Special Report: Micro-finance
	Face to Face Project Grants
	Southeast Asia Sabbatical
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This is the second in a series of special reports commissioned by Face to Face International

The Changing Landscape of Lending to the Poor: Micro-finance Institutions, Poverty Amelioration and Personal Empowerment
By Russell Brott

Global Poverty: The Problem We Face

Despite the 1990s being a decade of strong financial growth around the globe, approximately one billion people lived in households with per capita incomes of less than one dollar per day in 1999. Poverty tends to affect women most seriously as they not only face the typical challenges inherent in being poor, but also deal with institutional barriers that limit their capacity to escape prohibitive cultural norms. These impediments include barriers to male-dominated industries, hurdles to legal land ownership, and obstacles in attending school and securing banking credit.
Even so, optimistic news abounds about unusual financial institutions making progress in far-reaching corners of the world. The aim of these programs, micro-finance institutions (MFIs), is to transform economic and social structures in order to mitigate the widespread poverty and disempowerment that is found in targeted locations. Many MFIs aim to accomplish this hefty task by offering a variety of financial and other vocational services to low-income households previously unwelcome within the confines of traditional financial institutions. And as micro-finance programs slowly emerged in the late 1970s to deal with poverty, they specifically targeted women to fill the gap left by national governments that are too poor or too “underdeveloped” to tackle problems of such immense proportions.

While many economic schools of thought compete for influence among policy makers around the globe, none refutes the importance of access to capital in the transition from poor to less poor. This is the reality that initially spurred the “micro-finance movement”; the poorest and least connected individuals were the ones who had the least access to funds for economic activity. Without collateral, banks were essentially unwilling to engage in business with these potential entrepreneurs. Financial institutions considered the risks too high. In the unlikely event that one could secure a non-collateralized loan, the interest rates charged were so high that it turned out to make no economic sense to use the loan at such a rate.

So there is good reason for the excitement surrounding the rise of MFIs. These institutions represent a compromise rarely seen between the left and right wings of the political world. On the right, micro-finance programs are market-based solutions that encourage work to get out of poverty and limit the role of government in personal decision-making. On the left, MFIs encourage growth, focusing specifically on grass roots development and its specific need for serving the disenfranchised.
However, the excitement must be tempered, as subsidized credit programs (which is essentially what the majority of MFIs have become) were attempted from the 1950s until the 1980s and were largely examples of disastrous government bureaucracy. Repayment rates on loans were well below 50 percent and allocation of resources was often diverted to the politically powerful instead of the needy target population. This type of government program soon became passé with the realization of the fiscal profligacy that exemplified their poor planning and management.

MICRO-FINANCE INSTITUTIONS, THE PEOPLE THEY SERVE

The Grameen Bank, based in Bangladesh, drastically changed the perception of the poor being unsuitable for financial services, or even needing government hand-outs and is now the model on which many MFIs have based their operations. Common uses of Grameen loans were (and still are), livestock raising, rice growing and other traditional crafts, rarely in increments approaching minimum loan standards of a traditional bank. Supported by international donors the bank grew rapidly and by the late 1990s had over two million clients, 94 percent of whom were women. This is a particularly remarkable achievement in a country that has a relatively orthodox Muslim population where purdah (female seclusion) remains a prominent cultural institution. Reported repayment rates are 97-98 percent of the $30-$40 million dollars of loans per month. The bank covers more than half of the country’s 68,000 villages, maintaining a largely rural base in a country with barely 20 percent of the population in urban areas.

Providing services to the so-called “hard-core” poor creates an even greater challenge than that faced by Grameen style agencies. The loans typical of “poor” households would inevitably be diverted away from income-producing activities to covering necessities such as food and shelter. Consequently, it is necessary to provide food and/or shelter assistance when lending to the poorest of the poor. These programs are largely geared to shape the truly destitute into self-sufficient members of society who could be potential clients of other MFIs. The most successful example of such a program is the Income Generation for Vulnerable Group Development (IGVGD) program. The IGVGD is a collaborative food security program jointly led by the government of Bangladesh, the World Food Program (WFP) and the Bangladesh Rural Advancement Committee (BRAC).

Three essential elements of the IGVGD program include a food safety net, professional skills training, and financial services in the form of savings and credit. Very specific criteria for selection attempts to eliminate the corruption of past programs, while providing services to nearly a million participants in a 10-year period. Two thirds of the clients have “graduated” from absolute poverty to becoming microfinance clients, and have not gone back to taking governmental handouts. Surveys of the participants in this program reveal that women benefited significantly from the IGVGD program by increasing their incomes and their asset base . However, the IGVGD program does not charge high enough interest rates to cover the costs of servicing these clients. Both the government and donors estimate that subsidies of about $135 per person are provided in this program. There is a conscious effort to continue expanding the program’s reach in a bold statement of their faith in the subsidy’s merit. Yet, macroeconomic or external shocks could conceivably derail this program at any time due to its heavy reliance on political and international sources of funding.

THE METHODOLOGY OF MFIs

The Grameen Bank pioneered the now famous approach to lending called “group lending”, whereby a set of individuals interested in a loan get together to form a group, which is jointly responsible for the collection of individual loans. If one member fails to pay back their loan, everyone is punished by being barred from future loans of their own. This peer pressure technique has been hailed as a substitute for collateral. Pressures to appease one’s peers are so strong that repayment is theoretically essential to the participants. Evidence suggests that women are particularly sensitive to this type of peer pressure enforcement.

Yet group lending, heralded as the panacea for replacing collateralized loans by creating similar disincentives to default on the loan, has had mixed success rates since its popular introduction by the Grameen Bank in the late 1970s. While group lending plays a role in differentiating the MFIs from traditional finance institutions, the objective of lending in small denominations and necessarily not ensuring the loans with collateral is what truly sets the MFIs apart from traditional financial institutions. In fact, only a fraction of MFIs use group lending as a collateral substitute.

Another mechanism that Grameen modeled MFIs commonly require to help offset the cost of default is the generation of an “emergency fund”. Borrowers contribute a set amount to the fund for every one-half percent unit borrowed. The account acts as a collateral substitute and helps to keep interest rates lower than the market rates for the borrowers. An additional 5 percent of the sum borrowed is taken out as a “group tax” that goes into another group fund account that is later dispersed in zero-interest loans after the banks take out what they are owed (Morduch 1999).
But, the most common method utilized by the MFIs in place of collateral is charging relatively high interest rates to offset the risk of default. This is also the most criticized method. This accomplishes the same objective as the collateral but without imposing a totally unrealistic burden on the borrower. These rates tend to fall far below traditional rates for the poor and thereby create the MFI’s niche. Still, many in the industry see charging relatively high interest rates as a contentious practice because the MFI’s unique position in serving the poor. However, an increasing number of industry leaders see lending to the poor as a good profit opportunity and operate with such rates to ensure that the absence of collateral does not bankrupt a relatively profitable enterprise.

One method MFIs do have in common is “progressive lending,” --that is, lending in increasing amounts over time. This necessarily limits the truly risky borrowers to small funds and allows the more “worthy” borrowers to progress to the next and larger sized loans. Progressive lending also has the effect of allowing banks to keep interest rates below market rates (i.e. set by traditional financial institutions), and thereby creating a specific borrowing niche for the poor.

WOMEN AND THIRD-WORLD BANKING, THE NEW PARADIGM

The “Progressive lending” method of operation has highlighted the financial advantages of focusing on female borrowers. From the bank’s perspective, specifically targeting women clients is good business because females tend to pay back their loans more often than men do where MFIs are most prevalent. From a social perspective, the women tend to utilize a greater percentage of their increased income on the family as a whole rather than on their own consumption. For example, a 1998 study in Bangladesh noted that household consumption increased 63 percent more when lent to a female instead of a male. During 1980-1983, women made up only 39 percent of the Grameen memberships. But, by 1991, Grameen’s clients were 94 percent female, after observing the social and financial utility of specifically lending to them. Moreover, at Grameen, 15.3 percent of male borrowers were “struggling” in 1991 (i.e. missing some payments before the final due date), while this was true for just 1.3 percent of the women. These differences are probably attributable to many factors, however, not just the trustworthiness of female borrowers. One probable explanation is the limited access to capital that women have in Bangladesh. While on the other and, men in Bangladesh have much greater access to capital. Men thus have less incentive to pay back one bank when there are multiple lending options available to them and scarce credit-data collection prevails.

In fact, poor women have been singled out as the subset of the population that could benefit most from MFIs. In Nepal for instance, the United States Agency for International Development (USAID) has made the empowerment of women a top priority in the context of Hindi culture, which typically leaves women little option outside of the homemaker role. The psychological burden of limiting a human to so few career choices undoubtedly becomes a self-fulfilling prophecy whereby women have a hard time envisioning themselves outside of this traditional family function. The possibility of empowering women through increasing their cash reserves generated from direct skills training, secure savings opportunities and non-collateral credit from the USAID micro-finance program certainly emboldens female voices in household decision making. These spending decisions, inevitably influenced by who earns the money that is spent can have a strong impact on the strength of a person’s decision-making voice. Sixty-eight percent of participating women said they had increased their decision-making about household expenditures at least slightly.

Sadly, some programs report that the women receiving the loan are not really in full control of the funds as agreed to with the MFI. A study in 1996 found that an average of 39 percent of the women with outstanding loans retained little or no control of their funds. The leading MFIs must address this unacceptable figure before further programs begin.

MFIs are addressing the issue of women maintaining “ownership” of their loans through various means. Increased “loan utilization” audits by the MFIs are one common and effective method to ensure that the “ownership” of the loan is consistent with the MFIs original intentions. In addition, working with the female borrowers to emphasize their role as economic actors in control of their loans and the rights and responsibilities that come with this, mainly that they keep control over the borrowed funds is an important means of reducing male dominance of female borowers. Grameen’s system is once again a model to emulate. After completing three one-year loan terms the borrower is entitled to take out a housing loan. Conveniently, for the women of the Grameen program, a housing loan is only dispersed if the potential borrower can produce the ownership title to the land. In a country with similar social structures as Bangladesh however, the woman does not own the land, the man does. Thus, if the couple believes they want the house badly enough, and the woman is the one who qualifies for the loan, then the man must agree to transfer the title of the land to the woman. The woman thus becomes the owner of both the house and the land, which has important marital implications. In Bangladesh, for a man to divorce his wife he need not say more than “I divorce you” three times, and it is settled! Ordinarily the woman would be the one who had to leave, as it is the husband’s land and house she was living on. However, with the title of both the land and the house now being in the hands of the woman, the man dare not utter these words, as he is the one who would have to leave.

FINANCING AND THE ROAD OUT OF POVERTY

As MFIs come up with various methods to lend to the poor, many programs face their own precarious financial situations. The subsidized credit programs of the 1950s into the 1980s were deemed failures because the governments could not (or would not) sustain them, and the majority of MFI programs around the world today are similarly unsustainable. If donors stop footing the bill for microfinance, achieving financial sustainability will be the only option for the movement’s survival (Murdoch 1999).

Even Grameen, the most visible MFI, is largely unsustainable in its current form. Though, characteristically of the MFI sector, looking at the numbers Grameen provides would not tell such a story. This stems largely from the idiosyncratic ways that most MFIs calculate their financial statistics. If for example, Grameen followed standard accounting practices they would report a loss of $18 million between 1985 and 1996, rather than the bank’s reported $1.5 million in profits (Morduch 1999). The difference between these two numbers is that grants from donors are considered part of income in profit calculations. This is risky business as donors can be wary of giving out money during economic contractions, and programs that wish to exist in the future may be well advised to become independent of this relatively inconsistent income source. Moreover, self-sufficient programs can expand to meet demand as their incomes necessarily grow with their client base, while donor organizations must strictly rely on the consistent generosity of their patrons in order to expand. Importantly, donations, like subsidies a couple of decades ago, are frequently allocated inefficiently and do not necessarily flow towards the best investment opportunities as a hard bottom line would require. The task of becoming a sustainable MFI is no easy task and is becoming increasingly difficult as competition grows rapidly.

In stark contrast to Grameen’s operation are Banco Solidario (BancoSol) of Bolivia and the Bank Kredit Desa system (BKDs) of Indonesia. Their focus is banking, not social services. Interest rates at both these institutions are relatively high in comparison with the Grameen Bank’s typical rate of 20 percent per year. Clients with a solid performance record are offered loans at 48 and 55 percent per year, respectively, a fraction of the typical moneylender in this market who charges as much as 120 percent per year. As a direct result of these relatively high rates, both BancoSol and the BKD system operate without donations or subsidies, and actually earn a return on their loan portfolios. The Grameen Bank on the other hand, would need an average of 105 percent increase in their yearly interest rates charged to clients to be able to work without subsidies (Morduch 1999). In stark contrast with the Grameen bank and BKD clients, the BancoSol clients are relatively better off, averaging $900 loan balances compared with the average $100 loan at Grameen and $71 loan at the BKDs. While it seems likely that the subsidized/donor oriented programs that can charge lower interest rates benefit the poor more in the short run, the long run picture for these groups seems quite cloudy, keeping in mind their dependence on outside sources of funding.

However, financial sustainability similar to BancoSol and the BKD system is not commonplace due to the nature of lending to the poor. Lending small amounts to many people is more costly than lending large amounts to fewer people. While the first groups to penetrate the micro finance markets around the world have had some degree of success in achieving their objectives, the proliferation of MFIs appears to have led to market saturation. Field staff from the Consultative Group to Assist the Poor (CGAP) report that many micro-finance clients have become over-indebted and are financing the loan repayments of one loan with another.

CONCLUSIONS

While the hype that has surrounded the MFIs has proven to be rather mythological in terms of describing their perfection, empirical evidence optimistically points to MFI’s role in shaping the opportunities available to disenfranchised sections of the global population. Innovative lending approaches pioneered by the Grameen Bank have certainly affected millions of people in positive ways. But it will take much more than the past creativity to triumph over the challenges of today. New techniques, largely aimed at tackling issues of over supply of markets that have created perverse incentives to default, must be addressed. Moreover, largely unregulated groups with no financial experience are entering the market that they do not have the expertise to operate in and are problematic in so far as they are using scarce funds without the foresight or efficiency that is typical of a professional and experienced organization.

That women have gained financial decision-making powers within their families as a result of their relationships with MFIs is clearly important. However, steps must be taken to adequately address the methodological shortcomings of many programs. They have been unable to affectively utilize their leverage in transferring some of the decision making power from male to female in countries where this is seen as unusual. Again, Grameen provides an excellent model to follow in terms of their housing loan conditions premised on empowering the woman in charge of the loan.

The one certainty in terms of the MFI movement is that the trend towards non-governmental services for the poor is a win-win situation. What remains much less certain, however, is the right balance between governments, for-profit companies and non-governmental non-profit organizations that is needed to simultaneously maximize the benefits to the poor, while maintaining institutions that are financially sound enough to weather even the most traumatic economic downturns. Evidence suggests that if subsidies were cut and costs not reduced, as many as 95 percent of current programs would eventually have to shut down (Murdoch 1999). Regardless of the perfect balance, however, steps to continually increase the access to the previously inaccessible financial sector are bound to produce lasting results in parts of the world where poverty is a daily battle. Empowerment programs based on increasing the financial involvement of women in male-dominated economies is an important step towards strengthening all aspects of society previously unable to determine their own economic realities.

Edited by Amy Norton

Russell Brott has a joint degree in Economics and International Affairs from Lafayette College. His main area of focus is economic development in under-developed nations.

Marie Stopes International and Population Concern
“Woman to Woman – Face to Face” Book Project
United Kingdom
US$ 35,000

Renowned fashion photographer Mario Testino is collaborating with Face to Face’s UK partners to produce a commercial coffee-table-style book on AIDS. It will feature first-person testimonials by women all over the world whose lives have been touched by HIV/AIDS and a visual essay from Mr. Testino’s unique vision and perspective. The text and photographs will cover a wide range of subject matters, both harrowing and inspiring.

Foreningen Sex & Samfund (Danish Family Planning Association)
Denmark
“Face to Face” Book Project
US$ 60,000

Danish bestselling author Hanne-Vibeke Holst, Face to Face Spokesperson and UNFPA Goodwill Ambassador, is undertaking a Face to Face book project that will present the concerns of women in the South to readers in the North in a fresh and appealing manner. She aims to move her readers to get involved and advocate for a better quality of life for millions of developing world women, one woman at a time. The product will be a commercial hardcover book.

AIDOS
Italy
Safe Motherhood Campaign
US $30,000

In response to the fact that over 500,000 women die each year from complications related to pregnancy and childbirth, AIDOS is launching a Safe Motherhood Campaign. The media campaign will consist of television and radio spots promoting a testimonial by an Italian celebrity who has recently given birth. A public event and press conference will launch the event. AIDOS will leverage the media component to step up an advocacy campaign pressuring the national government to increase spending on reproductive health and population initiatives.

Equilibres et Populations
France
Celebrity Advocacy-Driven Project in Mali
US $20,000

Equilibres et Populations is planning the construction of a reproductive health center in Mali, a country where 40,000 women between 15 and 49 years of age are living with HIV/AIDS. Following her Face to Face-sponsored study visit to Mali, French actress Elsa Zylberstein felt compelled to assist with this project, first by hosting a fundraising dinner in Paris. Face to Face is investing in a project that will be leveraged for advocacy purposes.

Family Planning Association (FPFE)
Spain
Campaign to Increase Overseas Development Assistance Spending on Sexual and Reproductive Health
US $30,000

FPFE has drafted a “manifesto” decrying the situation of women in developing countries and asking the Spanish Government to fulfill its spending commitments for overseas development assistance, specifically in the area of sexual and reproductive health. FPFE plans to use advertising, seminars, and educational materials to publicize this document.

SWI
Austria
World Population Growth Teaching Materials
US $30,000

Building upon past successes in informing Austrian teachers about population issues, SWI is creating new media kits for schools. These kits will contain teaching materials such as videotapes, brochures, and a collection of press clippings related to world population growth. It is intended for interdisciplinary use, allowing teachers to integrate teaching on population growth, HIV/AIDS, and other concerns into their curriculum.

Family Planning Association (RFSU)
Sweden
Parliamentarians: Face to Face

RFSU will embark on a new “twinning” initiative, bringing Swedish parliamentarians (MPs) face to face with South African MPs. The initiative will consist of a study trip of Swedish MPs to South Africa, and a later visit to Sweden by the South African counterparts. The objectives of the twinning exercise will be to increase knowledge among by South African and Swedish politicians about population and sexual and reproductive health issues; to increase the focus on these issues in future work and interventions conducted by both elected bodies; and to obtain media coverage.

Southeast Asia Sabbatical, October 2000-June 2001
Joke van Kampen & Arjen van de Merwe

Reviewed by: Joanna Parzakonis

Seven months in Southeast Asia gave Joke van Kampen and Arjen van de Merwe more than just an education on the economies, cultures and philosophies of the countries they visited; it gave them an up-close understanding of the lifestyles of millions of Southeast Asian women and a renewed sensitivity to the varied challenges to reproductive healthcare outreach and education in this area of the world.

From Phnom Penh, Cambodia to Bangkok, Thailand, these journalists found economic hardship, illiteracy and social mores standing in direct opposition to, and condemnation of dialogue about sexual relationships, contraception and health care services. And still despite proclamations as bleak as Cambodia’s Chief Health Services Officer accepting the defeat of this generation and expressing hope only for the ‘unborn,’ and ideologies in Vietnam asserting ‘all evil to come from Western degradation of [that which is] moral,’ Joke van Kampen and Arjen van de Merwe found sincere hope and eagerness to learn in the faces of young women and men of the region. Scattered seminars on reproductive health and demonstrations of contraceptive devices were met with timid but earnest questioning and local grassroots health educators were eager to learn and practice new ways of informing young audiences.

With the help of English translators and insightful photographs, Joke and Arjen have shared these experiences in a 55-page booklet (available through Face to Face or by contacting van Kampen at joke@xs4all.nlarjenvdm@dds.nl). The publication is an important resource for any advocate or NGO hoping to get an updated look at Southeast Asia, its people, and its changing needs around reproductive health.

New Volunteers of the Month

November
Abby Miller
Our November winner is Abby Miller. Abby took charge of researching promotional products for Face to Face. She independently came up with dozens of creative ideas and then collaborated with designers and printers to produce some fantastic goods.

December
Mary Burns
Mary Burns is a computer systems professional who volunteers her time helping Face to Face keep abreast of coverage of our issues by major domestic newspapers, and she merits recognition as December's volunteer of the month. She developed a strategy for regularly pulling stories of interest from the New York Times, Washington Post, and L.A. Times. Face to Face built on Mary’s work to develop a news feature on our web site.

January
Rupali Arora
Rupali Arora brings ten years of experience as a business journalist to her volunteer work at Face to Face. Her great work conducting wide-ranging research on corporations of interest to Face to Face has earned her the January Volunteer of the Month award. Rupali has already made tremendous progress and is extremely conscientious about sending detailed and organized updates on her findings.