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August 13, 2007

Is Microfinance a Bad Thing?

It’s time for some guest blogging, and our first participant is Elmira Bayrasli, the Director of Corporate Partnerships & Outreach at Endeavor, a New York-based non-profit supporting high-impact entrepreneurship in emerging markets. Before joining Endeavor, Elmira was the Chief Spokesperson at the OSCE Mission to Bosnia and Herzegovina.  From 1997-2000 she was a Presidential Appointee in Secretary of State Madeleine Albright’s office.

Elmira was a participant in our Atlanta deep dive last month, and in it she engaged in a stunning discussion about the negative effects of microfinance. Here are her thoughts on that discussion.

Bono was booed recently at a conference on Africa, says Nicholas Kristof in a recent column in The New York Times.  “Several Africans scolded him for demanding more foreign aid, saying that’s not what Africa needs,” he writes. 

Exactly.  Africa has tremendously talented minds. What the continent doesn’t have is fair access to opportunity, which prevents those minds from innovating and improving their quality of life.  Aid has been a necessary measure in Africa.  But as disease, famine and war become more widespread throughout the continent, it can not continue to be Africa’s only option. 

At last month’s GIO deep dive in Atlanta, I was certainly energized by the many voices who spoke about the need for Africans to get away from aid dependence by supporting entrepreneurship.  But I was blown away by the chorus who demanded that it was imperative for Africans to get beyond microcredit and microfinance. 

Microfinance has enabled families throughout Africa, and beyond, to gain control of their own income.  But these small loans haven’t “made poverty a museum piece,” as the Nobel Laureate Muhammad Yunus envisioned.  These small enterprises yield 3-4 jobs at the most, and are rarely sustainable.  Developing economies need to create sustainable businesses that will expand jobs and inject wealth into the community. 

The Atlanta Deep Dive posed the question: “Why does innovation matter?”  Innovation generates ideas, which creates new businesses, which leads to jobs.  The real question should be, “How do we let innovation flourish?  How do we allow bright minds to create new ideas and solutions that will address the issues of poverty, conflict and inequality?” 

Innovation really matters because it leads to transformation.  And this is what Africans need – individuals who will think big and put ideas into action that will lead to change. 

Today, Africans are running businesses that produce world-class coffee and handicrafts and offer globally-competitive services.  They’re using both traditional and technical means to make it happen, and have the potential to scale their endeavors.  The obstacles they face, however, are enormous.  Rather than aid, these entrepreneurs need mentors, access to networks and role models to get them to the next level. 

There is no lack of entrepreneurial role models in the United States.  From Steve Jobs to Bill Gates, young people throughout America find inspiration from their example.  Young people throughout the world should “dream of being inventors,” as Thomas Friedman points out.  It is vital that whether in Africa or Alabama, children grow up in a society which empowers and enables them to think big and believe in themselves. 

That’s why innovation matters. 

August 13, 2007 in Africa | Permalink


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Interesting article. Did people really think microfinance was bad? You cannot expect someone going hungry to come up with the next BIG business plan, first they need to do something to feed their family. Isn't microfinance a step in the right direction. Doesn't the US thrive on small businesses?

Perhaps it is just not enough. To have more large companies, They need better access to banks and bigger loans as well. Venture capital perhaps.

Innovation can and will occur in Africa, but it will not look like innovation in the US.

Posted by: Julia Styles | Aug 14, 2007 10:21:12 AM

First, I would like to say I agree that more foreign aid to Africa is not the way to fostering strong and long-lasting development. With this, however, I would like to ask, if microfinance is not a helpful solution, then what is? Very good points are made for what Africa needs, but there are few mentions as to the means for accomplishing these tasks, for meeting these needs. How does one make large scale finance viable in situations of civil conflict, disease, extreme poverty and, in many places, an absolute lack of good governance and accountability? I commend all persons who work to conceive new ideas for aiding in the African development process, but I also think that Africans have already sat through enough years of great ideas when what they really need are great implementations, great actions and great leaders. You spoke truely about the need for positive role models and innovative leaders for all of world's youths, but I also agree with the comment from Ms. Styles above in that it is surely hard to be innovative on a large scale when you are working daily just to feed your family. American children can look to Steve Jobs and Bill Gates, as can the children of the world, but I think the differences in the realities of life in Africa compared to that in the United States cannot be fully comprehended by the latter. I am sure that Bill Gates, as he was dropping out of Harvard, did not have to worry about whether or not his family would go to bed hungry each night. And this is not a jab and Bill Gates, I have great respect for his innovative abilities and his humanitarian mindset, he is doing a lot of good in the world and I cheer for more like him. This is simply an example of reality.

On a second point, I do not neccessarily consider microfinance to be what one could call "foreign aid". Microfinance is a means to increasing standard of living that is viable for the lending institution while incorporating values of responsibility and accountabilitiy with those receiving credit. One of the main problems with foreign aid is the lack of transparency and accountability in its usages, items that are rooted in the functions of mircofinance. I think that the foundations of microfinance can have a lot of merit in shaping the lives and futures of innovative Africans. One aspect of these foundations is the progessive lending system in that if someone can establish themselves as not only innovative, but also responsible, greater funds are increasingly made available to them. I do not think that microfinance should be written off so easily by being smothered under the canvas of "foreign aid".

Posted by: Neal Detert | Aug 20, 2007 10:46:06 PM

Dear Sir/Madam

Crescent Educational Society (CES) is a secular organization working for the development of the vulnerable groups in Andhra Pradesh. We are focusing on education of the economically deprived segments of the society. We have initiated health and women empowerment programs and advocacy initiatives in Prakasam District. We realized that financial intermediation program will address the double bottom line development of vulnerable communities. Eventhough many organizations are addressing vulnerable groups by micro finance initiatives, the social aspects are not much addressed due to business outlook. Also the recent trend in India is having evidence of financial exclusions and lack of opportunities for livelihood initiatives in availing credit.

In India, micro finance is emerging as a business venture and many NGOs have taken up micro finance interventions for their financial sustainability. Micro Finance Institutions (MFIs) are extending rural credit thereby addressing only the financial bottom line of development. If we critically analyze the existing situation, the interest rate charged by many of the MFI ranges between 36 to 48% and hence the customers are having financial burdens by availing loan from MFIs. Also in Indian scenario, NGOs and MFIs are not supposed to mobilize group savings as per Reserve Bank of India norms. Hence many MFIs have floated their Non Banking Financial Corporations to mobilize group savings as cheap funds. They rotate group savings at the rate of 36 to 48% as loan funds within the group members and pay 6 - 8% interest income thereby exploiting the customers.

On the other hand the Government banks provided rural credit for women groups at 12% as priority sector lending. Due to inflation, the prime lending rate at banks in on the increasing trend and hence the problem of exorbitant loan interest will be charged on the rural customers from nationalized banks. Small and medium NGOs are having problems in mobilizing loan for women groups or for entrepreneurs as their work are not recognized by National Banks. Further groups that are linked to banks are provided with a credit based on the savings within the group. This will not serve the real purpose of economic development as the excess amount required will be borrowed from middlemen for a high interest rate. Urban customers with permanent income can avail loan at 10% for housing and 16% for personal loans, whereas rural customers are denied of loan at such interest rate.

To address the problems in micro finance, CES has established Department of Livelihood Support (DLSI) Initiative with professionals having experience in micro finance for more than 8 years. CES – DLSI is planning to mobilize loans at 2-4% margin and can lend to 3-4% margin to small NGO Partners striving for the development of vulnerable communities who do lack capacities in mobilizing loan funds and the partners can lend to SHGs at 3-4% margin. Hence the rural poor will have access to credit at 12% with monthly diminishing principal balance thereby addressing financial exclusions and providing credit with affordable interest rate for livelihood initiatives. CES – DLSI will have partner’s portfolio and will be rated in the due course of time.
The innovative project will be implemented in Kanyakumari District of Tamil Nadu and Trivandrum District of Kerala. The operational cost will be made minimum and the model will be made as a replica.

We came to know that your esteemed organization supports micro finance interventions. We will be happy to avail credit at 4% upto a tune of $2,00,000 with a small grant component to make the project sustainable in 6 months time. We kindly request you to send us your guideline so that we will submit the proposal with business plan as per your requirement.

For your kind response, support and guidance, we remain.

Thanking You,

Yours sincerely,

(Ethel Shea)

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So, microfinance encourages entrepreneurship and competition between businesses to provide a better product. And that's a disadvantage?

Consider; It would take a person in the third world who knows how long to earn the capital it takes to start a small business doing factory work, if they ever earn enough at all. Whereas, with a microfinance loan it would be almost instant. It's more expediency than anything else.

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if we do a deep study on microfinnace then we can conclude that it is not helping the poor people .....

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I knew it was a bad micro-credit, because many people do not start very much, but not necessarily destined to be a poor life, give them small loans, may help him succeed faster.

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Some argue that microfinance interest rates are too high, but I think that's just the cost of doing that kind of business. Otherwise, microfinance has been very successful.

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