History of microfinance The history of microfinancing can be traced back as long to the middle of the 1800s when the

theorist Lysander Spooner was writing over the benefits from small credits to entrepreneurs and farmers as a way getting the people out of poverty. But it was at the end of World War II with the Marshall plan the concept had an big impact. The today use of the expression microfinancing has it roots in the 1970s when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer Mohammad Yunus, where starting and shaping the modern industry of micro financing. Another pioneer in this sector is Akhtar Hameed Khan. At that time a new wave of microfinance initiatives introduced many new innovations into the sector. Many pioneering enterprises began experimenting with loaning to the underserved people. The main reason why microfinance is dated to the 1970s is that the programs could show that people can be relied on to repay their loans and that its possible to provide financial services to poor people through market based enterprises without subsidy. Shore bank was the first microfinance and community development bank founded 1974 in Chicago . An economical historian at Yale named Timothy Guinnane has been doing some research on Friedrich Wilhelm Raiffeisens village bank movement in Germany which started in 1864 and by the year 1901 the bank had reached 2million rural farmers. Timothy Guinnane means that already then it was proved that microcredit could pass the two tests concerning peoples payback moral and the possibility to provide the financial service to poor people. Another organization, The caisse populaire movement grounded by Alphone and Dorimne Desjardins in Quebec, was also concerned about the poverty, and passed those two tests. Between 1900 to 1906 when they founded the first caisse, they passed a law governing them in the Quebec assembly; they risked their private assets and must have been very sure about the idea about microcredit. Today the World Bank estimates that more than 16 million people are served by some 7000 microfinance institutions all over the world. CGAP experts mean that about 500 million families benefits from these small loans making new business possible. In a gathering at a Microcredit Summit in Washington DC the goal was

reaching 100 million of the worlds poorest people by credits from the world leaders and major financial institutions. The year 2005 was proclaimed as the International year of Microcredit by The Economic and Social Council of the United Nations in a call for the financial and building sector to fuel the strong entrepreneurial spirit of the poor people around the world. The International year of Microcredit consists of five goals: Assess and promote the contribution of microfinance to the MFIs Make microfinance more visible for public awareness and understanding as a very important part of the development situation The promotion should be inclusive the financial sector Make a supporting system for sustainable access to financial services Support strategic partnerships by encouraging new partnerships and innovation to build and expand the outreach and success of microfinance for all The economics professor Mohammad Yunus and the founder of Grameen Bank were awarded the Nobel Prize 2006 for his efforts. The press release from nobelprize.org states: The Norwegian Nobel Committee has decided to award the Nobel Peace Prize for 2006, divided into two equal parts, to Muhammad Yunus and Grameen Bank for their efforts to create economic and social development from below. Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights. Muhammad Yunus has shown himself to be a leader who has managed to translate visions into practical action for the benefit of millions of people, not only in Bangladesh, but also in many other countries. Loans to poor people without any financial security had appeared to be an impossible idea. From modest beginnings three decades ago, Yunus has, first and foremost through Grameen Bank, developed micro-credit into an ever more important instrument in the struggle against poverty. Grameen Bank has been a source of ideas and models for the many institutions in the field

of micro-credit that have sprung up around the world. Every single individual on earth has both the potential and the right to live a decent life. Across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development. Micro-credit has proved to be an important liberating force in societies where women in particular have to struggle against repressive social and economic conditions. Economic growth and political democracy cannot achieve their full potential unless the female half of humanity participates on an equal footing with the male. Yunuss long-term vision is to eliminate poverty in the world. That vision cannot be realised by means of micro-credit alone. But Muhammad Yunus and Grameen Bank have shown that, in the continuing efforts to achieve it, micro-credit must play a major part. The History of Microfinance This article examines the historical context of microfinance and its evolution. The concept of microfinance is not new. Savings and credit groups that have operated for centuries include the "susus" of Ghana, "chit funds" in India, "tandas" in Mexico, "arisan" in Indonesia, "cheetu" in Sri Lanka, "tontines" in West Africa, and "pasanaku" in Bolivia, as well as numerous savings clubs and burial societies found all over the world. Formal credit and savings institutions for the poor have also been around for decades, providing customers who were traditionally neglected by commercial banks a way to obtain financial services through cooperatives and development finance institutions. One of the earlier and longer-lived micro credit organizations providing small loans to rural poor with no collateral was the Irish Loan Fund system, initiated in the early 1700s by the author and nationalist Jonathan Swift. Swift's idea began slowly but by the 1840s had become a widespread institution of about 300 funds all over Ireland. Their principal purpose was making small loans with interest for short periods. At their peak they were making loans to 20% of all Irish households annually. In the 1800s, various types of larger and more formal savings and credit

institutions began to emerge in Europe, organized primarily among the rural and urban poor. These institutions were known as People's Banks, Credit Unions, and Savings and Credit Co-operatives. The concept of the credit union was developed by Friedrich Wilhelm Raiffeisen and his supporters. Their altruistic action was motivated by concern to assist the rural population to break out of their dependence on moneylenders and to improve their welfare. From 1870, the unions expanded rapidly over a large sector of the Rhine Province and other regions of the German States. The cooperative movement quickly spread to other countries in Europe and North America, and eventually, supported by the cooperative movement in developed countries and donors, also to developing countries. In Indonesia, the Indonesian People's Credit Banks (BPR) or The Bank Perkreditan Rakyat opened in 1895. The BPR became the largest microfinance system in Indonesia with close to 9,000 units. In the early 1900s, various adaptations of these models began to appear in parts of rural Latin America. While the goal of such rural finance interventions was usually defined in terms of modernizing the agricultural sector, they usually had two specific objectives: increased commercialization of the rural sector, by mobilizing "idle" savings and increasing investment through credit, and reducing oppressive feudal relations that were enforced through indebtedness. In most cases, these new banks for the poor were not owned by the poor themselves, as they had been in Europe, but by government agencies or private banks. Over the years, these institutions became inefficient and at times, abusive. Between the 1950s and 1970s, governments and donors focused on providing agricultural credit to small and marginal farmers, in hopes of raising productivity and incomes. These efforts to expand access to agricultural credit emphasized supply-led government interventions in the form of targeted credit through stateowned development finance institutions, or farmers' cooperatives in some cases, that received concessional loans and on-lent to customers at below-market interest rates. These subsidized schemes were rarely successful. Rural development banks suffered massive erosion of their capital base due to subsidized lending rates and poor repayment discipline and the funds did not always reach the poor, often ending up concentrated in the hands of better-off farmers.

Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil, and a few other countries extended tiny loans to groups of poor women to invest in micro-businesses. This type of microenterprise credit was based on solidarity group lending in which every member of a group guaranteed the repayment of all members. These "microenterprise lending" programs had an almost exclusive focus on credit for income generating activities (in some cases accompanied by forced savings schemes) targeting very poor (often women) borrowers. ACCION International, an early pioneer, was founded by a law student, Joseph Blatchford, to address poverty in Latin America's cities. Begun as a student-run volunteer effort in the shantytowns of Caracas with $90,000 raised from private companies, ACCION today is one of the premier microfinance organizations in the world, with a network of lending partners that spans Latin America, the United States and Africa. SEWA Bank. In 1972 the Self Employed Women's Association (SEWA) was registered as a trade union in Gujarat (India), with the main objective of "strengthening its members' bargaining power to improve income, employment and access to social security." In 1973, to address their lack of access to financial services, the members of SEWA decided to found "a bank of their own". Four thousand women contributed share capital to establish the Mahila SEWA Co-operative Bank. Since then it has been providing banking services to poor, illiterate, self-employed women and has become a viable financial venture with today around 30,000 active clients. Grameen Bank. In Bangladesh, Professor Muhammad Yunus addressed the banking problem faced by the poor through a programme of action-research. With his graduate students in Chittagong University in 1976, he designed an experimental credit programme to serve them. It spread rapidly to hundreds of villages. Through a special relationship with rural banks, he disbursed and recovered thousands of loans, but the bankers refused to take over the project at the end of the pilot phase. They feared it was too expensive and risky in spite of

his success. Eventually, through the support of donors, the Grameen Bank was founded in 1983 and now serves more than 4 million borrowers. The initial success of Grameen Bank also stimulated the establishment of several other giant microfinance institutions like BRAC, ASA, Proshika, etc. Through the 1980s, the policy of targeted, subsidized rural credit came under a slow but increasing attack as evidence mounted of the disappointing performance of directed credit programs, especially poor loan recovery, high administrative costs, agricultural development bank insolvency, and accrual of a disproportionate share of the benefits of subsidized credit to larger farmers. The basic tenets underlying the traditional directed credit approach were debunked and supplanted by a new school of thought called the "financial systems approach", which viewed credit not as a productive input necessary for agricultural development but as just one type of financial service that should be freely priced to guarantee its permanent supply and eliminate rationing. The financial systems school held that the emphasis on interest rate ceilings and credit subsidies retarded the development of financial intermediaries, discouraged intermediation between savers and investors, and benefited larger scale producers more than small scale, low-income producers. Meanwhile, microcredit programs throughout the world improved upon the original methodologies and defied conventional wisdom about financing the poor. First, they showed that poor people, especially women, had excellent repayment rates among the better programs, rates that were better than the formal financial sectors of most developing countries. Second, the poor were willing and able to pay interest rates that allowed microfinance institutions (MFIs) to cover their costs. 1990s These two features - high repayment and cost-recovery interest rates permitted some MFIs to achieve long-term sustainability and reach large numbers of clients. Another flagship of the microfinance movement is the village banking unit system of the Bank Rakyat Indonesia (BRI), the largest microfinance institution in developing countries. This state-owned bank serves about 22 million microsavers with autonomously managed microbanks. The microbanks of BRI are the product of a successful transformation by the state of a state-owned agricultural bank

during

the

mid-1980s.

The 1990s saw growing enthusiasm for promoting microfinance as a strategy for poverty alleviation. The microfinance sector blossomed in many countries, leading to multiple financial services firms serving the needs of micro entrepreneurs and poor households. These gains, however, tended to concentrate in urban and densely populated rural areas. It was not until the mid-1990s that the term "microcredit" began to be replaced by a new term that included not only credit, but also savings and other financial services. "Microfinance" emerged as the term of choice to refer to a range of financial services to the poor, that included not only credit, but also savings and other services such as insurance and money transfers. ACCION helped found BancoSol in 1992, the first commercial bank in the world dedicated solely to microfinance. Today, BancoSol offers its more than 70,000 clients an impressive range of financial services including savings accounts, credit cards and housing loans - products that just five years ago were only accessible to Bolivia's upper classes. BancoSol is no longer unique: more than 15 ACCIONaffiliated organizations are now regulated financial institutions. Today, practitioners and donors are increasingly focusing on expanded financial services to the poor in frontier markets and on the integration of microfinance in financial systems development. The recent introduction by some donors of the financial systems approach in microfinance - which emphasizes favorable policy environment and institution-building - has improved the overall effectiveness of microfinance interventions. But numerous challenges remain, especially in rural and agricultural finance and other frontier markets. Today, the microfinance industry and the greater development community share the view that permanent poverty reduction requires addressing the multiple dimensions of poverty. For the international community, this means reaching specific Millennium Development Goals (MDGs) in education, women's empowerment, and health, among others. For microfinance, this means viewing microfinance as an essential element in any country's financial system. Examples of Recent Innovations in Financial Services for the Poor: 1. CCACN (Central de Cooperativas de Ahorro y Crdito Financieras de

Nicaragua) is marketing its "Agriculture Salary" savings product to farmers. The goal of the product is to smooth the flow of income from the proceeds of an annual or semi-annual harvest. Each credit union works with its farmers to identify their individual expenses and determine a monthly "salary" (portion of harvest proceeds on deposit combined with an above-market interest rate) to be withdrawn from the credit union. In its infancy stage, the credit unions have noted an interest from agriculture-based clients in such a savings management program. Source: WOCCU: A Technical Guide to Rural- Finance Exploring Products. WOCCU Technical Guide # 3, December 2003. 2. Caja los Andes in Bolivia offers four loan repayment options that fit the cash flow of various agricultural activities, including an end-of-term payment for both principal and interest that fits single crop activities, and unequal payments at irregular intervals for farmers that have planted several crops with different harvesting periods. Flexibility is also provided in loan disbursements, and farmers can receive the sanctioned loan amount in as many as three installments. 3. Prodem in Bolivia has introduced a combination of biometric fingerprint and Smart Cards to deliver financial services to its clients. Biometric technology measures an individual's unique physical or behavioral characteristics, such as fingerprints, facial characteristics, voice pattern, and gait, to recognize and confirm identity. Although the technology is still new, growing awareness of the importance of data security is increasing adoption steadily. Prodem's fingerprint verification has reduced fraud, error, and repudiation of transactions. Staff had not had to deal with forgotten PIN numbers or unauthorized use of cards and accounts so they have more time to provide personal service and advice to clients. 4. International Remittance Network (IRnet): In late 1999, WOCCU, in partnership with Vigo, a money transfer firm, launched IRnet. As of June 2003, 173 credit unions in Central America offer IRnet, expanding the possibilities for sending remittances through 800 US credit union points of service. The Central American credit unions distribute remittances primarily to rural clients. The distributing credit unions help to integrate remittance recipients into the formal financial sector through trained staff who cross-sell services. When a nonmember enters a credit union to pick up a remittance, a staff person encourages this person to become a credit union member and save a portion of the

remittance in an interest-bearing voluntary savings account. Source: WOCCU: A Technical Guide to Rural- Finance Exploring Products. WOCCU Technical Guide # 3, December 2003. 5. Unibanka (Latvia): Prior to introducing credit scoring, Unibanka, a commercial bank, viewed microfinance loans as too costly to deliver. With the assistance of Bannock Consulting, Unibanka instituted a credit-scoring system based on qualitative client data because sufficient quantitative data was not available to develop a statistical model. Branch staff now uses scorecards to evaluate microfinance loan applications quickly, which has reduced the cost of review and <="" td="" border="0" height="276" made microfinance lending profitable for width="300"> Unibanka. Source: CGAP IT INNOVATION SERIES: Credit Scoring. 6. Managed ASCAs: A number of local organisations in the Nyeri District of Kenya provide management services to group-based loan funds. The groups operate as Accumulating Savings and Credit Associations (ASCAs) and receive management services provided by ASCA Management Agencies (AMAs). The AMA model serves a wider client base than the mainstream donor funded MFIs who tend to focus their attention on micro and small entrepreneurs. The clientele of AMAs are also drawn from other socio-economic strata, including salaried workers such as nurses, teachers and civil servants as well as subsistence and semi-commercial farmers. Hence their reach into the rural areas is much greater than the MFIs. Source: Nthenya Mule, Susan Johnson, Robert Hickson. Wambui Mwangi. The Managed ASCA Model: Innovation in Kenya's Microfinance Industry. Micro-Save Africa. 2001. 7. ICICI Bank (India): Two state banks in India (Corporation and Canara) partnered with an NGO to provide salaried low-income workers with access to savings. The project uses the already established automatic teller machines (ATMs) in the factories to offer a recurring savings product, along with education on personal

finance.

Source:

CGAP.

8. Microenterprise Access to Banking Services (MABS) in the Philippines nurtures the expanded use of the credit bureau by rural banks, which was started in 2001 to minimize client over indebtedness and defaults. MABS has helped to integrate the rural banks' microenterprise loan clients into an existing national credit bureau, by creating an e-mail encryption program that allows rural banks to share information electronically at a low cost. Source: Anita Campion and John Owens, MABS: A Sustainable Approach to Rural Microfinance, Microbanking Bulletin, July 2003. 9. BASIX in India reduced transportation and transaction costs for its clients and decreased staff expenses by establishing tellers in manned phone booths operating in India. The company operating the phone booths receives a service fee and phone booth operators are being trained in basic collection operations and accounting. BASIX is currently redesigning the project after the pilot and preparing it for relaunching. Source: CGAP. 10. Credit, life, and funeral insurance: A WOCCU study on savings and credit cooperatives (SACCOs) in Kenya indicates that HIV/AIDS poses high levels of risk to rural finance institution soundness. The Cooperative Insurance Company (CIC), a professional insurance provider, insures over half of Kenya's more than one million credit union members who subscribe to policies through their credit unions. Source: WOCCU: A Technical Guide to Rural- Finance Exploring Products. WOCCU Technical Guide # 3, December 2003. 11. The National Microfinance Bank in Tanzania (NMB) was created to retain the extensive rural branch network of the National Bank of Commerce (NBC) when it was privatized in 1997. The key to making it commercially viable has been rigorous control of costs through drastic simplification of the business model and tight managerial oversight. Key initiatives have been correct pricing of products, particularly payments and remittance services, which had traditionally been cross-subsidized by other product lines, and the development of microfinance products, mainly small (average US $400) individual loans. Source: Rural financial services: Implementing the bank's strategy to reach the rural poor (Work in Progress). Rural Private Sector, Markets, Finance and Infrastructure Thematic Group. Rural Sector Board, The World Bank. Washington, D.C. March 2003.

12. ADOPEM (Dominican Republic) thoroughly evaluated its PDA (Personal Digital Assistants) program and recorded dramatic improvements. Client retention improved significantly, and the number of days between application and disbursement dropped from five days to two days. Expenses for paperwork dropped by 60% and data entry expenses dropped by 50%. Loan officer caseloads and other productivity measures increased by about 35%. Source: Charles Waterfield, with CGAP and echange LLC Staff, "Personal Digital Assistants, (PDAs)," CGAP IT Innovation Series. Washington, D.C.: CGAP, October 2003. 13. The international NGO Technoserve has developed an inventory credit scheme in Ghana that enables farmers' groups to obtain higher value for their crops by providing post-harvest credit through linkage with a rural financial institution. Instead of selling all of their crop at harvest - when prices are lowest in order to meet cash needs, small-scale farmers in the scheme store their crop in a cooperatively-managed warehouse and receive a loan of about 75-80% of the value of the stored crop, which serves as collateral. This loan permits them to clear their accumulated debts and satisfy immediate cash requirements. Then, when prices have risen in the off-season, the farmers either sell the stored crop or redeem it for home consumption. Source: Rural financial services: Implementing the bank's strategy to reach the rural poor (Work in Progress). Rural Private Sector, Markets, Finance and Infrastructure Thematic Group. Rural Sector Board, The World Bank. Washington, D.C. March 2003. 14. Savings-based, Agriculture-oriented Rural Credit Unions - SICREDI - Brazil specializes in agricultural lending, primarily for the production of rice, wheat, beef, fodder, fish, vegetables and for agricultural equipment. Loan approvals are based upon the members' savings history and credit record, with the size limited to 50 percent of production costs and dependent upon the potential return of crop sale at harvest as well as household income and debt obligations. The borrower makes monthly interest payments and then a balloon payment of the principal at harvest time. In addition, SICREDI participates in the PROAGRO

national crop insurance, for which a premium is added on the loan rate. PROAGRO pays 100% of the loan loss if the crop fails. Source: WOCCU: A Technical Guide to Rural- Finance Exploring Products. WOCCU Technical Guide # 3, December 2003. 15. Producer Associations as Clients of a Financial Institution: GAPI and CLUSA in Mozambique: GAPI offers investment and working capital loans to fora (federations of associations) of small farmers and small and micro-enterprises. GAPI collaborates with CLUSA to set-up and register these fora. Loans are secured through a solidarity group-like guarantee between the participating fora. Each forum on-lends to its member associations, who collect the produce from their individual members and other area farmers and deliver it to the forum in return for the loan. About 80% of the profits from the sale of produce are handed back to the associations - the remaining 20% of the profits are kept by the forum as interest payments. Source: Pearce, Douglas. "Buyer and Supplier Credit to Farmers: Do Donors Have a Role to Play?" prepared for Paving the Way Forward for Rural Finance: An International Conference on Best Practices, held June 2-4, 2003. 16. In South Africa, a network of 8,000 armored trucks equipped with thumbprint recognition and smart-card technology deliver pension payments of about $60 each month to 4.5 million South Africans. The potential of this vast infrastructure to offer pensioners other kinds of financial services is tremendous. Source: CGAP Donor Brief No. 17: How Donors Can Help Build Pro-poor Financial Systems, by Brigit Helms and Ruth Goodwin-Groen, with input from CGAP staff, February 2004. 17. Banco Postal in Brazil, a joint venture between the Post Office and the largest private bank (Bradesco) has offered banking (and payment) services through its network of postal branches in remote and poor areas of the country since March 2002. Source: World Bank. Tanzania Posts Corporation mini-buses offer passenger service along domestic regional routes. Postal outlets have become one-stop service centers that provide photocopying, telephone and money transfer services. They also sell stationery and newspaper and act as agents for others by accepting newspaper advertisements, selling lottery tickets, revenue stamps for radio stations, and

tickets for boats between Dar es Salaam and Zanzibar. Source: International Trade Forum, Issue 4/2002, Page 30. 18. Equity Building Society (EBS) in Kenya has emerged as one of Kenya's leading microfinance institutions, with over 155,000 savings clients and 41,000 borrowers. Once insolvent, EBS transformed itself into a profitable financialservice provider by rigorously focusing on the needs of its clients - in particular, by developing a wide range of market-based financial products and services, including a mobile banking service. Source: CGAP Case Studies In Donor Good Practices No. 8. Donors As Silent Partners in MFI Product Development: MicroSave-Africa and Equity Building Society in Kenya. July 2003. Contributed by CGAP. Prepared for CGAP UNCDF Donor Training, "The New Vision of Microfinance: Financial Services for the Poor." Microfinance Isn't a Magic Bullet Microfinance was once the poster child for poverty alleviation. Hailed as an alternative to dangerous loan sharks, it quickly gained momentum and support from governments and NGO's alike. But lately the microfinance glitter has been wearing off, and this once-globally praised idea has come under intense criticism. Some governments have even encouraged their citizens not to pay back their loans, causing lenders to experience a drop in payback. This is most notable in the Southern Indian state of Andhra Pradesh, where repayment fell from almost 100 percent to a mere 20 percent. While much of the backlash has focused on India, the same problems could strike any community utilizing microfinance, making India an important lesson to learn from. Andhra Pradesh, which has a population of almost 80 million people, accounts for one third of India's microfinance loans, reports The Economist. And it is in Andhra Pradesh where microfinance is taking the most heat. Local governments have pointed the finger at microfinance institutions (MFIs), blaming them for farmer's suicides that occur as a result of severe debt, and castigating them as profiteering loan sharks. The motivations of these politicians, however may be more political than moral. Many of them have utilized the

situation to gain votes from the poor, suggests The Economist article. These politicians may also see MFIs as competition to government-installed programs and their own popularity. Microfinance has also come under fire in Bangladesh where Muhammad Yunus -the father of microfinance -- was facing allegations of illegal financial transactions. The accusation made by a Norwegian film maker has since been retracted, but the prime minister of Bangladesh still seized the opportunity to damage Yunus' reputation. This is important considering much of her motivation in doing so could have to do with Yunus's proposal to start a political party, despite the fact that this party never materialized according to The New York Times. However, NPR has speculated that despite the attention this case is getting, it will not hinder Bangladesh's use of microfinance loans. Other Latin American countries such as Nicaragua and Bolivia have also become entangled with the negative side of microfinance. And politicians in these countries have made similar statements to those made by their counterparts in India, encouraging the poor not to pay back their loans in order to gain support from the lower classes. In truth, microfinance is not a magic wand. Like all financial institutions it is wrought with the ups and downs of the market. And any situation involving loan and credit is dangerous, especially when people are allowed to borrow irresponsibly. The failure of microfinance in India is largely due in part to MFI's shifting their focus from non-profit to profit-making industries and the corruption that follows thereafter. In addition to this, microfinance in India expanded way too quickly without the experience or infrastructure to support it. The boom led to landslide profits for microlenders but disaster for their borrowers. It's important to remember that microfinance is just a tool that can be used in both positive and negative ways. And as The Economist notes, it is neither miraculous nor detrimental: In fact, research suggests that it [microfinance] does work for some people some of the time, as you would expect. It is not a magic bullet, but nor is it intrinsically harmful.

Still there is much hope for microfinance, but it needs strict monitoring and legislation to ensure that corruption and profiteering to not deter it from the original goal of poverty alleviation. Can Profit-Seeking Benefit the Poor? Of the three main microcredit models; non-profit, commercial, and regulated full financial services, which is best equipped to help the poor? The Clinton Global Initiative invited three heavyweights from the microfinance industry to debate this very question: Nobel Prize winner and Grammeen Bank founder Muhammad Yunus, SKS Microfinance founder Vikram Akula, and Mary Ellen Iskenderian, the president and CEO of Womens World Banking. You can listen to Planet Money's distilled version of the conversation below. Yunus presented an argument against the profit-maximizing, commercial approach, contending that rich investors seeking profits should not be allowed to usurp capital from the interest payments of the poor. He argued: Grameen Bank is a for-profit organizationWe are not NGO, we are a bank. But ownership is the question. Grameen Bank is owned by the borrowers. So we make profit, profit goes back to them. So we protect that part. So what we are opposed to when you say profit or commercialization, its money of the poor going out to somebody else. In contrast, Akula alleged that the only way to extend microcredit opportunities to as many poor people as possible is to follow a commercial model: Women from more remote areas would often come and say Can you start in our village? and wed always have to say No, you know, its grant run and so we dont have funds, and wed have to turn them away and theyd walk away disappointed I left my NGO and came up with the idea of using a highly commercial model so that you could access capital markets and go back to that *poor+ woman or any poor woman anywhere in the world and say Yes, you too can have an opportunity. The other panelist, Iskenderian, advocated extending full financial services to the worlds poor. She reasons that the poor need access to regulated, commercial institutions that provide credit but also accept deposits and protect assets.

However, she acknowledges the difficulties of becoming a microbank, specifically those laws often prevents the formation of such institutions and that it is extremely expensive to run them. In The Wealth of Nations, Adam Smith first articulated the notion that firms acting in self-interest and profit-maximization would unintentionally produce socially beneficial outcomes. But is it the best way to prioritize the needs of the poor? You decide. The definition of microfinance Microcredit, or microfinance, is banking the unbankables, bringing credit, savings and other essential financial services within the reach of.millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with money, not for people without. (Gert van Maanen, Microcredit: Sound Business or Development Instrument, Oikocredit , 2004) (Microcredit) is based on the premise that the poor have skills which remain unutilized or underutilized. It is definitely not the lack of skills which make poor people poor.charity is not the answer to poverty. It only helps poverty to continue. It creates dependency and takes away the individuals initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty. (Muhammad Yunus, Expanding Microcredit Outreach to Reach the Millennium Development Goals, International Seminar on Attacking Poverty with Microcredit, Dhaka, Bangladesh, January, 2003) Microcredit belongs to the group of financial service innovations under the term of microfinance, other services according to microfinance is microsavings, money transfer vehicles and micro insurance. Microcredit is a innovation for the developing countries. Microcredit is a service for poor people that are unemployed, entrepreneurs or farmes who are not bankable. The reason why they are not bankable is the lack of collateral, steady employment, income and a verifiable credit history, because of this reasons they cant even meet the minimal qualifications for a ordinary credit. By helping people with microcredit it gives them more available choices and opportunities with a reduced risk. It has successfully enabled poor people to start their own business generating or sustain

an income and often begin to build up wealth and exit poverty. The amount of money thats lended out seldom exceeds 100USD. Microcredit fits best to those with entrepreneurial capability and possibility. This translates to those poor who work in growing economies, and who can undertake activities that generate weekly stable incomes. For those who dont qualify because they are extreme poor like destitute and homeless almost every microcredit institution have special safety programs that offer basic subsistence and later endeavours to graduate this members in their microfinance program making ordinary microcredit available. Microcredit plays an important role in fighting the multi-dimensional aspects of poverty. Microfinance increases household income, which leads to attendant benefits such as increased food security, the building of assets, and an increased likelihood of educating ones children. Microfinance is also a means for selfempowerment. It enables the poor to make changes when they increase income, become business owners and reduce their vulnerability to external shocks like illness, weather and more. Microcredit has widely been directed by the non-profit sector while commercial lenders require more conventional forms of collateral before making loans to microfinance institutions. But now its successfully growing bigger and getting more credibility in the traditional finance world. Due to that the traditional banking industry has begun to realize that this borrower fits more correctly in a category called prebankable. The industry has realized that those who lack access to traditional formal financial institutions actually require and desire a variety of financial products. Nowadays the mainstream finance industry is counting the microcredit projects as a source of growth. Before almost everyone where neglecting the success of microcredit in the beginning of the 1970s when pilot projects such as ACCION where released until the United Nations declared 2005 the International Year of Microcredit. The most of the microcredit institutions and agencies allover the world focuses on women in developing countries. Observations and experience shows that women are a small credit risk, repaying their loans and tend more often to benefit the whole family. In another aspect its also seeing as a method giving the women more status in a social economic way and changing the current conservative relationship between gender and class when women are able to provide income

to the household. Women are in most cases responsible for children, and in poor conditions it results in physical and social underdevelopment of their children. 1.2 billion people are living on less than a dollar a day. There are many reasons why women have become the primary target of microfinance services. A recent World Bank report confirms that societies that discriminate on the basis of gender pay the cost of greater poverty, slower economic growth, weaker governance, and a lower living standard for all people. At a macro level, it is because 70 percent of the worlds poor are women. Women have a higher unemployment rate than men in virtually every country and make up the majority of the informal sector of most economies. They constitute the bulk of those who need microfinance services .Giving women access to microcredit loans therefore generates a multiplier effect that increases the impact of a microfinance institutions activities, benefiting multiple generations. The very future of microcredit in India is in danger, which is a shame for the countrys poor HER sobbing can be heard throughout her village, Nagaram, in the Indian state of Andhra Pradesh (AP). When visitors from Hyderabad, the state capital, some 80km (50 miles) away, cross the threshold of her bare little house, Narsama Anthaiah flings herself prostrate and wailing onto the dirt floor to touch their feet. Her theatrical grief is heartfelt. Two months ago her husband, aged 40, drowned himself. The AP government blames unlikely villains: microfinance institutions (MFIs), which have been expanding fast in the state. Microcredit small loans to the poor, ideally to start a tiny businesshas until recently been seen as one of best hopes for the three-quarters of Indians who still live on less than $2 a day. But the political fallout from such deaths has put paid, at least for now, to the industrys expansion. It could even destroy it altogether in AP, and conceivably beyond. The blame the MFIs shoulder is unfair. Farmer suicides are lamentably common in India. Anthaiah took his own life as a payment loomed on a 15,000 rupee ($333) MFI loan. Heavy rain had waterlogged his cotton crop and left the family struggling to pay the interest rate of 36% a year. But the couple, who had borrowed to build this house, also owed 34,000 rupees to a local moneylender, who charged over 50%.

Even so, Anthaiahs name features on a government list of 85 MFI victims, who had taken their own lives by November 16th. The government has reacted by introducing an ordinance forcing MFIs to change their practicescutting interest rates, changing from weekly to monthly repayments, etc. Opposition politicians, scenting votes, have encouraged borrowers to default. Not surprisingly, recovery rates for some lenders have plunged from close to 100% to around 20%. This is a huge problem for Indian microcredit. AP is not so much the jewel in its crown as the crown itself. The country as a whole has seen a spurt in microcredit, overtaking, in the number of borrowers, Bangladesh, the global movements fountainhead. AP accounts for at least half Indias total, with more than 25m borrowers, up from 8m in 2007. Indeed, the MFIs very success in AP is the source of their present troubles. There have been abuses. Chasing growth, MFIs seem to have piled into the same villages, lending to the same people. Some recovery methods have involved intimidation. In Godhumagudu, not far from Nagaram, Laxmi Peta is mourning her 16-year-old daughter Lalitha. The family ran up 66,000 rupees in debts from five MFIs to pay for the wedding of their elder daughter. Unable to meet a payment, they went away to seek help from the new in-laws, leaving Lalitha alone. An MFI officer arrived, along with the village head and the four other members of her mothers joint liability groupfellow villagers who had taken collective responsibility for the debt. After their harangues, Lalitha drank pesticide. Her mother treasures a tattered suicide note. It advises her not to take out any more loans, except for her young sons education. The MFIs, however, are less abusive, as well as far cheaper, than traditional moneylenders. Their troubles in AP stem from a mixture of institutional rivalry, politics and ideology. Among the MFIs biggest critics is Budithi Rajsekhar, boss of the Society for Elimination of Rural Poverty, an arm of the state government formed in 2000 to run its own microcredit programme. Set up with World Bank money, this involves a network of self-help groups, each of 10-15 women, who pool savings and then have access to bank finance. According to Mr Rajsekhar, there are now about 1m groups, with 10m members, covering 8m-9m households, or 95% of the states

rural poor. The MFIs poach their clients for their smaller, five-member, borrowing syndicates, and dump unneeded loans on them. The antipathy is mutual. For the MFIs, the governments groups offer too little credit, too late. The MFIs offer an alternative to the old-fashioned usurer. But their success in AP has made them a political targetlarge numbers of voters owe them money. The main opposition Telugu Desam Party lost power in 2004 partly because it was seen as in thrall to the IT industry and foreign investors. Championing poor MFI borrowers was a cost-free way of burnishing its credentials with the rural poor. Ideologically, many in India worry that large MFIs have become for-profit firms. The biggest, SKS, was launched by Vikram Akula as a charity, with (according to his divorced and embittered wife) donations from the guests at their lavish wedding. In July it floated on the stock exchange. The issue was 13 times oversubscribed and valued the company at $1.5 billion. It has a star-studded share register and board of directors, and a great appeal for those who like to think you can do well by doing good. Saints and sinners Even charitable microcredit, however, is less fashionable than it was. Other countries microlenders, too, have had crises. In Pakistans Punjab province, for example, it became fashionable in 2008-09 for politicians to encourage borrowers to default on microloans. And this week the movements patron saint, Muhammad Yunus, a Bangladeshi economist and Nobel laureate, was cleared of allegations of diverting Norwegian aid money from one arm of his Grameen bank to another. The film making the accusations also aired arguments that microcredit may do more harm than good. In fact, research suggests that it does workfor some people some of the time, as you would expect. It is not a magic bullet, but nor is it intrinsically harmful. In Nagaram, where Mrs Anthaiah still has to pay off the moneylender with only her own labour to sell, her self-help group is arranging a loan to tide her over. Indias problem is not too much microcredit, but too little, too narrowly directed.

Microlenders, Honored With Nobel, Are Struggling Microcredit was once extolled by world leaders like Bill Clinton and Tony Blair as a powerful tool that could help eliminate poverty, through loans as small as $50 to cowherds, basket weavers and other poor people for starting or expanding businesses. But now microloans have prompted political hostility in Bangladesh, India, Nicaragua and other developing countries. In December, the prime minister of Bangladesh, Sheik Hasina Wazed, who had championed microloans alongside President Clinton at talks in Washington in 1997, turned her back on them. She said micro lenders were sucking blood from the poor in the name of poverty alleviation, and she ordered an investigation into Grameen Bank, which had pioneered microcredit and, with its founder, was awarded the Nobel Peace Prize in 2006. Here in India, until recently home to the worlds fastest-growing microcredit businesses, lending has slowed sharply since the state with the most microloans adopted a strict law restricting lending. In Nicaragua, Pakistan and Bolivia, activists and politicians have urged borrowers not to repay their loans. The hostility toward microfinance is a sharp reversal from the praise and good will that politicians, social workers and bankers showered on the sector in the last decade. Philanthropists and investors poured billions of dollars into nonprofit and profit-making micro lenders, who were considered vital players in achieving the United Nations ambitious Millennium Development Goals for 2015 that world leaders set in 2000. One of the goals was to reduce by half the number of people in extreme poverty. The attention lavished on microcredit helped the sector reach more than 91 million customers, most of them women, with loans totaling more than $70 billion by the end of 2009. India and Bangladesh together account for half of all borrowers. But as with other trumpeted development initiatives that have promised to lift hundreds of millions from poverty, microcredit has struggled to turn rhetoric into tangible success. Done right, these loans have shown promise in allowing some borrowers to build sustainable livelihoods. But it has also become clear that the rapid growth of

microcredit in India some lending firms were growing at 60 percent to 100 percent a year has made the loans much less effective. Most borrowers do not appear to be climbing out of poverty, and a sizable minority is getting trapped in a spiral of debt, according to studies and analysts. Credit is both the source of possibilities and its a bond, said David Roodman, a senior fellow at the Center for Global Development, a research organization in Washington. Credit is often operating at this knifes edge, and that gets forgotten. Even as the results for borrowers have been mixed, some lenders have minted profits that might make Wall Street bankers envious. For instance, investors in Indias largest microcredit firm, SKS Microfinance, sold shares last year for as much as 95 times what they paid for them a few years earlier. Meanwhile, politicians in developing nations, some of whom had long resented micro lenders as competitors for the hearts and minds of the poor, have taken to depicting lenders as profiteering at the expense of borrowers. Nicaraguas president, Daniel Ortega, for example, supported movimiento no pago, or the no-pay movement, which was started in 2008 by farmers after some borrowers could not pay their debts. Partly as a result of that campaign, a judge recently ordered the liquidation of one of the countrys leading microlenders, Banco del Exito, or Success Bank. These crises happen when the microfinance sector gets saturated, when it grows too fast, and the mechanisms for controlling over indebtedness is not very well developed, said Elisabeth Rhyne, a senior official at Accion International, a organization in Boston that invests in micro lenders. On the political side, politicians or political actors take advantage of an opportunity. When they see grievances, they go, Wow, we can make some hay with this. While a broad thread of resentment and disenchantment runs across the globe, the hostility toward microcredit stems from different circumstances in each nation. In Bangladesh, Ms. Hasina appears to have become embittered with Grameen after its founder, Muhammad Yunus, who shared the Nobel, announced in 2007

that he would start a political party. At that time, the country was ruled by a caretaker government appointed by the military. Though Mr. Yunus later gave up on the idea, analysts say Ms. Hasina and Mr. Yunus have not made amends. Ms. Hasinas recent comments about microcredit were prompted by a Norwegian documentary that accused Grameen of improperly transferring to an affiliate $100 million that Norway had donated to it more than a decade ago. Ms. Hasina said Grameen, 3.4 percent of which is owned by the government, might have transferred the money to avoid taxes. The bank, which has denied that accusation, reversed the transfer after Norwegian officials objected to it. Norway recently issued a statement clearing Grameen of wrongdoing. The prime ministers press secretary did not return calls seeking comment. In India, leaders in the southern state of Andhra Pradesh, which accounts for about a third of the countrys microloans, have accused lenders of impoverishing customers. Stories proliferated in the local news media about women who had amassed debts of $1,000 or more as loan officers cajoled them into borrowing more than they could afford and then browbeat them to repay. Many had used the money to pay for televisions or health care or to soften the blow of failed crops, rather than as seed money for businesses. Microcredit firms in India were also accused of siphoning borrowers from government-run self-help groups womens organizations that can borrow small amounts at subsidized interest rates from government-owned banks. The movement against microcredit was started by opposition politicians, who have encouraged borrowers not to repay their loans and have accused senior leaders of the ruling Congress Party of being in cahoots with lenders. The Congress-led state government made the cause its own and passed a tough new law in December to cap interest rates and regulate collections. The crisis has had ripples across the nation. Banks, the primary source of money for micro lenders, have turned off the tap because they are worried about the industrys future. As a result, micro lenders have slowed or stopped lending nationwide.

Grameen Financial Services, a micro lender in Bangalore that is not related to Grameen Bank, has idled 600 new employees it hired just a few months earlier with plans to expand into western and central India. The firm does not lend in Andhra Pradesh. This is frustrating, said Suresh K. Krishna, managing director of Grameen Financial. This is not what we set out for. The whole objective of floating this was to support entrepreneurs and support people in the rural areas and people below the poverty line. Industry leaders say they hope the issues will be resolved soon. The federal government and the Reserve Bank of India, the countrys central bank, are working on new federal regulations to oversee microcredit, said Alok Prasad, chief executive of the Microfinance Institutions Network. Still, some industry officials acknowledge that the sector needs to reform itself to overcome political opposition and live up to its promise. They say organizations that now offer only loans need to diversify into micro savings accounts, which many specialists assert are much better than loans at easing poverty. The industry, they say, also needs to speed up efforts to build a credit bureau that would reduce over lending. And organizations need to measure their success not just by growth and profits, but by how fast their customers are getting out of poverty, experts say. We at microfinance have a job to do to make it easier for politicians to support us, said Alex Counts, the chief executive of the Grameen Foundation, a nonprofit in Washington that is not part of Grameen Bank. Rather than make claims that get out in front of the research, we need to impose on ourselves the discipline of transparency about poverty reduction. Micro-Finance The Only Way to Inclusive Finance By Tameemuddin Humble, India Microfinance The vast majority of the Indian population is chronically poor and destitute and live on the daily income of Rs 20/ who cannot avail the services of the formal financial institutions.

Almost 65% of the population in the country dont get benefit from the formal financial services extended by the government due to unable in providing the required collaterals or finding no guarantor standing for them against the borrowings. This problem is furthered because of the ruling of the Supreme Court that the principal debtor and the guarantor are equally liable to be proceeded at the same time against for recovery of a loan by the creditor. The legal position is clear that liability of the guarantor and principal debtor are co-extensive and not in alternative said a Bench of justices Dalveer Bhandari and H L Dattu. Reserve Bank of India Governor D. Subbarao urged bankers to meet the four formidable challenges before them: deepening financial inclusion, financing infrastructure, strengthening risk management and improving efficiency Commercial banking in India has not penetrated sufficiently to serve the large mass of rural, illiterate and poor people in any meaningful way, the RBI Governor noted. The intermediation cost in India is still high, largely due to high operating costs, said Dr. Subbarao. The challenge for the Indian banks is to reduce the costs and pass on the benefits to both depositors and lenders. Thus the big challenge India is facing now is the financial inclusion of a large segment of the population. And this challenge could only be met through the proper application of microfinance. In the Budget 2010 the UPA Government has set a deadline, i.e., March 2012 to carry out the financial inclusion drive that has the target to cover 60,000 habitations through the Lead Bank Scheme to reach the unbanked people. The scheme is to provide appropriate banking facilities to habitations with more than 2,000 populations. Now the average population coverage by a commercial bank branch in urban areas is 9,400 and in rural and semi urban areas it is 15,900 as on June 30, 2010. Even by the spread of the commercial banks the financial problem of the masses could not be solved as we all know the commercial banks are based on the minimization of risks and maximization of profits and unfortunately cannot reach the masses.

Microfinance Micro-finance movement in India can be traced back in 1992 when NABARD linked SHG with banks. The working definition of micro-finance is given by NABARD in 1998 which states: Provision of thrift (saving), credit, and other financial services and products of very small amount to the poor in rural, semiurban and urban areas for enabling them to raise their income levels and improve living standards. It is a paradigm shift from class banking to mass banking growing at the rate of 60% and covers the population earning more than $2 a day. Out of 9 crore clients or customers of MFIs in India, 80% are women and 90% have SC/ST and minority background. The main point of departure of microfinance from mainstream finance is its alternative approach to collateral and thus becomes the powerful tool to achieve 100% financial inclusion. Micro-finance provides financial services to poor and low income people whose low income standing excludes them from formal banking systems. Now-a-days financial credit is treated as a human right. They need financial services to meet their life-cycle events such as birth, marriage, old age and in emergencies. Microfinance was earlier a social experiment but unfortunately it has now becoming a profit making sector for todays money lenders. They charge high rate of interest in the name of empowering the poor. One can ask the practitioners of microfinance, who charge 24% rate of interest, how you justify the exorbitant rate of interest. At 24 per cent rate of interest the micro-finance institutions (MFIs) are empowering the poorest of the poor where as the rate of interest for the urbanites, whether it is for housing, for car, or for any other business activity, is as low as 6 to 8 per cent. If the poor can be empowered with a 24 per cent rate of interest, how the resourceful persons need a much lower interest rate to get empowered? If the poor in the villages can make a business enterprise by paying a 20-24 per cent rate of interest, why do people in the cities find it difficult to do so? Or is it that we need a different yardstick to empower the poor. The report tells us that SKS Micro-finance is charging approximately 24 per cent rate of interest in Orissa, Karnataka and Andhra Pradesh; in southern India, Equitas Micro-finance is seeking 21-28 per cent interest rate and Basix

Microfinance is providing small loans at 18-24 per centinterest rate. There are numerous other players, and they all rake in money. Sewa in Gujarat and the Grameen Bank in Bangladesh too thrive on a similarly high rate of interest. The government must take care of this phenomenon and make microfinance more accessible to the poor meaning thereby charging the borrowers only the cost of services which could not go beyond 8% of the finance then the growth rate of financial inclusion will not only increase but the poverty in India could also be alleviated smoothly.