New partnership hopes to improve access to microcredit in South Africa

A great new partnership between a cosmetic business, an entrepreneurship organization and the website KIVA will work to improve access to microcredit loans for women in South Africa. The skincare product Dermalogica will begin donating a portion of each sale to Financial Independence Through Entrepreneurship. FITE will then use the money raised to start a microcredit fund concentrating on women in South Africa. They will also operate a website powered by KIVA, where people can donate additional funds to the women.

From the Inter Press Service, we find out more about the great new service.

Powered by global non-profit micro-lending organisation KIVA, FITE aims to empower women in developed and developing countries worldwide through the provision of micro-loans. Since its official launch in South Africa in February, 30 South African women have been recipients of loans through FITE.

Skincare brand Dermalogica is the founding partner of FITE. "Through the FITE initiative, Dermalogica aims to empower over 25,000 women in business around the world in developing and developed countries in the next two years," said Lauren Michlo, general manager of Dermalogica South Africa.

Each time a consumer buys a specially marked Dermalogica product and enters the code supplied on the packaging into the FITE website, the company makes a one-dollar donation towards the global FITE fund.

The initiative also enables consumers to become direct lenders by making donations in increments of 25 dollars through the FITE website. And the lenders have the power to choose which projects they would like to support by selecting from a list of candidates.

Once the loan has been awarded, lenders are kept up to date on the recipient's progress via e-mails from KIVA. Once a loan has been paid back, that money is put towards a loan for a new recipient. Loan amounts and repayment schedules vary depending on the business plan of individual candidates.

A microcredit business model change that might be crisis ending

The microfinance crisis in the Indian state of Andhra Pradesh has really hurt the reputation and earnings of the lending institutions. In addition, it has cut off the only way that the poor could obtain access to credit.

A new law that is about to be passed in India may help put microcredit back into operation. Before the law takes effect, one of the microcredit lenders has found a little change in the business model that might also help.

From Wall Street Journal, writer Paul Beckett describes the change that the company BASIX is beginning to use.

For the better part of nine months, the microfinance industry has been in paralysis because of restrictions put in place by the government of Andhra Pradesh, the state that was the center of micro-lending in India. Almost immediately, banks turned off the credit tap that allows microfinance lenders to operate, and borrowers abandoned the high repayment rates of the past and stopped paying.
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And Vijay Mahajan, the chairman of BASIX, a company that specializes in micro-lending and other services targeted at the poor, warned that his microfinance operation is on the brink of folding.
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Mr. Mahajan, however, is testing a new business model that may, if it catches on, provide something of a lifeline for the industry though it won’t solve all its problems.

The key move he has made is to establish a business within the BASIX Group that acts as a partner to banks rather than a borrower from banks. This is a tweak that doesn’t necessarily change much on the ground but changes tons in perception and viability. Under this model, the company stops being the originator of small loans to the poor, the definition of microfinance, and instead turns BASIX into a bank agent. Borrowers (BASIX lends to individuals and doesn’t use the group model favored by other lenders) won’t see much difference. They still will interact with BASIX representatives, who will be responsible for originating loans and collecting repayments.

But, critically, the BASIX representatives will be dispensing bank loans, rather than BASIX taking credit from banks onto its books and then assuming responsibility for the loans it issues. The bank will be able to set the interest rate and will pay BASIX a fee for handling the loan.

If the politicians of a particular state don’t like what they see, they will have to deal with a politically-connected, well-established bank — most likely government-owned — as well as possibly the Reserve Bank of India, rather than targeting small, politically lightweight microlenders. For microfinance companies, this model has the added advantage that the bank assumes the risk of default on the loan.

Mr. Mahajan told India Real Time that this bank partnership model represents a “desirable future” for the company. He declined to name the area where the company currently is using this structure (though we might hazard a wild guess) or to name bank partners.

But he said BASIX already has secured approval to lend out $56 million in bank capital. That contrasts with what he says is a total of just $5.6 million in bank loans to BASIX itself under the old model in the months since the crackdown in Andhra Pradesh in October made banks skittish about lending money to MFIs.

Microcredit banks applaud possible changes to regulation in India

The microcredit industry in India is applauding the draft of a bill that could give new oversight to the industry. The good news has even seen the stock price of microcredit giant SKS microfinance rise up in the last couple of days.

The draft calls for microcredit to be regulated under the central reserve bank instead of individual states. Currently the state of Andrea Pradesh has tight restrictions against microcredit with laws that treat responsible lenders no better that predatory moneylenders.

From the Wall Street Journal's LiveMint, writers Remya Nair and Dinesh Unnikrishnan detail the pending bill.

The Microfinance Institutions (Development and Regulation) Bill gives more powers to the Reserve Bank of India (RBI) to regulate microlenders. It will cover all MFIs, including the smaller ones. MFIs give tiny loans to poor borrowers at around 24% interest. The Bill has to be approved by the cabinet and Parliament before it becomes law.

The industry welcomed the draft, saying it offers more clarity to the future of India’s Rs.20,000 crore microlending sector. The Bill, which has been posted on the finance ministry website for public comment, says MFIs registered with the apex bank won’t be treated as moneylenders, thereby keeping them out of the purview of the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010.

“This (the new draft Bill) covers all types of MFIs, including the smaller companies, which gives confidence to the sector,” said Vijay Mahajan, president of lobby group Microfinance Institutions Network. “The regulations have been drafted in line with the recommendations of Malegam committee, but go well beyond that to provide comfort to the sector. It is a new generation Bill.”

More than a quarter of the industry is concentrated in Andhra Pradesh, which promulgated a law in October restricting operations of microlenders. This led to a drastic rise in bad loans as borrowers stopped repaying debt. Banks in turn stopped lending to MFIs. The state law, which had been preceded by an ordinance, followed reports of coercion in recovering loans that allegedly led to suicides.

Early this year, RBI issued regulations to govern MFIs operating as non-banking financial companies, based on the recommendations of an expert committee headed by noted chartered accountant Y.H. Malegam. The new rules capped the interest rate MFIs can charge at 26% and made a minimum two-year tenure mandatory for all loans above Rs.15,000.

Taking the cooperative spirit of microcredit a step further

One of the best qualities microcredit was the improved relationship between the lender and borrower compared to traditional banking. That relationship that was based on working together to improve the borrower's life and to later repay the loan seem to have gotten lost somewhere. Now, there is an effort developing to take the cooperative and communal spirit that was once featured in microcredit a step further.

Again, the Inter Press Service brings us a story of a microcredit cooperative that is a part of this effort. A group of women in Bangladesh. have pooled their savings together first, then borrow against it later. The women work together to make sure the loans a payed back, otherwise their savings are gone. Writer Naimul Haq tells us of the Pally Bikash Kendra cooperative.

Unlike the traditional microfinance arrangements where credit comes from external sources or development partners, the local NGO Pally Bikash Kendra (PBK) has taken a different approach where beneficiaries themselves generate and save money to help small businesses survive.

Called "Self-Help", the programme was launched four-and-a-half years ago in the wetlands of Mithamoin in Kishoreganj district in central Bangladesh, less than 150 kms from the capital Dhaka. Today, the 317 women’s groups operating in the area have a combined fund of roughly 15 million taka or over 200,000 dollars.

Twenty-eight-year-old Bishan Chkraborti is one of hundreds of beneficiaries who virtually had nothing at the beginning but, after joining the "samity" or group, now runs her own business raising cygnets and selling adult swans at a local market.

Four years ago, her eight-year-old son had to drop out of school, since she could not afford the boat fare to take him to the only primary school in the 200-hectare swampland. "I had no income as my disabled husband could not work. We lived in a tiny one-room bamboo-shed home," said Chkraborti, who comes from Puran Borgadia village.

Now she has a bigger house with a tin roof, mud floor and bamboo fence. She also grows vegetables and sells them to locals with a slight profit margin. Her son is also back in school.

The Self-Help programme, designed for very poor women, is a simple system based on the discipline of raising and saving money, creating small funds to be loaned out to beneficiaries at negligible interest rates.

Every samity is made up of about 15 women – mostly the landless, widows, beggars and divorced – who deposit 10 taka (13 cents) every month when they meet for discussions to approve fresh loan applications. In those meetings, they also discuss what to do with the loan money, how to use it efficiently, and other social issues that affect women like education and health.

"We don’t have any defaulters," said a proud and confident Padabi Rani Das. "If a member fails, we all fail. We don’t let anyone fail as we have a system of helping members overcome their difficulties."

Myanmar Government open to microcredit expansion

From IRIN, a story about a statement from Myanmar's President about expanding microcredit services that has aid and credit workers in the country excited.

Myanmar President Thein Sein’s statement in May that a sustainable microfinance system should be established has sparked interest among aid workers and those already involved in the country’s embryonic microfinance system.

The president made the announcement at a rural development and poverty alleviation workshop where he acknowledged the country’s poor are concentrated outside the cities and in need of assistance.

“We expect [from the president’s statement] that we would be able to work more broadly in the future,” said Maung Maung, general manager of international NGO Pact which recently hosted Myanmar’s largest microfinance project. As of March, Pact had 478,404 clients in 22 townships from three zones - Delta, Dry and Shan.

More than 85 percent of rural households in Myanmar rely on loans from multiple sources to meet basic needs, according to the UN Development Programme (UNDP), which brought microcredit lending to the country in 1997.

“The need for credit in the rural economy is substantial,” Akbar Usmani, acting UNDP resident representative, told IRIN. He estimated the present demand for loans in rural Myanmar at around US$340-471 million per year.

Current microfinance activities in Myanmar are conducted on the basis of specific authorizations provided to microfinance actors. These take the form of a set of Memoranda of Understanding (MoUs) signed by the various microfinance actors with their line-ministry.

Microfinance is, therefore, not yet mainstreamed into a regulated financial sector, but is rather authorized on a case-by-case basis by the government. There is no specific microfinance regulation in Myanmar, according to a 2010 microfinance industry report published by France-based NGO ACTED and the Banking with the Poor Network in collaboration with the Foundation for Development Cooperation.

Both Maung Maung and the UNDP’s Usmani agreed that a strengthened legal framework could fortify and sustain microfinance lending in this agriculture-based country, where 70 percent of the population live in rural areas and about 26 percent below the poverty line, according to UNDP’s country-wide survey conducted in 2009 to 2010.

Guessing game

Still, no one knows what form the rules and regulations will take, and agencies are wondering how the government will amend current restrictions on lending from financial institutions. A law passed in 1990 forbade both state and privately-owned banks from providing uncollateralized credit.

This means all bank credit has to be backed by either real estate or by a fixed deposit account, which always worries agencies that rely on donor funds to run their projects.

“How can we borrow money from the [local] banks, when we have nothing to collateralize?” said Nyunt Hlaing, executive committee member of Myanmar Business Executives Association, which is one of the local groups engaging in the microfinance sector. “This is a big challenge in expanding and sustaining the projects for the long-run.”

In the absence of access to institutional credit from the private and public banks, the rural poor rely on relatives, friends, moneylenders and pawn shops for small loans which charge interest rates as high as 60-200 percent a year.

UNDP introduced microfinance to Myanmar in 1997 using the Grameen model of group-based lending in which typically a small group takes on the responsibility of repaying the debt. The initiative was originally implemented through several sub-organizations, but in 2006, Pact took over all of UNDP's microfinance programmes.

Several other government-sponsored groups, semi-governmental organizations and local and international NGOs have microfinance projects thanks to individual MoUs with the government.

There are institutional microfinancing lenders in 46 of the country's 330 townships, and according to UNDP, only 10 percent of Myanmar’s demand has been met.

Experts and economists believe that poverty could be effectively reduced if modern rules and regulations are implemented for the microfinancing sector.

Kenyan businesswomen having trouble accessing the Women Enterprise Fund

Established in 2006, the Women Enterprise Fund was set up by the Kenyan government to give microcredit loans to women. The WEF was funded with 3.7 million dollars available to give to the women that banks wouldn't do businesses with. Banks would avoid the small businesswomen because of lack of education or collateral. Despite the goal by the fund to be more accessible, women are still having trouble getting the loans.

From the Inter Press Service, writer Miriam Gathigah describes the trouble that women are having.

But meeting the requirements has not been an easy task for some women. Stella Omollo from Nyanza region was only able to access the fund after a long wait.

"It is true there are women who want the money but can’t meet the requirements. There are those who have no idea what a business plan is and run whatever business they have as a way of life and not really with a business mindset," Omollo says.

Omollo also did not know how to draw up a business plan until she asked her nephew, a college student, to help her. Omollo, however, says it is the responsibility of the fund officials to ensure that women are adequately trained and know how to access the funds.

"Indeed we are trained before accessing the money, but the information is generally inadequate and only benefits women who are quick to understand issues. Most of the target group for the fund have no proper education and are in the informal sector," Omollo says.

Wambui agrees: "What’s the point of a one-off session for women in the informal sector? We need consistent training, perhaps once every three months to keep us on track."

When the fund started each of the 210 constituencies in the country were allocated the equivalent of 12,000 dollars; but this has now been doubled to meet demand through an increased national budgetary allocation.

The Fund's CEO, Samuel Wainaina, has heard the complaints about women having a hard time accessing the money available.

"There have been complaints relating to lack of information on where to access disbursed funds, particularly among rural women. There is need for more information," Wainaina admits.

Yunus gives first interview since his ousting from Grameen Bank

Muhammad Yunus has given his first public interview since being ousted as the chief of his microcredit bank. Yunus only said that the Bangladesh prime minister who led the charge to remove him was "badly advised"

Yunus was removed from his Grameen Bank because of a seldom enforced Bangladeshi law that says leaders of the country's licensed financial institutions have to be below the age of 70. Critics say that the Bangladesh ruling party made Yunus the target of smear campaign. At one time, Yunus briefly flirted with the idea of entering politics with a competing party.

From this AHN story that we found at Gant Daily, writer Saleem Samad summarizes the interview for us.

In an interview with the BBC’s Lesley Curwen broadcast on Wednesday, Yunus said he was forced to stand down last month. He said Prime Minister Sheikh Hasina had only done so because she had been “badly advised.”

Yunus spoke to news media for the first time since he was forced out of Grameen Bank following a brief legal battle.

Microcredit guru Yunus was alleged to have siphoned money from Grameen Bank. Hasina on Dec. 5 last year told journalists that he was “sucking blood from the poor.”

Hasina, criticizing Yunus, said “there is no difference between a person who enjoys taking interest on money and one who takes bribe.”

The pioneer of microfinance contested the prime minister’s observation that the bank of the poor failed to play its role to eradicate poverty.

A microcredit co-operative with indigenous roots

One of the strengths of microcredit was the close relationship the lender had with the borrower. Some of the microcredit banks made sure that the loan helped improve the borrowers life instead of put a bigger burden on them. Grammen and similar microcredit banks made sure that borrowers made commitments to improve their health and education as well as using the loan to improve their business. Each borrower belonged to small groups that helped each member meet these commitments as well as their payments.

We are now seeing this communal aspect of microcredit being taken a step further. Small cooperative savings and loans are staring up without a big central bank controlling the money. Members of the group will contribute to a pot of money that members can later borrow against when needs arise. We linked to a story about one such cooperative in Kenya not long ago. Today, we find a story from the Inter Press Service on one in Argentina. Writer Marcela Valente says some aspects of the cooperative have roots in the Aymará indigenous tradition.

Abra Pampa is the capital of the department of Cochinoca in the arid altiplano region of La Puna, whose scarce population is mainly of indigenous origin, as is Brajeda, a Kolla Indian who, as she says, "was born and will die here."

"You'll laugh if I tell you how much money each of us puts into the pool. It might be 30 or 50 pesos (between seven and 12 dollars) and once in a while up 100 pesos (24 dollars). The money then goes to whoever needs it," she said.

The loans are small, up to 5,000 pesos (1,200 dollars) at the most. "Anyone who wants more has to go to the bank," Brajeda laughs. The interest rate is nine percent, and has remained stable since the fund was created seven years ago.

"Our group gives out loans monthly. If we don't have the amount someone requests, we continue to collect until the next month. And the small interest fee we charge is so that the capital will not run out, so that there will always be something there," she says.

Brajeda says the system is a way "to help ourselves without so much paperwork or red tape." The money goes towards purchases of yarn or thread for weaving work, antibiotics, school supplies or shoes. "It's a big help," she emphasises.
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The original adviser to all of the projects was anthropologist Raúl Llobeta.

"This programme was conceived of from an anthropological, rather than market-oriented, viewpoint," Llobeta, a professor at the National University in Jujuy and an adviser to several Avina Foundation projects, tells IPS.

One of his studies found that South America's Aymará indigenous people used to have a financial institution: the "pasankus" – a trust-based community system of savings and credit.

The old system was recreated "to strengthen the self-esteem and cultural identity, and the political and social organisation, of local communities, and it also serves as a financial lever to break the circle of poverty," he says.

Microfinance will have to reinvent itself in Andhra Pradesh, India

SKS; the Indian microcredit bank, has seen their stock shares drop ever since several waves of controversy began to wear on the company.

Originally created as a non-profit, SKS then changed to a for-profit bank. An initial public offering of stock created controversy as some were troubled by microcredit firms beginning to mix profit with public good. Some were saying that a publicly traded stock put too much emphasis on profit.

Soon after that, a rash of suicides in Andhra Pradesh, India amongst microcredit borrowers hit SKS and other banks by surprise. New very strict laws followed, leaving banks unable to make new loans in the region without government approval.

From the New York Times, Vikas Bajaj tells us about the troubled times for the big microlender.

SKS, whose investors include the Silicon Valley financiers Sequoia Capital and Vinod Khosla, reported that it had lost 697 million rupees ($15.6 million) in its fourth quarter, which ended in March. That compared to a profit of 629 million rupees a year earlier. Analysts say SKS will probably have to recognize losses on a big portion of its $312 million loan portfolio in Andhra Pradesh.

Vikram Akula, the American who is chairman of SKS, said it was hard to say exactly how much money the company would lose in Andhra Pradesh. Loan repayments could go up significantly if the state restricts new lending there, he said, because it would give borrowers confidence in the company’s viability in the state. “If we are able to restart lending, we think there could be a dramatic improvement,” he said. “If we can’t restart lending, we will have a painful couple of quarters.”

Other large Indian microlenders, like Basix, Share and Spandana, also face big losses in Andhra Pradesh, but those firms do not trade on the stock exchange.

Samit Ghosh, managing director of Ujjivan Financial Services, a microlender based in Bangalore, said it would take up to two years for the industry to overcome the crisis in Andhra Pradesh, which has also made it hard for lenders to raise money from banks to make loans elsewhere in India.

“In many ways, microfinance will have to reinvent itself,” Mr. Ghosh said.

Mr. Akula said SKS would not grow as aggressively as it had initially projected. Instead it will seek to make bigger loans to qualified borrowers outside Andhra Pradesh, who he said might have fewer options because of the trouble microfinance firms are facing.

He also said SKS would expand into other businesses like loans made with gold as collateral, a popular form of personal and business finance in southern India. The firm plans to open as many as 50 offices to make such loans this year.

A chance to reform microcredit, if they want to do it

After the Andhra Pradesh suicides, microcredit has a chance to reform itself and continue to spur on positive change. A commentary we found today takes a look at economic crises of the past and how it spurred positive reform. Microcredit has the same opportunity ahead if it does want to reform itself. Writer Oscar Abello from the Center for International Private Enterprise presents the challenge that is ahead.

After the 1997 East Asian Financial Crisis, development finance institutions in East Asia knew that they needed to restore investor confidence and get economies back on the market-oriented growth path that has reduced more poverty than in any other region in the world. Led by the Association of Development Finance Institutions in Asia and the Pacific (ADFIAP), their collective response was to strengthen corporate governance in the region, starting with themselves.

With a collectively-built corporate governance rating system, region-specific training materials and the ADFIAP-housed Institute for Development Financing to support and conduct regular risk management and governance seminars for staff and board members (more info on www.governance-asia.com), development finance institutions got themselves on track to strengthen corporate governance in the region by serving as the standard to which they held their client networks accountable.

After the Andhra Pradesh crisis, its largest to date, can microfinance follow in the footsteps of development finance institutions? Though not inclusive of all microfinance providers, there are about $26.9 billion in deposits and $65 billion in loans on the balance sheets of the 1,933 microfinance institutions reporting to the Microfinance Information Exchange as of writing this post – and those numbers have been growing about 20 percent a year. Microfinance providers are thus emerging as new economic hubs.

By serving as examples of effective corporate governance, microfinance providers could succeed where so many financial institutions have repeatedly failed, and in so doing could ‘infect’ their client and community networks with the ‘disease’ of strong corporate governance. With almost three billion unbanked people still to reach, those are huge potential networks to infect.

Such an epidemic would be good for reducing poverty, as it would serve to attract investment into new and growing businesses. It would be good for financial sectors around the world trying to end the succession of financial scandals and crises. It also would be good for new or struggling democratic states, once more transparent financial sectors within countries take over development financing from international institutions.

If they got their corporate governance act together, microfinance providers could ignite a good governance epidemic. But that’s a big if.

A unique savings and microcredit program

A story from the Inter Press Service today introduces us to a unique microcredit cooperative. Pamoja Women Development Program first acts as a savings vehicle for poor women. Women from the same village form a self-help group so save money and work on business plans. Women are asked to save a few pennies a week into a combined savings account. The women can later make loans against all the money accumulated by those involved in the program.

The Pamoja Women Development Program now has over 48,000 members throughout Kenya. From the IPS, writer Isaiah Esipisu tells us about one success story form the program.

Eight years ago, Mama Njoki - "Njoki's mother" as Njuguna is affectionately called in honor of one of her five children - says she was a housewife in the Kiambu District of Central Kenya. Her husband is an accountant, earning enough to cover household expenses.

Today, she is the proprietor of a dairy project with 15 Friesian and Jersey cows, delivering milk daily to the nearby milk collection centre in her home village of Ndumberi. Her success is attributed to a robust savings and credit system that allowed her to build up the business.

The 58-year-old keeps her dairy herd, which produces a little over 100 litres of milk each day, on a small piece of land, just about a thousand square metres. Also bleating and clucking in what little space there is to spare are a few goats and the chickens from a small poultry.

"What I have today is attainable for any housewife who handles at least 100 Kenyan shillings ($1.25) a day for the family food budget. All she needs to do is to save a few coins out of this with a self-help group, so that she has at least 200 shillings by the end of the month," says Mama Njoki.

Capital unlocks potential

She's repeating the advice she herself accepted eight years ago from an official with a microfinance institution known as the Pamoja Women Development Program (PAWDEP), when she joined 39 other women in her village to form the Consolata Self Help Group.

"We registered the group as a community-based organisation, and linked it to the microfinance institution immediately, so that we had a banking platform for our savings," says Mama Njoki.

Each member of the Consolata group was to put the equivalent of $2.50 into a common kitty each month. Members presenting a workable business idea can then borrow money from the combined savings at an interest rate of five percent; the loan is repayable at the end of three months.

Members' loans are limited to two and a half times the capital they have accumulated in savings with the group; for example, a member who has accumulated $100 in savings can take out a loan of $250. In this way 40 percent of the loan is guaranteed against money the borrower herself has put into the scheme if she defaults.

"We encouraged them to keep experimenting by borrowing from time to time and investing in small businesses," says Rachel Wanyoike, a microfinance adviser now working as the Head of Human Resources at PAWDEP. "In the meantime, we have a pool of credit officers who keep teaching them on how to invest the money in a manner that will help them service their loans successfully."

A study of microcredit over-indebtetness in India

A rash of suicides amongst microcredit borrowers in the Andhra Pradesh state of India has raised concerns of putting the poor in further bondage. Politicians in India have labeled microcredit banks as "predatory" even lumping in some good banks into the group. Most within the microcredit industry agree that some reforms and regulation do need to be made to prevent the poor from being over-extended with micro-debt.

The Consultative Group to Assist the Poor has conducted a survey to see how lending practices were different in Andhra Pradesh than in the rest of India. They asked borrowers questions such as if they felt they took on too much debt, were burdend by repayments, and if they had to skip meals to repay. The survey found more yes responses in the town where the crisis took place than in other areas.

From the CGAP Microfinace Blog, writer Karuna Krishnaswamy gives us the conclusions of the study.

It is interesting that despite large incidences of repayment stress, only 2% of the clients in the mass default towns reported that their economic lives had become worse after taking MFI loans. Close to 89% said that their household condition had improved because of increased income generation from business and due to lower interest rates of MFI loans compared to outside options, while 9% reported no change. While we should not draw strong conclusions from these self-reported responses, it provides a perspective in the discussion on how much is too much debt for borrowers.

What can MFIs do?
We find that those who report no repayment stress or regret have an average monthly loan repayment to household income ratio of close to 40%. This is consistent across the five questions. While there is a large variance in the values of this ratio around the mean, the average of 40% may be a useful guiding figure in the Indian context.

Augmenting the loan application form to ask a couple of simple numeracy questions will help identify some high risk clients at low cost. Asking the customer a simple verifiable question such as how much can she repay every week given her stated current monthly income and expenses is easily done. If she gets it wrong, she could offered a smaller loan and monitored more carefully. This further implicitly places more responsibility on the customer to borrow responsibly.

National Microcredit meeting begins in India

A national conference of microcredit lenders is underway in India. It's the first time that leaders have gathered together since the controversy in Andhra Pradesh. A year ago several microcredit borrowers in the Indian state committed suicide. Authorities alledge that the victims were over-indebted to microcredit and killed themselves because they were unable to pay their loans. The suicides began a government effort for more regulation over microcredit and many banking leaders say they welcome it.

From the Wall Street Journal, writer Vibhuti Agarwal describes collected some quotes from the conference.

Jayashree Vyas, of Sa-dhan, the industry association that sponsored the conference, also underlined the need to get “closer to the clients and ensure ethical lending and recovery practices.”

Many microlenders said it was vital to have national-level regulation.

In a report released in January, India’s Reserve Bank proposed certain measures that could form the basis of such regulation, including capping interest rates for loans to save borrowers from exploitation.

The Economic Survey that was released last month also directed the government to take steps to ensure that borrowers understand the terms of contract when they borrow from microfinance institutions.

Shashikant Sharma, a senior bureaucrat in India’s finance ministry, promised that microfinance was high on government’s agenda for financial inclusion.

“The sudden and rapid growth of microfinance institutions has given rise to lending malpractices. A strong and effective regulation of the sector is therefore imperative to put the sector on the path of providing inclusive growth,” he said.

Bangladesh high court rejects Yunus' challenge

A news source from India gives us an update on the legal proceedings for Muhammad Yunus and his Grammen Bank. Yunus is fighting in court the forced dismissal of his post as head of his Grammen Bank. The government of Bangladesh is citing seldom enforced law for his dismissal. The law sets a age limit on who can have leadership positions at Bangladeshi banks. Yunus at the age of 70 has surpassed the age limit.

The legal proceedings have not started out very well for Grameen. The Indian website Sify says that the High Court rejected the banks petition to challenge the law. The article from Sify only briefly mentions this at the end. This the only source we have found so far on this update to the story.

The Dhaka High Court Tuesday rejected Yunus's writ petition challenging the legality of his removal as managing director of Grameen Bank.

The attack on microfinance in India

India will soon begin to press charges in the suicide deaths of microcredit borrowers. This may have leaders of microcredit banks going to court to defend their practices. The government alleges that over 50 people in Andhra Pradesh committed suicide because they were over-indebted to microcredit lenders. These allegations are despite studies that say that microcredit borrowers are less likely to commit suicide over their economic situation.

Indian government leaders say that microcredit is charging too high of interest rates and conducting predatory lending practices against the poor. The controversy is bound to bring about more regulation for microcredit in India. Some say the regulation is welcome, but others worry that the restrains will go too far.

First, ths Associated Press article at Google News has an analysis of the situation in India.

Microfinance has excelled at getting a lot of money to a lot of borrowers quickly, disrupting established networks of power and patronage in the process.

Some say that remarkable growth has prompted a backlash from vested political interests.

"The poor is a constituency politicians see as their own turf," said Alok Prasad, chief executive of India's Microfinance Institutions Network, whose 46 members represent about 85 percent of the lending in the sector in India. "Anything which leads to greater empowerment of the poor makes them insecure."
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In India, some say pandering for voters, corruption and competition with a state-backed lending program helped spark a crackdown that has essentially frozen microlending in the southern state of Andhra Pradesh, India's most important microfinance market. The central bank had to step in to try and prevent microfinance institutions from going bankrupt.

Government lending programs for the poor in India have been losing ground to microfinance groups. In 2007, state-backed self-help groups, which link local borrowers with banks, sometimes at subsidized interest rates, added 8.5 million clients, while microfinance groups added 3.2 million. Two years later, self-help groups added just 6.7 million clients, while microfinance groups added 8.5 million, according to M-CRIL, an Indian micro-credit rating agency.

M-CRIL director Alok Misra said the gains by the private microfinance groups have shamed the government and unsettled politicians who believe the self-help groups are an important means of securing votes.

"It is showing the government its own inadequacy," Misra said. "That's a big challenge for the politicians. Politicians feel poverty-lending should be in the government's name."

Next up, an opinion piece found at the Guardian focuses on the new regulations that might soon come to India. Writer Sarika Bansal says the government regulations will hurt the poor that the leaders are trying to protect.

Following the politicians' announcements, practitioners estimate that more than 80% of customers in Andhra Pradesh have stopped repaying their loans. MFIs have been bearing unprecedented losses, would-be customers have had fewer options for borrowing money, and international media outlets have been running apocalyptic headlines such as "India microcredit faces collapse from defaults".

Microfinance lenders say the present limbo is not sustainable. They insist the situation must return to business as usual, or more realistically, that new rules – ones amenable to both politicians and practitioners – must be established. The Reserve Bank of India (RBI) has been trying to do just this. They recently commissioned a high-powered group, the Malegam Committee, to study current problems in microfinance and create a new set of rules for the industry. This committee submitted an initial report on 19 January, and after rounds of discussion, the RBI will enforce the final recommendations later this year.

Unfortunately, most industry insiders have been disappointed with the report's draft. Of particular concern are the new recommended caps on interest rates. Malegam recommends large microfinance companies to have lending margins (that is, the difference between the borrowing and lending rate) of no more than 10%. Operating costs for many companies, particularly those that serve remote populations, are often at least this much. Profitability becomes nearly impossible. According to one industry source, the "interest rates were never really an issue in India in the past. What this cap will do is make it more difficult to expand into underserved areas or reach the poorest customers. Reaching these regions and customers is more expensive, and rigid margin caps take away a lender's flexibility to price for these higher costs. Companies will instead focus on areas where customers are easy to reach, which runs counter to the government's stated financial inclusion goals."

The Malegam report also places a low ceiling – 50,000 rupees – on borrowers' annual household income. The rationale is that microfinance was originally created to serve the poorest of the poor, and that ceilings will ensure they stick to that mission. Unfortunately, this recommendation runs counter to many academic findings. Microfinance has been shown, in several instances, to work best for people who are poor, but not entirely downtrodden. These customers, according to MIT's Poverty Action Lab, are more likely to use funds profitably and to repay debt. Brahmanand Hegde, founder and CEO of Vistaar Livelihood Finance, said that "the report is a huge disappointment to us. It is forcing the industry to accept conditions that run against any business sense."

Pros and Cons of a new Microcredit Summit Campaign report

A new study from the Microcredit Summit Campaign says microcredit has helped 1.8 million Bangladeshi families out of poverty. The new study has its share of both fans and critics, and we found both in a couple of different stories today.

First the con viewpoint... from Sify we learn about the experts who rejected the study. 

Dr Qazi Kholiquzzaman Ahmad, the Chairman of the Palli Karma Sahayak Foundation (PKSF) that loans money to microcredit agencies in Bangladesh, said his studies in 2006-2007 showed that only seven percent of micro-borrowers were able to rise above the poverty line.

"In this latest study, only ten percent of people have moved up, leaving the other 90 percent where they are. We cannot conclude that a whole lot has been achieved," he added.

In the recent past, serious charges have emerged about microfinance borrowers taking on multiple loans and too much debt, coercive collection practices by microfinance staff, and even suicides among borrowers who were unable to meet their payments.

India's multi-billion dollar industry was on the brink of a mass default until all major banks in the country agreed to continue lending to microfinance firms.

Meanwhile, Vancouver Sun writer Dan Cayo applauds the results of the study.

The worst floods ever in one of the world's most flood-prone countries, a serious food crisis, governance problems ranging from corruption to incompetence to instability, Bangladesh has been no stranger to hard times over the past two decades.

Yet during this difficult period for what has long been one of the poorest countries on earth, 1.8 million families whose earning power was bolstered by microcredit were able to cross the $1.25-a-day threshold that defines abject poverty. By doing so they dragged nearly 10 million of the country's 160 million people up to a level of living that's at least a little bit better.

A report documenting these numbers, prepared for the Microcredit Summit Campaign, doesn't claim direct cause-and-effect between microcredit and this solid progress.

In other words, some of these people -- maybe all of them, though I very much doubt it -- might have moved beyond the worst of poverty anyway.

Read more: http://www.vancouversun.com/business/Bangladesh+microcredit+experiment+proves+worthwhile/4182809/story.html#ixzz1CKhA5mE4

Finally the press release from the Microcredit Summit Campaign gives us more details on the report's conclusions. You can download the full report from this link.

Nearly 2 million Bangladeshi households involved in microfinance — including almost 10 million family members, on net — rose above the US$1.25 a day threshold between 1990 and 2008. These figures were released in a report by the Microcredit Summit Campaign today.

A survey of more than 4,000 Bangladeshi households, led by Sajjad Zohir of the Dhaka-based Economic Research Group, found that a dramatic number of families moved out of poverty between 1990 and 1997, but that a massive flood in 1998 and the food and fuel crisis of 2008 were the likely cause for millions of families to fall below the $1.25 a day threshold during that later period. Even with these setbacks, on net nearly 10 million people rose above poverty.

The Microcredit Summit Campaign report closely mirrors the findings of official country-level research in Bangladesh with the national Household Income and Expenditure Survey (HIES) estimating that 10.62 million Bangladeshis left hardcore poverty between 1990 and 2005. Zohir, the report’s author writes, “[O]ur estimate seems quite in line with the national level poverty findings.”

“While the Bangladesh survey was not designed to assign causality, it is very significant that the number of microfinance clients who left poverty closely links to the national data on poverty reduction,” said Microcredit Summit Campaign Director Sam Daley-Harris. “The majority of poverty in Bangladesh is in rural areas and so are the majority of microfinance clients.”

This good news comes during a difficult time for the microfinance sector. In recent years, microfinance programs have seen growing questions about their effectiveness. Several randomized controlled trials (RCTs) matched microfinance clients with control groups and showed no movement out of poverty in the group receiving the microloans. But these studies, touted for their rigor, have been met with questions of their own.

“Two of the problems I have with the RCTs that have been done to date are that they haven’t studied programs that are known for their deep commitment to ending poverty, and they typically cover a 12- to 18-month period, which is too short a time for real change to take place,” said Chris Dunford, President of Freedom from Hunger. “We have to remember that not all microfinance programs are the same. This new study from Bangladesh includes a large number of clients from BRAC and Grameen Bank, two Bangladeshi institutions known for their groundbreaking efforts to end rural poverty.”

Another setback for microfinance came in the wake of a tremendously successful initial public offering (IPO) in 2010 by SKS, an Indian microfinance program based in the state of Andhra Pradesh. Soon after the IPO’s success, serious charges began to emerge in the state about microfinance borrowers taking on multiple loans and too much debt, coercive collection practices by microfinance staff and even suicides spurred by these challenges.

“There are quite a few people who believe that microfinance has lost its way,” said Alex Counts, President and CEO of Grameen Foundation. “This Bangladesh survey reminds us that, even in the most difficult circumstances, major progress can be made. Bangladesh is not the ‘bottomless basket case’ that then-U.S. Secretary of State Henry Kissinger called it 35 years ago. It is instead a teacher to the rest of the world, with its civil society leading the way.”

The Bangladesh survey was administered between February and August 2009.

Download the report online: http://www.microcreditsummit.org/uploads/files/Bangladesh_Report_FINAL.pdf



Microcredit Summit Campaign:

The Microcredit Summit Campaign is a project of RESULTS Educational Fund, a U.S. based advocacy organization committed to creating the will to eliminate poverty. The Campaign was launched in 1997 and in 2007 surpassed its original goal of reaching 100 million poorest families with credit for self-employment and other financial and business services. The next Global Microcredit Summit will be held November 14-17, 2011 in Valladolid, Spain.

Economic Research Group:

The Economic Research Group (ERG) is a not-for-profit organization based in Bangladesh and was established to promote education and research with a view to improving social economic justice. ERG seeks to bridge the gap between academic research and policy analysis within Bangladesh and other countries of South and Southeast Asia. Through its work, ERG also aims to extend the frontier of knowledge on developing economies through analytical research and discussion of views on contemporary economic issues. www.ergonline.org

Introducing MYC4, auctions for low-interest microcredit lenders

The website MYC4 may have found a good solution to the problem of high interest microcredit loans. MYC4 lets lenders compete in an online action for the right to give a loan to a small African business. The lender with the lowest interest rate wins the auction.

From CNN, reporter Max Foster interviews Tim Vang one of the founders of MYC4.

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.

Yunus says for-profit lenders are taking advantage of poor

A lot of us who have been advocates of microcredit have had our confidence shaken with the recent scandal in India. A rash of suicides amongst borrowers have led to government investigation into the practices of the for-profit microcredit lenders. Many borrowers have stopped repaying their loans until new regulations are set in place.

In a new op-ed piece in the New York Times, the founder of microcredit Muhammad Yunus says that India does need a regulatory body to protect the poor. He says the commercial enterprises with excessive interest rates should not be called microcredit at all. Yunus explains why the high interest rates are unfair to the borrowers and describes how his bank operates.

IN the 1970s, when I began working here on what would eventually be called “microcredit,” one of my goals was to eliminate the presence of loan sharks who grow rich by preying on the poor. In 1983, I founded Grameen Bank to provide small loans that people, especially poor women, could use to bring themselves out of poverty. At that time, I never imagined that one day microcredit would give rise to its own breed of loan sharks.

But it has. And as a result, many borrowers in India have been defaulting on their microloans, which could then result in lenders being driven out of business. India’s crisis points to a clear need to get microcredit back on track.

Troubles with microcredit began around 2005, when many lenders started looking for ways to make a profit on the loans by shifting from their status as nonprofit organizations to commercial enterprises. In 2007, Compartamos, a Mexican bank, became Latin America’s first microcredit bank to go public. And this past August, SKS Microfinance, the largest bank of its kind in India, raised $358 million in an initial public offering.

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. The people whom microcredit was supposed to help were being harmed. In India, borrowers came to believe lenders were taking advantage of them, and stopped repaying their loans.
...

Grameen Bank, where I am managing director, has 2,500 branches in Bangladesh. It lends out more than $100 million a month, from loans of less than $10 for beggars in our “Struggling Members” program, to micro-enterprise loans of about $1,000. Most branches are financially self-reliant, dependent only on deposits from ordinary Bangladeshis. When borrowers join the bank, they open a savings account. All borrowers have savings accounts at the bank, many with balances larger than their loans. And every year, the bank’s profits are returned to the borrowers — 97 percent of them poor women — in the form of dividends.

More microcredit institutions should adopt this model. The community needs to reaffirm the original definition of microcredit, abandon commercialization and turn back to serving the poor.

Stricter government regulation could help. The maximum interest rate should not exceed the cost of the fund — meaning the cost that is incurred by the bank to procure the money to lend — plus 15 percent of the fund. That 15 percent goes to cover operational costs and contribute to profit. In the case of Grameen Bank, the cost of fund is 10 percent. So, the maximum interest rate could be 25 percent. However, we charge 20 percent to the borrowers. The ideal “spread” between the cost of the fund and the lending rate should be close to 10 percent.

India, the suicide capital of the world

When there was a rash of suicides occurred in India amongst microcredit borrowers, government stepped in with new regulations to reform microcredit lending. Statistics indicate that the problem of suicide in India is not limited to microcredit borrowers. India is the suicide leader of the world with over 121,000 people taking their lives in 2009. The people who often commit suicide in India include farmers in debt, women without many rights, and students who are love sick.

From the Inter Press Service, writer Sujoy Dhar tells us about one professor who is studying the issue.

"India has become the suicide capital of the world," says Daya Sandhu, a counselling psychology professor at the University of Louisville in the U.S.

As a Fulbright-Nehru Senior Research Scholar at Guru Nanak Dev University in Amritsar, India, Sandhu spent five months in India last year researching suicide trends in the country.

"While I was in India from January to June 2010, I was troubled to read headline news almost on a daily basis about students, farmers, and housewives hanging themselves, jumping before trains, taking poison, and committing self-immolation," says Sandhu.
...

In India, one farmer committed suicide every 32 minutes between 1997 and 2005, according to P. Sainath, a writer on Indian poverty who calculated the statistic from National Crime Records Bureau figures.

Farmers and students are most at risk.

According to the latest statistics of India’s National Crime Records Bureau, 127,151 people in India committed suicide in 2009. This indicates an increase of 1.7 percent over the previous year's figures.

Suicide is a great social leveller in India, Asia’s third largest and one the world’s fastest growing economies with a projected GDP growth of 8.6 percent from 2010-11.
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Sandhu says that though the media highlights the issue, the Indian government turns a blind eye to the problem at all levels - local, state, and national.

"There is no awareness about depression in India," says Sandhu.

Interviewing a large number of students in India, Sandhu found academic pressure, parental expectations, marriage tension and relationships to be the primary causes of suicide among young people.

"I was stunned that all the students I interviewed mentioned that at least 70 percent of them have a prem rog (love sickness) and they live loveless lives," Sandhu said. "They do not feel anchored anywhere. There seems to be no genuine parental love, but only conditional love. They are also strictly prohibited to engage in romantic love, as there is no dating system."