Saturday, January 22, 2011

The difference between Grameen and most microcredit banks

The Grameen Bank was the first microcredit bank in the world. Many banks that followed operated quite differently than Grameen.

Grammen uses a system of peer groups to ensure re-payment. They also ask that borrowers that make steps to improve their savings, health and education. The banks that followed only made loans without making other "investments" into the lives of their borrowers.

From the Seattle weekly Crosscut, writer David Korten examines the differences.

In 1983 Yunus founded the Grameen Bank, universally cited as the inspiration and model for the global microcredit movement. His purpose was to improve the lives of millions of poor Bangladeshis by making small loans to poor women to fund income-generating microbusinesses.

The basis for the Grameen Bank’s worldwide renown lies in a number of key characteristics that are not widely understood.

* Most local branches are self-funded by deposits of their local members in taka, the Bangladesh national currency.
* By serving as a depository for its members, Grameen Bank allows the poor to build their own financial asset base.
* The bank extends loans to its members at a maximum interest rate of 20 percent, a fraction of what many other microlenders charge.
* Operating on a cooperative model, profits are redistributed to the Grameen Bank’s owner-members or are invested in community projects.

These features root the Grameen Bank in the community it serves and keep money, including interest payments, continuously circulating locally to facilitate productive local exchange and build real community wealth.

Microcredit programs seeking to replicate the Grameen model have spread rapidly across the globe. Most, however, replicate only the loan feature. Few provide their members with depository services or replicate the Grameen Bank’s other defining features, though these features are central to its commitment to community wealth building.

As microlending programs became increasingly focused on repayment rates and growing the size of their loan portfolios, they looked for new sources of capital to expand their reach. With encouragement from foreign philanthropists, many turned to foreign commercial equity investors. Since private equity conflicts with the nonprofit model, sometime around 2005 many nonprofit microcredit programs changed their status to for-profit enterprises and converted their philanthropic nonprofit assets into private for-profit assets.

One such micro-finance program was Compartamos in Mexico, which in 2007 launched an initial public stock offering. According to a New York Times article, it charged its borrowers an annual interest rate of near 90 percent, producing a return on equity of more than 40 percent, nearly three times the 15 percent average for Mexican commercial banks. This made Compartamos highly attractive to private equity investors. The public offering brought in $458 million, of which “private Mexican investors, including the bank’s top executives, pocketed $150 million.”
For the groups that turned to Wall Street for financing, the line between social purpose microcredit and predatory loan sharking began to disappear.

Another example is SKS Microfinance in India, whose initial public offering in August 2010 raised $358 million from international investors and yielded its founders stock options worth more than $40 million.

Yunus describes the consequences of such conversions and public sales:

To ensure that the small loans would be profitable for their shareholders, such banks needed to raise interest rates and engage in aggressive marketing and loan collection. The kind of empathy that had once been shown toward borrowers when the lenders were nonprofits disappeared.


Rajan Alexander said...

Make no mistake. The days of MFI as the primary vehicle for promoting financial inclusion in the country is over.

Though MFIs could have claimed the latter status till now; the scenario has changed. The sector's strategic significance has been downgraded and the new policy framework would encourage other vehicles like direct bank lending.

While Malegam report did not explicitly state as a recommendation, the implications implicitly is that it wants to contract the growth of the MF sector and thereby discourage PE investment in the country by creating a significantly lower growth environment for the sector.

Sooner the MF reconcile to the emerging policy framework, the better they can adapt

Read More:
India's Central Bank finally give a loud unambiguous policy signal: MFIs will not die, only need to be castrated. Part 1

snot said...

If the commercial model provides access to finance to those you cannot access "philanthropic" microfinance or any other finance for that matter, surely this is not a bad thing?

Yes, the poor are vulnerable but that doesn't make them stupid or financially illiterate.

Perhaps, commentators should have some faith in the free market providing services to customers!