Expanding Educational Programs in Microcredit: The Dependent Relationship between Investors and Clients Sheila Kilkelly Wake Forest University, United States Kilksa4@wfu.edu Abstract- Microcredit has emerged as one of the most promising tools in the fight against poverty. Targeting women, microcredit loans give the poor an opportunity to devise a microenterprise and lift themselves out of poverty. Microcredit has been linked to generating desirable indirect effects, such as raising self-confidence, giving a sense of empowerment and creating a social network that helps to build communities. However, the positive statistics may be deceiving as microcredit is failing to reach the world’s poorest who are in dire need of financial, educational and medical health. The best model of microfinance is a program that integrates a monetary loan with business and health education, as it improves the lives of the poor overall. But, the MFIs must remain sustainable as a financial institution while they expand services for their clients. Thus, MFIs should incorporate new practices to expand their appeal to external investors - an action that will ultimately benefit the poor clients. A consolidation of reliable and comparable information is important to investors and MFIs, which is the service that The Microfinance Information eXchange (MIX) offers. In addition, partnering with cooperative banks provides the microfinance industry with a new realm of resources and protection. For MFIs to continue their success there must be an effort to enhance both the education given to clients and the financial sustainability of the institution. Thirty years ago, a group of development visionaries created a new method for alleviating global poverty by granting small loans with no collateral requirement to some of the poorest people in the world. This idea, called microcredit, focuses on giving loans to families living in poverty to start a microenterprise. These microenterprises include a broad range of services and manufacturing, from fruit vending to basket weaving to bicycle repair, all of which utilize the strength and mind of the borrowers to lift themselves out of poverty. Microcredit loans are not “micro” in reach, but “micro” in the sense that a small monetary amount is loaned, the repayment periods and amounts are shorter than that of a commercial loan, and the interest rates are lower than other credit sources for the poor. The most common model of microcredit is a social network of borrowers who mutually guarantee repayment of loans and also participate in a savings program. Microfinance institutions (MFI) span the globe from Latin America, Africa, the Middle East and Asia. Statistics are promising with 113,261,390 total clients reached by 2005. But only 81,949,036 of that number are considered being among the poorest, which is defined as living on the equivalent or less than 1 US dollar a day (Daley-Harris). Of the poorest clients reached, 84% of the clients are woman. Women have proven to be a better credit risk than men, and are more likely to repay loans and to use their savings in productive ways that will benefit their family, thus multiplying the line of impact (Eichfeld 2006). The success of microcredit made the international community reexamine its expectations of the individuals who live in the vicious cycle of poverty for generations. But, measuring the success of microcredit and MFIs on sheer numbers does not suffice. As a business and as a tool to eliminate poverty, microcredit must be judged evenly; not only on its success in improving the lives of the poor, but also on the financial success of the business. For microcredit to not only be successful, but merely exist, it is necessary to balance the financial sustainability of the MFI’s with measurable improvements in the lives of the poor. The increase of a woman’s confidence from assuming g a non-traditional role by providing for the family is not a serious long term economic effect. Nor is granting credit to a person with HIV and no access to medical treatment considered a significant improvement in that person’s life. There must be a balance. Taking a complementary approach by including educational and social programs and enacting more sound banking policies will help the global community reap the full benefits of microcredit. A total of 113,261,390 clients were reached by 2005. But what is the actual significance and story behind this number? Supporters of microcredit look upon the world’s most saturated microfinance market, Bangladesh, as a glowing example. In 1983, Muhammad Yunus formed Grameen (“Village”) Bank which grants small loans to groups of 5 individuals, mainly women, that supervise, support, and reinforce one another to invest the grant and repay loans. With initial loans typically less than $150, the Grameen Bank has now reached 6 million borrowers. What’s more, the growth of microfinance programs in Bangladesh has had a ripple effect on other pressing issues in the country. For example, the fertility rate in Bangladesh has dropped from 6.4 in 1970 to 3.2 in 2004. In addition, the number of deaths of children under five per 1,000 live births has fallen from 239 per 1,000 to 77 in 2004 (Daley-Harris 2005). A comprehensive study conducted by the World Bank found that, as a result of the three largest programs in Bangladesh, 18% of borrowers increased their household consumption and, by participating in microfinance programs, 5% of clients escaped poverty annually. Similar results were found in Peru where clients of MFIs earned $266 more per household annually than non-clients (Eichfeld 2006). Participants in three microfinance programs in Uganda also showed an increase in assets and savings and saw a greater profit from their microenterprise compared to non-participants (Barnes 2001). Provided that the microcredit loans target the poor and that the institutions are well run, microcredit has proven its merit as a means to fight poverty. As a tool that works from the ground up to eliminate poverty, microcredit is attributed with causing important non-qualitative life improvements. With the majority of women being borrowers, microcredit programs can build confidence and self-esteem as women independently repay loans and build savings. In addition, there is evidence that microcredit is linked to empowerment. 68% of participants in Nepal’s Women Empowerment Program experienced an increase in decision- making positions in areas traditionally held by men (Cheston 2002). Offering roles to women in the non-traditional sector, microcredit is also believed to break down gender roles in countries where females are generally viewed as an inferior and incompetent gender. In addition, civic life is improved by certain microcredit models that utilize social networks to ensure repayment of loans. Such programs can “create social capital by promoting horizontal and vertical networks of workers within a community, establishing new norms of behavior and fostering a new level of social trust” (Eichfeld 2005). Social trust strengthens the community as a network which is a vital concept to help communities work together to tackle other issues. With all of these acclaimed results, government agencies, philanthropic foundations, development agencies and private donors were quick to ride the tails of microcredit’s initial success. However, in the case of microcredit, quantity does not equal quality and MFIs are running the risk of becoming a “self-polluting industry” (Dichter 2005). Microcredit programs must avoid being carried by hype and urgency instead of developing a sound plan. Progress in sheer numbers may be evident, but poverty will not be eradicated just by handing out loans. While analyzing results from microcredit programs, it is essential to gauge what percentage of the poorest are being reached. Microcredit is designed to develop from the ground up and the failure to reach the poorest of the poor is a deficiency that must be filled. A study conducted on Bolivian microfinance organizations found that “the five (main) organizations…most often reached not the poorest of the poor but rather those just above and just below the poverty line” (Navajas 2000). Table 1 shows the number of clients in the poorest class reached in microcredit programs in both urban and rural La Paz, Bolivia. Rural La Paz overwhelmingly reaches more of the poorest than the urban part of the sector, however none of the programs are comprised of at least 50%.This is a typical breakdown of other countries which illustrates the need for more outreach to the poorest clients. Poorest Total % Poorest Urban La Paz 1,900 20,000 9.5 FIE 120 1,600 7.5 Caja Los Andes 370 3,000 12.3 BancoSol 1,400 15,000 9.3 Rural La Paz 2,600 6.300 41.3 PRODEM 800 2,100 38.1 Sartawi 1,800 4,200 42.9 Total La Paz 4,500 26,00 17.3 Microcredit loans given to people who are better off in terms of education or personal capital will produce a great income. Therefore, the statistics may not be as encouraging if only the poorest clients received microcredit loans, since the poorest clients do no have the assets to recover from an unseen change. Reaching the poorest must remain a goal of MFIs, even if the statistics take a hit. After all, a repaid loan does not necessarily indicate success if the person had to sell part of the enterprise to reimburse the loan. More efforts should be focused on bringing basic business and financial skills to those who have no prior exposure to such knowledge. Too frequently, the poorest clients engage on enterprises which already have too many producers or there is no access to customers with the means to afford their business. In addition, the infrastructure and political environment in the borrowers’ country have a substantial effect of the success of the microenterprise. Lack of roads and buildings may prevent an appropriate area for business transactions to be made. Strategic planning, industry analysis and strengthening of organizational practices are all educational programs that microcredit clients should receive. Such business and finance education will enable the poorest clients to intelligently utilize their loans, reach consumers and adapt to market changes. Another change that will both strengthen MFIs and add benefits to the clients is assimilating microcredit programs with health education. Education geared towards improving women’s reproductive health and HIV prevention is particularly important for the populations that participate in microcredit programs. The integration of health education and microcredit has potential to thrive because very poor clients cannot consider health educatio n or services without an incentive. The lure of credit would attract clients; a commitment to health education from the borrowers would also benefit the institutions because the health of the clients has a great impact on the ability to repay loans. The HIV epidemic is of utmost significance to the success of MFIs. Daley-Harris explains, “the HIV/AIDS epidemic is so severe that it threatens microcredit institutions through reduced loan portfolio growth, decreased client retention, increased portfolio delinquency and increased draw-down from savings deposit, as well as death of experience staff or the burden on them of caring for dying relatives” (2002). In addition to HIV prevention, the reproductive health of women is crucial to microcredit programs. A larger family requires time and effort that takes away from building up the microbusiness and the income it generates. Another important health issue is unawareness of contraceptive methods as a means to prevent disease and unplanned pregnancies which hinder the success of female clients. A study of a microfinance group in Bangladesh found that participants were 1.8 times more likely to use contraceptive after one year in the program versus non-participants (Steele 1998). Taking a more active role in their own health may be related to the sense of empowerment that microcredit delivers to the female clients. The sense of empowerment also leads women to take more responsibility in the health of their children. The results of the study concluded that, “ small children of clients who have participated for a longer period in the program are less likely to get sick…However, if the children do get sick, 91% of the women clients do access medical attention” ( Chiba 2005). Awareness leads to action and women who partic ipate in integrated microfinance and health education programs are more likely to take steps to secure their own good health, as well as the health of their children. Embarking on a health education function is a worthwhile investment for microfinance institutions. More and more, companies are able to offer both educational and financial services to their clients, while also maintaining, or even improving on, their strength as a for-profit organization. The most effective approach in doing so is to combine the services at all levels of the institution. By offering both services at the same point, mainly the group meeting, the MFI can practice cost efficiency by not having to provide two separate administrations and staff (Dunford 2006). Thus, marginal costs of the educational programs are covered by revenue generated from return on loans and the MFI can remain financially sound while offering valuable service to the clients. Crédito con Educacion Rural (CRECER) is an example of a large group-based lender who successfully merged financial and health services while still attaining financial growth and sustainability as an institution. CRECER organizes village banking in Bolivia where communal associations of 15-20 people are formed and loans are divided among the members. To receive the individual loan that averages US $150, at least 10% of the value of the loan must be put into savings. CRECER staff attends the group meetings to train new members on how to manage the group’s finances and also offer educational sessions on maternal and child health, reproductive health, breast- feeding, family planning, self-esteem and management skills. As of September 2005, CRECER’s program was reaching 68,748 clients, with a majority being women, 73% falling below the national poverty line and 23% classifying as “poorest” (Dunford 2006). CRECER’s financial strength is reported to have doubled the number of clients within 4 years and increased the portfolio by more than 30%. As of 2005, operational self-sufficiency of CRECER, the extent to which internally generated income is greater than or equal to expenses, stood at 133% proving that MFIs are capable of expanding services to clients while maintaining a competitive stand in the industry. Microcredit institutions with a social program must retain profitability in order to reinvest in their clients’ welfare, an acknowledgment that access to financial resources is not enough to stimulate development. One of the major implications of profitability of an MFI is the rate at which loans are repaid. For an MFI, “growth means adding new clients, training new staff, and working in new regions. This brings with it repayment risks that microfinance providers must learn to manage” (US Agency 2005). To avoid this risk, microfinance programs strive to help poor families cope with better security and “recover from traumatic events (drought, severe illness or death of income earner, etc)” (Chiba 2005). Loan repayments are a great indication of how well MFIs are accomplishing this goal. Microcredit Institutions have great potential in the fight against poverty because they are able to combine the resources, the vision, and the prestige of publicly traded businesses with an agenda that serves the poor. Today, several large microfinance establishments have evolved into regulated financial liaisons and may go public in the near future. The pack leaders in the microfinance industry “ have begun to access private capital markets and are demonstrating that microfinance portfolios can become a low-risk class of assets that will garner the attention of mainstream investors” (Eichfeld 2006). In order to become appealing to outside investors, there must be a compilation of data and benchmarks. In June 2002, the Microfinance Information eXchange (MIX market) was incorporated as a not- for- profit organization that strives to promote information exchange in the microfinance industry. MIX will help appease the main challenge in strengthening microfinance industries: a lack of reliable and comparable information that shares the financial strength and performance of MFIs with the public. By increasing standardized reporting, benchmarking and monitoring tools, the MIX market will increase public and private investment in microfinance. The MIX market provides potentia l investors with such information such as inflation, deposit, lending and interest rates, GDP and the cost to become a business in certain countries. All of this information is vital for investors and the MFIs to gauge the environment and how it receives investment and business growth (MIX market 2005). For microfinance businesses, the MIX provides standards that are comparable and information that makes it easy to track performance. The microfinance industry also has the ability to track the social performance of MFIs with such tools as the Poverty Progress Index (PPI) which provides data on client poverty levels and how they may change over time, so that MFIs are able to evaluate their programs and change accordingly to meet their goals (Eichfeld 2006). In order to provide the most constructive and comprehensive information, all microfinance programs need to track and report their information. The MIX market and the PPI provide useful information to investors as well as MFIs, but needs the full participation of all microfinance programs. By reporting information to these tools, microfinance programs have a better chance of receiving more external investment and being able to improve client services. In addition to more regulated information and an increase in public and private investment, there are other changes that are predicted to occur for microfinance to reach its full potential in delivering relief to the poor. Microfinance is a newly emerging sector and has experienced rapid expansion. With these characteristics, economists predict that “microfinance has reached a stage at which consolidation is bound to occur, particularly among the top two or three-hundred microfinance institutions…with some becoming banks, integrated into the formal financial” (Eichfeld 2006). In addition to MFIs developing into banks, already established commercial banks will enter the microfinance market. Already, MFIs that have demonstrated financial sustainability have begun to partner with commercial banks in innovative ways. For example, there are some partner models in which the MFI performs all lending operations but the commercial bank records the risk in its financial statements. The last predicted change to alter the microfinance industry is protection against the fluctuations of foreign exchange rates. In November 2004, Grameen Foundation organized an assembly to discuss how to best use the global financial system to increase funds available to the very poor through microfinance. The meeting concluded that “access to guarantees that would protect MFIs from fluctuations in exchange rates and with access to local financing” (Eichfeld 2006) is the best step in using the global financial system. The Grameen Foundation, partnered with CitiGroup, took steps to initiate this suggestion. Through a program named the Gram men Foundation Microfinance Growth Guarantees, individuals “pledged marketable securities to their bank of choice or used margin accounts to enable the bank to issue a letter of credit through Citigroup to local microcredit institutions (Eichfeld 2006). Individuals pledging personal assets to insure the risk of exchange rates on microcredit loans is a testament to the future of microcredit. Changes such as these and the expansion of partnerships that have already taken off will bring MFIs more prestige as a financial institution, thus having more opportunity to grant loans and educate clients. Microcredit institutions have become a phenomenon with development agencies. For the program’s current merit and future potential, it is crucial for microcredit institutions to incorporate educational facets in their programs as well as research innovative ways to gain appeal to investors. This may be done through standardizing information, legitimizing banking policies or partnering with commercial banks. The relationship between the success of the MFI as a business and as a program that works for the poor is one of dependency: investors are attracted to the institutions whose clients are most successful and the success of c lients are dependent on extra services that are funded by external investments. The ability to use the active business environment of a wealthy country to benefit members of third world countries is at hand. Microcredit programs have a unique opportunity to pioneer the use of business in aiding the poor, not in a quick solution or as a charity, but as a sustainable institution in which the success of the clients becomes the cornerstone of the business.