Microfinance Comes of Age – Nobel signals growing momentum of banking for the poor
WASHINGTON, 7 December: After decades of occupation and conflict devastating its economy, Afghanistan did not have a single functioning bank by the end of 2001.
Poor farmers, widows and others who could not borrow from family or friends were forced to turn to loan sharks who demanded 80 percent annual interest or significantly higher.
Five years later, with the help of the World Bank and other donors, Afghans can get small loans and other financial services at microfinance institutions in 22 of the Central Asian countrys 34 provinces.
And despite interest rates higher than 30 percent annual rate-to cover the cost of starting up a financial institution among the rural poor-demand for loans “far outstrips supply,” says Stephen Rasmussen, the Lead Microfinance Specialist for the South Asia Region of the World Banks Finance and Private Sector Development department.
– It contributes in a significant way to help people think about themselves and how they participate in the economy, particularly women, says Stephen Rasmussen.
The new microfinance institutions are the first evidence of a formal financial sector that most Afghans have seen in many years, Rasmussen says. The institutions have helped start businesses and reached out to farmers looking for ways of making a living other than growing opium poppies.
And most importantly, microfinance is beginning to create a sense of energy and empowerment among people who use its services.
– It contributes in a significant way to help people think about their livelihood options and how they participate in the economy, particularly women, Rasmussen notes.
Access to finance has also been shown to contribute to better nutrition (ernæring), education, housing and other essentials.
Microfinance and microcredit are in the spotlight this week as the Nobel committee prepares to present the 2006 Nobel Peace Prize to Muhammad Yunas and Grameen Bank for their pioneering efforts in offering microcredit for the poor.
The committee cited Yunus and Grameens efforts to create economic and social development, saying “Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty.”
Many believe the award signals a coming of age for microfinance, often thought of as banking for the poor.
While microcredit is essentially the extension of very small loans to poor people normally excluded from traditional banking because they lack collateral (kan ikke stille sikkerhed) or employment, microfinance offers a fuller range of financial services including loans, savings, insurance and payment services, to the poor.
– I think the Nobel really underscores that microfinance is no longer a niche development field, but has become part of the financial mainstream, says Syed Hashemi, a senior microfinance specialist at the Consultative Group to Assist the Poor (CGAP).
– But microfinance today is about much more than small loans. It is about providing a full range of financial services, like safe places to save and transfer money, to ever-larger numbers of poor people, he adds.
CGAP, a consortium of 33 public and private development agencies housed at the World Bank, represents 95 percent of the money going to microfinance today.
Public sector donors commit at least 1,5 billion US dollar annually to microfinance, and another 500 million dollar comes from quasi-commercial donors, according to CGAP.
The group estimates the World Bank is the worlds largest microfinance donor, contributing up to 1,2 billion dollar or 6 percent of its total lending in 2005 to credit lines, policy advice, credit bureaus, and building the market infrastructure that will allow microfinance to thrive.
The International Finance Corporation-the World Bank Groups private sector arm-also invested 421 million dollar by June of fiscal year 2006, with plans to double that amount by 2009, says Andre Laude, IFCs principal investment officer, global capital markets.
– It is one of the primary weapons in the fight against poverty, says Laude.
– We are definitely committed to the sector. We want to put more resources behind it, and one clear priority for us is to focus on Africa.That is where we need to create capacity on the ground, adds he.
Nearly 3 billion people could benefit from microfinance services, but only about 500 million have access to them, according to CGAP.
The “cradle of microfinance” is South Asia, where about 45 percent of the people who use microfinance services live. Organizations like Bangladesh-based Grameen Bank and BRAC and Indias Self Employed Womens Association (SEWA) have provided financial resources to large numbers of poor people for decades.
The Bank got involved in South Asia microfinance in the early 1990s, disbursing a total of 260 million dollar of International Development Association (IDA) funds through two microfinance projects in Bangladesh in 1996 and 2001, as well as a Learning and Innovation Loan in 2002, and supporting microfinance in Sri Lanka and Pakistan.
In Bangladesh, it became the first major donor to the Palli Karma Sahayak Foundation (PKSF) in 1996 by reimbursing (stille med midler til) microcredit loans to more than 6 million poor borrowers, 90 percent of them women.
The women used these small loans to earn money from trading, fish farming, raising cattle and poultry, tailoring, rickshaw pulling, and other activities. The loans increased income for 90 percent of borrowers and improved nutrition, clothing, housing, education, sanitation and overall quality of life for the vast majority.
In India, the Bank supported Andhra Pradesh Indira Kranti Pratham, which has mobilized women into self-help groups, built their social capital, and eased their access to finance. Six million poor women are now benefiting from the program.
Money is not the “key bottleneck in microfinance, nor is it the World Banks most potent instrument to enhance (øge) poor peoples access to finance,” says CGAP Director Elizabeth Littlefield.
– What microfinance needs is better aid, not more aid. Building domestic markets and local intermediation capacity between savers and borrowers requires more technical and managerial inputs than financial ones, she says.
IFCs role is to help microfinance institutions become long-lasting, viable enterprises that do not require donor funding, says Laude.
– We plant the seed but over time we push them toward capital markets so they can raise sufficient funding. There cannot be real growth unless there is closer integration with the capital markets. That is our core strategy, he notes.
In Afghanistan, the Bank provided the seed money to bring the banking sector “back from zero,” says Rasmussen.
– The Banks intervention is crucial. We are not the biggest funder…but microfinance would not have happened without the Bank being involved, he says.
Three years ago, the Bank set up the Microfinance Investment Support Facility for Afghanistan (MISFA) with 5 million dollar from the Afghanistan Reconstruction Trust Fund. MISFA, now a private Afghan company, paving the way for donors to pool their funds, and for microfinance institutions to come into Afghanistan and help rebuild part of the countrys financial system.
The donors now include the UK Department for International Development (DFID), Canadian International Development Agency (CIDA), Swedish Agency for International Development (SIDA), the Danish government (Danida), and US Agency for International Development (USAID).
Since the microfinance sector began, 14 commercial banks have also been licensed, though their outreach is still only to a few major cities, and other formal sector providers are beginning to provide services.
– You do not have to be the biggest donor in every country to make a difference. And I think the Bank has made a difference. It is not just how much money we put in, it is how we engage. Do we set the right standards? Do we follow the right policies to build lasting, sustainable institutions? Do we help create an enabling regulatory environment? says Rasmussen, adding:
– Probably one of the biggest accomplishments is that we have been able to create a good institution that is an Afghan institution that is setting high standards and will be there for a while.
While microfinance has a small impact on the economy even in countries like Bangladesh where it has existed for 30 years, it reaches a lot of people and makes a difference in their lives, especially as more poor people have access to a full range of financial services, says Rasmussen.
– It is not just a question of financial resources. It is about many previously excluded people seeing new opportunities and feeling confident about what they do, the amount of energy it creates-this sort of immeasurable (umålelig) sense of empowerment and inclusion, he concludes.
