poverty level makes them “invisible to commercial institutions and unable to enter them, but who with financial support and training are able to change their lives,” Bangente president Juan Uslar told IPS.

At the Jul. 16 forum, and at later meetings between the international speakers and Venezuelan microcredit operators and clients over the next two days, the microfinance industry exchanged experiences on the introduction of the six Standards, established in 2012.

The Standards were formulated by a consensus of the Social Performance Task Force (SPTF), made up of leaders of all parts of the microfinance sector: donors and multilateral or private investors, technical aid providers, national and regional operators, certification agencies, experts and beneficiaries.

Laura Foose, the director of SPTF, said thanks to the Standards, “microfinance is rebooting,” because “there’s incredible momentum around ensuring that the client is at the centre of our work.”

SPTF was created in 2005 by several international organisations, especially the World Bank’s Consultative Group to Assist the Poor (CGAP), which says 2.5 billion people lack access to affordable financial services, although they are key to overcoming poverty.

The Standards build on the work of previous initiatives, like the Client Protection Principles promoted by the Smart Campaign to define, measure and certify dual social and financial results. The campaign was launched in 2009 by microfinance leaders in countries of the developing South and the industrialised North.

Adela Sagastume, planning and marketing manager for the Guatemalan microfinance organisation Génesis Empresarial, told IPS “we saw warning signs that made us understand that the sector had entered a very complex phase that demanded instruments for everything to remain connected to our heart: social questions, the people, and the excluded.”

Ninety-two percent of Génesis Empresarial’s credits and services are granted in rural areas, 67 percent of them to women and 62 percent to indigenous people, said Sagastume, who was also a speaker at the Forum.

She pointed out that some microfinance institutions have evolved into formal banks, while the capital markets are now the largest financiers, replacing donors.

“We who were born to eradicate poverty, improve living conditions, and generate positive changes in clients and their businesses, families and communities have always been concerned with the social return on investments. But the Standards give us clear concepts and well-defined goals, and that does a great deal to facilitate management,” she said.

Moreover, “it focuses each member of the institution and its clients on the goals: for whom, and why, everything is done. The board, the human resources department, client services, the finance sector, marketing – they all line up with this focus and that helps create a convergence of efforts and purposes,” said Sagastume.

In the new scenario, Medina said, recalibrating indicators on the social aspects of practices and assessments “is essential…What is not measured, is not improved, and only when you begin to measure practices and results do you open a new and wide spectrum of aspects you can improve for people’s benefit,” he said.

His organisation, Mibanco, has gone even further than the assessment of dual social and financial results by incorporating “triple results” in its practices, goals, measurements, monitoring and assessments.

“We include the environmental component in credits and services, for the institution as well as for the clients, because without it there can be no sustainable development,” he said.

McCandless said the Standards are: “define and monitor social goals; ensure board, management and employee commitment to social goals; treat clients responsibly; design products, services, delivery models and channels that meet client needs and preferences; and balance financial and social performance.”

She stressed the importance of the decision to set the Standards for management practices and not for social results. “Experience shows that if an institution focuses on balancing financial and social performance, good financial and social results are achieved,” she said.

She added that there were “so far no comparable data to monitor and define standards for client impact,” although she ventured a guess that in the future such universal data might exist.

Caption: FAO Director General José Graziano da Silva presents the Jacques Diouf Award to Reema Nanavaty of SEWA. Credit: ©FAO/Giulio Napolitano

By Stella Paul
ROME, Jun 15 2013 (IPS)

Jassiben, a self-employed potter from Nana Shahpur village in western India, loves summer despite the heat waves and frequent power cuts, because summer days always mean great business.

“Poor people like us do not have refrigerators, so they store drinking water in the earthen pots that keep the water cool,” says Jassiben, who uses only one name."The best thing is that my husband doesn’t have to migrate anymore. Now he helps me run this business." -- Jassiben, a self-employed potter from Nana Shahpur

“This year, the demand has been so high, I am selling at least a dozen pots every day,” she says with a smile. That fetches over 17 dollars – literally a month’s worth of food.

Jassiben was born into a potters’ family, but married a landless farmer. About six years ago, her husband started to migrate to the city in the summer as work became scarce due to a water shortage.

Left behind with two infants, Jessiben often faced hunger and starvation. She wanted to start making pots to help her family, but found nobody willing to lend her any money.

“The nearest market is about 10 kms away, the roads are bad and most pots break while transporting. So everyone thought it was a high-risk business,” she says.

Three years ago, she heard of the Shri Mahila Sewa Sahakari Bank, which offered micro-loans to poor women to start a business. It was founded in 1974 by the Self-Employed Women’s Association (SEWA), a non-profit organisation that helps women become find a livelihood and become self-reliant.

Jassiben borrowed 60 dollars, a sum that helped her buy a potter’s wheel and build an extra room in her house to store her pots.

“It was a turning point. I discovered that buyers too found it equally troublesome to buy a pot in the market and bring it home intact. Now, they can come to my home, choose a pot or any other item they want, and even order one. I now earn about Rs 5,000 (86 dollars) every month. But the best thing is that my husband doesn’t have to migrate anymore. Now he helps me run this business,” she says.

SEWA bank initially had 4,000 self-employed women workers. Today it has over 50,000 depositors and a working capital of 174,000 dollars. It functions as a cooperative, in which all the members and customers are self-employed women and policies are made by their own elected board.

In recognition to their great contribution to women’s empowerment, SEWA was presented with the Jacques Diouf Award Saturday by the U.N. Food and Agriculture Organisation (FAO) at its ongoing 38th conference in Rome.

Accepting the award on behalf of its 1.7 million members, Reemaben Nanavaty, president of SEWA, tells TerraViva that through the initiative of the SEWA bank, poor women have been given control of natural and financial resources.

“The SEWA Bank has contributed directly in achieving, to some extent, the larger SEWA goals of organising and creating visibility for self-employed women, enabling them to get a higher income and to have control over their own income,” she says.

“A large number of members now have their own hand-carts, sewing machines, looms and tools of carpentry and blacksmithy to work with. Many of them have upgraded their skills and developed more business.”

According to Nanavaty, the award is a great motivation. “I dedicate this award to all the women who are fighting poverty and finding food security and financial self-reliance collectively,” she says.

SEWA shares the award with the European Commission, which has also been working to reduce poverty and ensure food security in 50 countries across the world.

Other FAO awards handed out Saturday recognised the UK-based Guardian newspaper’s global development team for its reporting on agriculture, food security and poverty; FAO field officers David Doolan, Patrick Durst, and Luca Alinovi; the Kenya Forest Service; and the Organización del Sector Pesquero y Acuícola del Istmo Centroamericano (OSPESCA).

Verónica Morales has a small-scale flower-growing business near Mexico City which she started thanks to a loan. Credit: Emilio Godoy /IPS

By Emilio Godoy
MEXICO CITY, Mar 8 2013 (IPS)

The culture of entrepreneurship is weak among women in Mexico, despite the positive influence that it has on women’s development, in a world where women continue to face greater obstacles than men when it comes to setting up and running a business.

Like in other countries of Latin America, women entrepreneurs in Mexico face institutional barriers and hurdles in access to training, financing and markets, which are added to the physical, sexual and economic violence they suffer, according to international and local studies.

“The majority of women entrepreneurs are in the non-agricultural sector, because women don’t have access to land, which means most of them are in more urbanised areas,” Marcia de Castro, the United Nations Development Programme (UNDP) resident representative in Mexico, told IPS.

In this country, entrepreneurs represent just under five percent of the economically active population. But of that proportion, only 2.4 percent are women, according to the World Bank.

Women represent 46 percent of the country’s economically active population of 50 million people.

In Latin America, on average, only three out of 10 entrepreneurs are women, according to the multilateral lender.

According to the national statistics institute, INEGI, seven million of Mexico’s 19 million households are female-headed, in a country of nearly 117 people.

In 2010, the income of male-headed households in urban areas averaged 780 dollars a month, compared to 507 dollars for female-headed households. In rural areas, the averages were 351 and 273 dollars a month, respectively.

“Without adequate financial products, women cannot grow their businesses,” said Leticia Jáuregui, director general and founder of Crea Comunidades de Emprendedores Sociales, a non-governmental organisation that supports social entrepreneurs,

“We started out teaching women the value of what they are doing,” she told IPS. “They have all faced the same challenges, and have worked them out in different ways.

“Investing in women provides enormous social dividends,” said Jáuregui, whose organisation provides advice and training on accounting and productivity to some 1,200 rural micro-businesses set up by women.

Thanks to this, the women’s incomes have increased 50 percent on average, to between 7,800 and 15,000 dollars a year, she said. And 90 percent of the micro-enterprises that have received assistance from CREA have been successful, while 88 percent now have formal accounting systems.

Women entrepreneurs “face legal barriers and obstacles to accessing capital and markets. Financial products are inflexible, set difficult conditions, and are costly. High quality products are lacking,” said David Gough, chief investment officer of Women’s World Banking, a microfinance network of 39 financial institutions in 28 nations.

The agriculture ministry’s programme for women in agriculture provided 78 million dollars in 2012 to more than 4,000 productive projects that benefited some 30,000 women. This year, it plans to provide 57 million dollars.

In addition, since it took office in December, the government of conservative President Enrique Peña has been designing a cash transfer programme for female heads of households, and is creating a National Institute of the Entrepreneur to aid micro, small and medium-sized businesses, with a special focus on women.

Of Mexico’s women entrepreneurs, 84 percent own small companies that employ between two and five people and “are vulnerable to factors like the market and prices,” said the UNDP’s de Castro.

She also said that “26 percent work less than 35 hours a week, because they have to strike a balance with their family life. Besides, their incomes are lower than those of men.”

The 2009 time use survey conducted by INEGI found that men dedicate 53 hours a week to productive work and 12 to domestic tasks, while women dedicate between 40 and 45 hours to economic activity and over 20 to family care and household maintenance.

In its 2012 study “The Effect of Women’s Economic Power in Latin America and the Caribbean”, the World Bank underlined the important role played by women in reducing poverty and easing the impact of the global financial crisis that broke out in the United States in 2008 and is sweeping Europe.

The World Bank estimated the rate of growth of the female labour force in Mexico at 13 percent between 2000 and 2010, below the growth in Panama – 39 percent – and Colombia – 23 percent.

The World Bank stressed that “Female income was especially critical in reducing the strains on the poorest of the poor, along with public and private transfers,” and that “during the 2009 crisis, female participation in the labour market was crucial for compensating for the decline in male labour income.”

Since 2003, the UNDP has been carrying out a global gender equality seal programme to promote fair treatment of men and women in the workplace and supply chain and reduce barriers to women’s insertion in the labour market.

In the case of Mexico, the programme has so far certified 1,623 organisations, 1,038 of which are public, 570 private and 15 non-governmental.

“The laws are not enforced,” said de Castro. “Without a political commitment, at all levels, to reduce gender inequality, violence and exclusion, progress will not be made.”

A law on “equality between women and men” was put into effect in 2006, and in 2007 a law on “women’s access to a life free of violence” went into force. But neither law has been fully enforced, experts say.

Women “must determine what they want to do and how far they want to go,” said CREA’s Jáuregui. She said women entrepreneurs “generate quality jobs that allow their children to get an education, that generate income, and in which they are the decision-makers. If they resolve their problems of domestic violence and self-esteem, they are more productive.”

Given the lack of appropriate financial services for women, Women World’s Banking is preparing a pilot project in the southern state of Puebla.

“We plan to develop a different kind of credit product, more suitable for women,” “There is a major niche that can be sustained with very low costs.”

The plan is to offer productive loans averaging around 780 dollars to between 100 and 200 women for eight months starting in May.

Arely Domínguez, right, and other members of El Guapo at the inauguration of the bankomunales exhibit. Credit: Estrella Gutiérrez/IPS

By Estrella Gutiérrez
CARACAS, Oct 2 2012 (IPS)

“We were used to losing, so a group of us said to ourselves: let’s lose something here,” said Carmen Caravallo, describing the start of a “bankomunal”, a self-managed microfinance fund based on investment, in her rural community in eastern Venezuela.

Ten years later, Caravallo and the other members of the bankomunal in Llanada de Puerto Santo, in the state of Sucre, “are getting used to winning,” she told IPS. “Now we are a family, and we have learned to be responsible; we have improved our lives with money that belongs to us, and strange as it may seem, we feel we are very much in charge,” she added.

Bankomunales, present in 14 countries on four continents, are the brainchild of Venezuelan social entrepreneur Salomón Raydán, who demonstrated that the poor can be self-financed, after Muhammad Yunus of Bangladesh, the father of microcredit, had shown that they could be financed.

The 54-year-old Caravallo, who is in mourning after the recent death of one of her three children, said the road has been “slow, hard and paved with mistrust.” But after three years “people began to make a profit, and saw that we were reliable and responsible.”

In her community of 1,000 people, in one of the poorest states in the country, she is treasurer of the local bankomunal, which began with 20 members and now has 107 as well as “a long waiting list to join.”

Similar experiences have been repeated in 180 bankomunales throughout Venezuela, which have a combined total of 25,465 members who contributed a minimum of 2.30 dollars to become both investors and clients.

Raydán, a philosopher and sociologist by training, told IPS the idea was born 15 years ago, out of his experiences as an adviser for small farmer financial assistance programmes and from what he learned about the way of life of poor rural communities.

Poverty is defined by the irregularity of income, more than the lack of it, he said. “Insecure and fluctuating resources do not allow the poor to face spending that is needed for survival, and so poverty takes root,” said Raydán, the head of the Foundation for Rural Finance (FUNDEFIR).

“Eighty percent of poor people in the world have access to credit through informal systems,” mostly self-managed in their communities, he said.

“But these sources are insecure and they do not add value for their users. They need to be adapted to offer more transparency, training, security and efficiency, so they become more formal, although that doesn’t mean they need to be regulated according to the rules of the state that has excluded them,” said Raydán.

These mutual credit associations began to operate in 1997, granting multiple and variable loans, in contrast with traditional systems that make rotating loans of fixed amounts, which are widespread in poor areas of the developing South.

Furthermore, “their members are not just savers, but investors; they are active, not passive,” he emphasised.

“Only 2.5 percent of the poor population of the world has access to banking services, and microcredit systems serve 105 million people, while the demand for microfinance is two billion people,” he said.

Venezuelan microinvestors acquire a certificate of assets worth 2.30 dollars. No one can acquire more than 15 percent of the total assets, members of different bankomunales who have arrived in Caracas for a photo exhibit about the system tell IPS enthusiastically.

Members are the leading lights of the show launched in September in a gallery in the capital city, where powerful images are shown of open-air meetings or gatherings in borrowed spaces – meetings of credit committees and activities involving the granting or payment of loans.

There are also images of members on cultivated land in both rural and urban areas, grocery stores set up in homes, other small shops, home renovations, sewing or repair workshops, and minifactories producing different products. Other members are depicted next to children wearing new school uniforms, or holding up new kitchen utensils.

Credits are granted for “any legal purpose,” in general to be repaid in three to 18 months, with interest decided by each organisation. Loan amounts vary: a new association may only lend up to 100 dollars, while a more established one may have a ceiling of 2,000 dollars.

All decisions are made at well-attended meetings, and the credit committee gives its decision on each request within 24 hours. “We know each other and we know everyone’s payment capacity; we work on trust,” said Arely Domínguez, head of the bankomunal in El Guapo, a village that was reborn from tragedy.

In December 1999 a flood burst the dam near the village, located 125 kilometres from Caracas, in the north-central state of Miranda. The low-lying land in El Guapo, home to some 3,000 people, was flooded.

FUNDEFIR was one of the organisations to come to their aid, and a year later Domínguez and 34 others founded their bankomunal, which now has 117 members and makes an average of 10 loans a week, totalling 6,000 dollars.

First of all, like everyone else involved in the initiative, they received training and advice from FUNDEFIR. “We learned how to balance our accounts, write budgets, do audits, assess risks and use computers,” said Domínguez, a 49-year-old schoolteacher with two daughters.

Up to August, bankomunales had granted 275,631 credits to 84,884 people, for a total 3.6 million dollars at the official exchange rate.

In El Guapo, the bankomunal operates in the building of a cultural association, but most of the associations meet in members’ houses. Officers are elected at general meetings and work on an honorary basis.

The vast majority of members are women, but the number of men is increasing. One-third of loans are requested for consumption, one-third for enterprises and one-third for emergencies, especially health problems.

Every loan is backed up to at least 40 percent by certificates of assets of the member and his or her sponsors, “to be in the safe zone,” a mantra repeated by the members. “There are hardly ever any problems, but on the second default, they are out,” Caravallo said.

Profits are calculated monthly and distributed to the members annually. “One of the principles of bankomunales is distribution rather than accumulation,” said Raydán. “The profits have little economic importance, but a great deal of educational importance.”

It is “a financial education programme, not a microfinance programme, and the profits help generate a sense of entrepreneurship,” he said.

The model has spread to Bolivia, Brazil, Chile, Colombia, Dominican Republic, Haiti, Peru, Germany, Spain, Hungary, Portugal, Senegal and Indonesia.

The Spanish version, Comunidades Autofinanciadas, won the 2009 prize for the best microfinance programme in Europe, while FUNDEFIR’s system was voted in 2010 one of the 25 social projects in the world most likely to be globalised, by Ashoka Globaliser, an international foundation that promotes social enterprise.

FUNDEFIR has financial support from Total Oil and Gas Venezuela, a subsidiary of the transnational French oil corporation Total, which works in the east of the country.

Diana Vilera, the sustainable development manager, told IPS the company “seeks to promote projects that are a tool for people to be lifted out of poverty.”

“Oil companies take a lot out of the planet and the environment, and we have a duty to contribute whatever we can, beyond the business angle,” she said.

After decades of grinding poverty under successive military dictatorships, Myanmar’s rice farmers have a chance at a better future through rural reforms ushered in by the country’s quasi-civilian government. Microfinance is at the root of it.

The guarantees of small, low-interest loans to this least developed country’s debt-ridden farmers turn a page in the ledger of rural credit, which had virtually dried up within the small agriculture banking system during the 50 years of military rule, forcing farmers to borrow from money lenders at usurious interest rates.

Small loans ranging from 60 to 600 dollars are being offered to the agriculture sector by organisations like the Livelihood and Food Security Trust Fund (LIFT), a Western donor-backed microfinance initiative facilitated by the introduction last November of a microfinance law in Myanmar (also known as Burma).

LIFT donors, including Denmark, the European Community, the Netherlands, New Zealand, Sweden, Switzerland and Britain, contribute to livelihoods and food security for achieving the United Nations Millennium Development Goal of eradicating extreme poverty and hunger.

LIFT has stated strategy of  sustainably increasing food availability and incomes of two million targeted beneficiaries.

Small loans, much in need during the current ‘monsoon paddy’ season, are already  providing relief to farmers who must spend 100 to 150 dollars to produce one acre of paddy, says Andrew Kirkwood, LIFT’s fund director. “With affordable credit, more farmers will be able to afford to cultivate all of their land.”

“The new microfinance law has raised hopes that poor people will soon be able to get affordable credit, which is one of the keys to reducing poverty in the country,” he told IPS. “Access to credit from recognised lenders is extremely limited in Myanmar.”

The assistance from one of the 50 local and foreign organsiations that have been granted microfinance licences stands in contrast to the meagre options farmers faced during military rule when the only official source of rural credit – the Myanmar Agriculture Development Bank (MADB) – was, till 2010, offering eight dollars per acre to farmers.

With commercial banks in Myanmar banned from giving loans to farmers, the limited offerings of the MADB only catered to about a third of the farming population. The void was filled by the money lenders who charged interest rates as high as 20 percent per month.

A recent United Nations statement says that the promise of these new low-cost loans, with interest capped at 2.5 percent a month, has seen the demand for microcredit in rural areas inch close to 470 million dollars and that this could balloon to an estimated two billion dollars with growing demand for smaller loans.

This small change of fortunes for farmers in the rice-growing stretches such as the Irrawaddy Delta is part of a broader economic agenda that President Thein Sein has been pushing since last year. The reforms include the creation of a rural development and poverty alleviation central committee, whose objectives range from improving agriculture production to providing rural credit.

“The governmnt’s commitment to reform has led to the development or the revision of at least 25 new laws since (last year’s) first parliamentary session,” says Jenny Swe Swe Myint, policy coordinator for the Myanmar office of Oxfam, the British development agency. “In March, two land laws, the farmland law and vacant, fallow and virgin management law were approved as part of the land rights reform.”

“These laws would benefit the two-thirds of the population relying on agriculture for their livelihoods,” she said in an IPS interview. “However, there are still major gaps in both laws which could have serious negative impacts on farmers.”

The Thein Sein administration’s strategy is sound.  Agriculture accounts for 36 percent of the gross domestic product, employs the majority of the workforce and provides 25 -30 percent of exports by value, according to a new study by the Asian Development Bank.

“The opportunity to expand farm output, both at the extensive margin (more land under cultivation) and the intensive margin (increased productivity) remains enormous,” the Manila-based financial institution revealed in ‘Myanmar in Transition: Opportunities and Challenges’, released in mid-August.

“With its good weather, abundant water resources, and large rural population (about 60 million people) Myanmar could harvest this ‘low hanging fruit’ as a source of growth in the near term and further develop a vibrant export sector in farm products.”

Currently, according to the regional lender, only 18 percent of the country’s total land area of 68 million ha is cultivated and of which 18.5 percent is irrigated for crops ranging from rice, beans, sesame seed to vegetables. Rice coverage dominates the agriculture land, estimated at close to eight million ha.

“The success of the government’s reforms will be tested in the rural areas,” says Sean Turnell, a Myanmar expert at the Sydney-based Macquarie University. “It is so obvious an area of reform and part of that should require strengthening the rural financial sector.”

“The benefits will be profound, given the extent of rural poverty,” the economist who has authored ‘Fiery Dragons: Banks, Moneylenders and Microfinance in Burma’, told IPS. “It is here where the government can really demonstrate that the new economic change is meant to benefit the people and build a broader reform constituency.”

Laboni (left) checks product quality at her lingerie unit. Credit: Naimul Haq/IPS

By Naimul Haq
DHAKA, Aug 15 2012 (IPS)

Laboni Vhoumik’s lingerie manufacturing unit in the Gopai village of Noakhali district, about 180 km outside the capital, is a forceful argument in favour of the Grameen Bank microcredit model that fosters female entrepreneurship and also relies on it.

But the Grameen Bank is itself under threat of creeping government control sparking  a storm of protests by entities ranging from women’s rights groups to the state department of the United States.

Vhoumik, 36, started out in 2003 with nothing to commend her except tailoring skills. Today, she runs a production unit which employs 12 women and supplies quality undergarments to several major retailers in Noakhali and the adjacent districts.

Joining a local non-government organisation (NGO), Noakhali Rural Development Services (NRDS), helped Vhoumik to borrow Taka 4000 (then about 45 dollars) to buy her first sewing machine.

“We counsel and offer free training to promote such small entrepreneurships. The idea is to ensure that the borrowed money is properly utilized,” Mohammad Kaiser Alam, NRDS microcredit programme coordinator, told IPS.

Vhoumik now earns about 238 dollars a month, which is considered handsome in her village. She also has large savings and recently paid for some major repairing of her home.

Her group of 65 members discusses social and family problems as well as members’ progress with their business or problems or outstanding loans.

Members rarely default as the group is responsible as guarantor for the loans.

But this simple business model that has worked to lift thousands of Bangladeshi women out of poverty is now under threat because one of its pioneers, the Grameen Bank, is undergoing changes at the helm that will allow greater government control.

The government owns three percent of Grameen Bank, but by suitably changing the ‘Grameen Bank Ordinance’ the new state-appointed chairman will be able to appoint its chief executive officer.

“This represents a de facto imposition of government control of the bank; in other words, the poor women, who are also its owners, are being deprived of their right to manage their own bank and are being made powerless,”  says a statement issued by 60 of Bangladesh’s leading civil society representatives.

“Grameen Bank is unique in the world for being owned by impoverished women. Representatives of the 8.4 million women borrowers sit on the board of the bank and have participated over the years in its decision making, unlike any other bank in the world,” the statement said.

Shireen Huq, one of the signatories to the statement, told IPS “there is no reason to believe that the changes (to Grameen Bank) are being made with good intent.”

Huq, a leading women’s rights activist and founder of the NGO ‘Naripokkho’, said the proposed amendment to the Grameen Bank’s constitution gives the chairman of the board the authority to form a three-member selection committee. “In other words, the majority board members will be in effect disenfranchised.

“The government’s appointment of a person known for his animosity towards Prof. Muhammad Yunus (Grameen Bank’s founder) as the chairman did not bode well for the institution,” Huq told IPS.

A press statement on Aug. 5 by Patrick Ventrell, acting deputy U.S. state department spokesman, said Washington was “deeply concerned about recent actions the government of Bangladesh has taken to give the government-appointed chairman of the Grameen Bank Board control over the selection of the bank’s new managing director.”

“This move would diminish the role the largely female borrower-shareholders play in shaping the direction of an institution that has made a difference to millions of impoverished women in Bangladesh, and indeed around the world,” the statement said.

“We are concerned that the latest actions by the government could threaten the future of the bank which was founded by Nobel peace prize laureate Prof.  Muhammad Yunus,” Ventrell said.

The plan by the government to increase its role in Grameen Bank has sparked a furious debate in Bangladesh that has pitted economists who favour microcredit as a development tool against those who believe that it is not effective enough.

Prof. Abul Barkat, who head the economics department at Dhaka University’s  told IPS that microcredit reaches only small portion of the poor people. “Hardcore poor who need most attention remain out of the reach of such services and who are considered having no potential of repaying loans.”

“Out of Bangaldesh’s 150 million population, 98.9 million are poor, 47 million are middle class and 4.1 million are rich people. Out of the 98.9 million, 50 percent form the hardcore poor and remain in the lower bottom. Microcredit only reaches the upper half of the poor who are the potential target group of the NGOs,” the economist explained.

According to Barkat economically the upper half of the poor (49.4 million) who get microcredit facilities “bounce in their own orbit” and they “neither come out of poverty nor slide down to the hardcore poor group.”

Qazi Kholiquzzaman Ahmad, another noted economist, told IPS that he has rarely seen poor people getting significant benefit from microcredit programmes. “One of my own studies shows only seven percent of the borrowers actually coming out of poverty from microcredit.”

Ahmad, who currently chairs Palli Karma-Sahayak Foundation or PKSF, said his 2008 study showed that fewer than ten percent of the total 23 million borrowers in the country actually came out of poverty. “This means that microcredit programmes are not always sustainable in poverty alleviation.”

But, the PKSF itself was launched by the government in 1990 to build on the success of private players and now has over 250 partner organisations (small NGOs) and has 8.6 million borrowers.

Mohammad Hasan Ali, founder and executive director of Pally Bikash Kendra, an NGO that operates microcredit programmes in the northwestern districts, told IPS that the steady growth in borrowings and repayments showed the robustness of the model.

“Surely the poor are borrowing because they are getting some benefit in one way or another,” Ali said.

What is important, most economists agree, is that the small borrowings made through NGOs have  eliminated traditional village moneylenders who charged usuriously high rates of interest and increased the debt burden of the poor.

The real success of microcredit, economists say, lies in the fact that it integrates other programmes like health and hygiene, education, water and sanitation, social safety, legal aid, human rights and other basic issues with the lending process.

S. M. Ali Aslam, executive director of ADAMS, an NGO operating in the southwestern districts, told IPS, “There is no doubt that the NGOs took the leadership in providing financial security to the poor when the  state failed to offer any secure economic programme.”

Aslam added that that foreign donors continue to support microcredit programmes in Bangladesh “because they work.”

For several decades, microcredit presented itself as a magical and benign financial tool for the poorest people in the world, who were otherwise completely excluded from conventional commercial banking services, to secure easy access to loans in order to set up their own businesses and live a dignified life.

Such was the hype surrounding the concept of microfinance that in 2006 its leading practitioners, the Bangladeshi economist Muhammad Yunus and his Grameen bank, received the Nobel Peace prize for, as the Nobel Foundation in Stockholm put it, “their efforts through microcredit to create economic and social development from below.”

Such prestige quickly lured activists, investors, and tycoons like Bill Gates, George Soros, Bono, William and Hillary Clinton and even the Queen of Spain, to fund and endorse microfinance projects around the world.

Now, new evidence suggests that even microcredit was not protected from the greed that characterises modern international finance.

Two recent studies show that microfinance was simply another profit making scheme for global private finance corporations, such as the Deutsche Bank, Citigroup, and Standard Chartered, who started pouring money into microcredit initiatives.

In his book, ‘Confessions of a Microfinance Heretic’, released Jul. 9, former investment banker Hugh Sinclair claims that such banks and funds use microcredit, through local operators, to charge usurious interest rates – of up to 200 percent – on even the smallest loans.

Sinclair said in an interview that microfinance has been “hijacked by profiteers”. According to Sinclair’s interpretation of the microfinance business, “neither (is) the entire sector evil, nor (is) the basic model fatally flawed.” Still, he argued that most of the financial sector involved in the business does not care about microcredit’s actual impact on poverty reduction.

By his own account, Sinclair worked with several microfinance institutions and funds in countries such as Mexico, Mongolia, Nigeria, and Mozambique.

“I couldn’t help but notice that even with a booming 70 billion-dollar industry on their side, the poor didn’t seem any better off in practice,” he told IPS. “Exorbitant interest rates led borrowers into never-ending debt spirals, and aggressive collection practices resulted in cases of forced prostitution, child labour, suicide, and nationwide revolts against the microfinance community.”

European Investment Bank under fire

Similar criticism constitutes the backbone of yet another study, focused on the European Investment Bank (EIB)’s approach to microfinance in developing countries.

The study, by Italian economist Valerio Carboni, was published last June by Counter Balance, a European coalition of development and environmental non-governmental organisations, formed in 2007 specifically to challenge the EIB.

“Microcredit originally was meant to help the poor to escape the poverty cycle,” Carboni recalls in his report. Microcredit “was designed to short circuit the poverty trap that condemned poor people excluded from the banking system to rely on usury loans or accept slavish working conditions.”

Hence, Carboni concludes microfinance addressed primarily the needs of micro entrepreneurs and vulnerable people.

Western governments, through their financial agencies, have for the last three decades been pouring funds into local microfinance initiatives in emerging markets, and helped to turn the original niche sector into a multi-billion-dollar business.

It was in this context that the EIB started its own microfinance activities. Carboni pointed out that though the EIB’s microfinance portfolio still represents a very small fraction of its total budget, it has been growingly steadily through the years.

“Since the EIB’s first operations in Morocco, back in 2003, the average deal size has been increasing constantly and is now expected to hit 10-50 million dollars,” Carboni told IPS. According to the EIB’s own figures, the bank has, since 2003, committed some 881 million euros to microfinance activities, in nearly 50 countries.

“Nowadays microfinance encompasses a wide range of financial services, from micro-insurance to mobile banking, and seems to have lost its original vocation: instead of helping the poorest the question has been turned upside down and it is now how to make money out of them,” Carboni added.

Due to these changes, microfinance is no longer contributing to self-reliant development processes based on domestic resource mobilisation and local institution building, but has instead become “in some cases a significant blockage for the development of the poorest by dragging them into speculative market dynamics and generating a renewed dependency on international financing and actors”.

Carboni’s primary critiques of microfinance in general, and of the EIB’s activities in the sector in particular, are that there is a general lack of strategy and vision. “The EIB just follows the markets,” Carboni said.

He also lamented the fact that in countries with limited capital markets, “the EIB is simply involved in investment projects, rather than in reaching out to the poor.” Furthermore, he said, “the accountability chains are long and obscure, and the management of portfolio is insufficient.”

Sinclair called attention to the lack of regulation on microfinance. “The ultimate investors are not in practice protected by any meaningful regulation, have a limited idea of what their funds are being used for and rely entirely on the funds to reassure them,” Sinclair writes in his book.

While none of the private financial corporations questioned by Sinclair’s book have reacted, the EIB issued a statement in which it “recognise(d) the challenges posed by the lack of standardised social performance measurements used by both microfinance investors and donors”.

But the EIB added that, as an active member of the Social Performance Task Force (SPTF), it has contributed to the establishment of the Universal Standards for Social Performance Management.

The SPTF, a coalition of over 1,000 academics, agencies, donors, investors, and others active in international microfinance founded in 2005, formulated a common social performance framework and an action plan to improve the industry’s social performance.

The SPTF defines social performance as the effective translation of a microfinance organisation’s mission into practice in line with commonly accepted social values.

The EIB also recalled that it has endorsed the Client Protection Principles in microfinance, which are incorporated in all microfinance contracts to encourage improved social responsibility and have helped improve best-practices across the microfinance industry.

(END)