A Little Can go a Long Way Towards Making Life Better

Financial Times, UK
November 15, 2004

By FT reporters
(Amy Yee in New York, Fiona Harvey in London, Amy Kazmin in Bangkok and Farhan Bokhari in Islamabad)


Not long ago, 46-year-old Than Than Win and her husband eked out a living by working the fields of landowners in Kangyi, a small village about half a day's journey from Rangoon. Along with many of Burma's poor, Ms Win had little means to improve her life or those of her six children.

But Ms Win says receiving microfinance loans to buy a flock of ducks through the United Nations Development Programme (UNDP) in 1998 changed her life.

Her first loan of $6 (€3.3, £4.6) was used to buy 50 ducks, whose eggs she sold at the local market for a profit of $1 a day.

Microfinance has traditionally consisted of distributing small loans worth between $25 and $2,500 to help the urban and rural poor start small businesses, with typically high rates of repayment of up to 97 per cent in some developing countries. Successful initiatives show an average rate of return of about 2.5 per cent of total assets.

The concept evolved in response to the deficiencies of the traditional banking system whose high overheads often made small loans unaffordable to relatively poor clients. Microfinance sought to reduce the cost of lending either by linking lenders to existing development projects where borrowers had a track record, or by using non-governmental organisations to vet prospective customers.

Other techniques used to reduce risk have included lending to a group of poor borrowers who between themselves decided how much money to pass on to a member and who are collectively responsible for managing a default by any individual member.

Microfinance has grown at an average annual rate of 25-30 per cent over the past five years, involving an increasing number of banks such as Citibank, Deutsche Bank and India's ICICI.

On Thursday the UN will declare 2005 the International Year of Microcredit. “Microfinance has proved its value, in many countries, as a weapon against poverty and hunger,” said Kofi Annan, the UN secretary-general, yesterday. “It really can change peoples' lives for the better especially the lives of those who need it most.”

The UN International Fund for Agricultural Development (IFAD) says giving the poor access to basic financial tools will help meet the UN's Millennium Development Goal of halving extreme poverty by 2015.

But for microfinance schemes to reach “a meaningful number of the world's poor”, more banks and more NGOs need to get involved, says Henri Dommel, IFAD's rural development technical adviser.

Critics say, however, that no matter how fashionable, microfinance is no panacea in the fight against poverty. Such loans often still carry relatively high rates of interest and the number of poor who can be helped is limited.

In the largest micro-finance initiative by any government, Thaksin Shinawatra, the Thai prime minister, has moved to fulfil a campaign promise made four years ago to provide each of Thailand's 70,000 villages with a Bt1m ($24,761, €19,150, £13,413) microcredit fund.

But Thai academics have questioned whether the poorest and most needy villagers have had access to the funds, and whether money has been used for productive investment or simply for conspicuous consumption.

Some economists have suggested that some Thai families are being forced to borrow from money lenders in order to repay the village funds. Kazi Matin, chief economists for the World Bank in Bangkok, says successful microfinance projects generally require well-developed regulatory frameworks to ensure that they are sustainable and do not add to financial pressures on vulnerable families.

“If you actually give relatively large loans and that money actually does not get used productively, it could get people into trouble if you try to enforce the repayment,” says Mr Matin. “They get into trouble trying to repay, and that is the category of risk that is worst for the poor households.”

In Pakistan, economists warn of limitations to a plan to expand the role of microfinance in the country's fight against poverty.

“The idea of microcredit has been fashionable and you would find many people pleading the case for more such ventures,” concedes a senior Pakistani government official. “The problem is that there continue to be practical difficulties. When you give out small loans, you just can't do this without charging high interest rates. But high interest costs defeat the purpose of lending to the poor to deal with their predicament.”

Such objections are being met with growing calls within the community of aid donors for a redefinition of microfinance.

Elizabeth Littlefield, a former banker who runs the Consultative Group to Assist the Poor, a Washington-based consortium of 30 donor agencies, says the real challenge is not only to distribute more small loans but to overhaul entire financial systems. “This means making poor people central to the financial systems in poor countries,” she says, “whether in making it easier with the help of new technology for urban workers to send remittances to family in the countryside or to build local financial intermediaries to harness savings.”


© Copyright The Financial Times Ltd 2004.


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