Penny wise: Bankable Poor

'Give a man a fish, feed him for a day. Teach a man to fish, feed him for a lifetime.' Microcredit is about "making small loans available to the poor through schemes especially designed to meet their requirements." This form of financing the poor was primarily conceived by Professor Muhammad Yunus of Grameen Bank in Bangladesh. With a repayment performance of over 97 to 100 percent on credit, Professor Yunus was able to prove that the poor are bankable and lending to poor can be a sustainable business. World Prout Assembly supports microcredit finance institutions that are owned by the borrowers, as they are based on the cooperative business model.--------------------------------------------------------------------------------

by Hema Bansal

Give a man a fish, feed him for a day. Teach a man to fish, feed him for a lifetime.'
Microcredit is about, ?Making small loans available to the poor through schemes especially designed to meet their requirements?. This form of financing the poor was primarily conceived by Prof. Muhammad Yunus of Grameen Bank in Bangladesh. With a repayment performance of over 97 to 100 percent on credit Prof Muhammad was able to prove that the poor are bankable and lending to poor can be a sustainable business.

Since then, a number of organizations like BAAC in Thailand, BRAC in Indonesia, SEWA Bank in India and PRIDE in Africa were able to prove the viability of microcredit. The Microcredit Summit of 1997 in Washington D.C. was also highly instrumental in popularizing the microcredit movement. A large variety of players, including governments, non-governmental organizations, bilateral and multilateral assistance organizations, existing microfinance institutions and private donors, professed their commitment to the microcredit movement. Microcredit does not follow any standard approach but is innovative and continues to evolve. The most commonly used models in microcredit are:

Solidarity Group Lending Model: This model adopts the group based approach to lending and mainly works through peer pressure dynamics exercised through regularly held group meetings e.g. Grameen Bank and its replications like K-REP in Africa, Pro Mujer in Bolivia and ASA in Bangladesh.
Individual Lending: This model provides credit access to individual borrowers who are selected on an individual, discretionary basis and often have at least some small form of fixed assets or income e.g. The Bank Rayat in Indonesia, ADEMI in the Dominican Republic (an ACCION affiliate).

Village Banking model: Village banks are established in relatively stable communities through the initial assistance of a sponsoring agency. The sponsoring agency lends seed capital to a newly organized bank composed from between ten to fifty self-selected members who collectively guarantee repayment of the amount. Prevalent village bank providers include Foundation for International Community Assistance (FINCA), Freedom From Hunger in Thailand, Save the Children in El Salvador, and CARE in Guatemala.

Credit Union model: Credit unions, while varied in their institutional approaches, provide savings and loan services to members - usually low-income microentrepreneurs similar to those served by specialized microcredit programs. Thousands of individual credit unions, often affiliated with national or regional credit union leagues, exist in a variety of developing countries.

Microcredit with its diversity and innovative approaches has been able to meet the credit needs of almost 55 million microcredit borrowers. By the International Year of Microcredit in 2005 it is expected that 100 million of the world?s poorest families would be reached. As the microcredit movement grows to meet the exponential demand of financial services to the poor, it faces numerous challenges:

Microfinance institutions need to upscale their outreach to meet the poverty reduction targets of reducing the number of world?s poor to half, by 2015. Up scaling would require increasing the outreach and introducing new financial products whilst maintaining the quality of its service.
Sustainability is about creating institutions that can provide a positive flow of benefits for as long as they are needed. If people are using the program and graduating to commercial sources of credit, then the program is successful, and sustainable. Achieving sustainability is one of the most important issue of the microcredit movement.
In order to enable microcredit to grow, flourish and strengthen it needs a suitable regulatory environment. Some countries are still to adopt suitable regulatory frameworks.
As a large amount of funds have been flowing to microenterprises all over the world, it becomes necessary to undertake impact assessment to review the success or failure of the credit intervention program.
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Dr. Hema Bansal is Assistant Professor in Banking and Business Finance at the M. S. University of Baroda. She has published widely on the importance of microfinance to development in India, with particular emphasis on gender issues.
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Last Updated May 5, 2005 8:23 AM