Niamh Shortt and Heather Barry Irish League of Credit Unions International Development Foundation What is Microfinance? “The provision of thrift, credit and other financial services and products of very small amounts to the poor (mostly women) to enable them to raise their income and improve their living standards.” (Morduch, 1999) Grameen Bank success (1970s) sparks an international trend. Traditional banks – ‘break-even point’ Microfinance (MF) can fill the financial services gap and be used as a development tool. Providers, and Role of MF in Development Different providers: Governments, private banks, NGOs, the Grameen Bank, Small Medium Enterprises, SHGs, credit unions, financial cooperatives Is MF an effective strategy to get people out of poverty/reach the Millennium Development Goals? MF is a tool, not a solution. Problems stem from belief: ‘MF is a solution’ Case Study – Indonesia The Small Farmers Development Fund (SFDF) Provided microfinance services to women in agricultural families. Provided training programmes (business management, marketing, leadership skills). Positive results: 54% increased the quantity and variety of their products, 34% reported an expansion into activities outside the group business, 112% increase in income, 90% of families lifted above poverty line, 97% repayment rate, increased children’s education & improved nutrition. Benefits Facilitates savings and income generation. Facilitates new business opportunities. Positive externalities for household and community– health, education, empowerment, etc. Common Problems Not Sufficiently Addressed Distorted repayment rate (evaluation) Market saturation (economic infra.) Long-term vs. short-term growth (evaluation) Diseconomies of scale, ‘crowd out’ industry (economic infra.) Lack of coordination (political) Social collateral (social) Globalisation and neoliberal agenda (social) Credit Unions “A credit union is a group of people who save together and lend to each other at fair and reasonable rates of interest... Every credit union is owned by the members – the people who save and borrow with it.” As an external provider (i.e., not part of local government, nor part of local culture), credit unions prove to be one of the most effective MFOs. The foundation on which credit unions are built is trust, mutual ownership, and long-term commitment. This is what enables credit unions to be so successful in other communities. To avoid mistake of improper integration into local infrastructure, credit unions too must go through a planning process and use ‘best practices’. Policy Recommendations Transparent decision making process Microfinance providers need to utilise Checklist and Best Practices – e.g. Credit Union Need to integrate MFOs into wider systems + strategies, and for MFOs to adjust to local community culture. Evaluation – long term & honest Education – all MF institutions must include education component to ensure program will self-sustain. Assess how MFI structures influence money use. Best Practices 1. Microfinance means building permanent local institutions that are self- sustaining. 2. Well researched and contexts specific plans to ensure long-term sustainability 3. Type of collateral should reflect the local culture and the particular group you’re working with. 5. Focus on women 6. Flexible loan repayment 7. Openness and accountability, trust in and close relationship with client 8. The institution should have the provisions to increase loan amounts. 9. Create incentives to reward those who pay on time; allow grace period where you are willing to reschedule payment dates, but issue penalties for payments after this period. Assessing the community: Checklist Potential Donor Area/Community/Group/Individual: Microfinance provider Points to investigate and incorporate What’s your area of expertise? to ensure a smooth and sustainable operation: Is the service you’re offering what - What’s the local hierarchy/people of they need? (Plan X/Y – Z problem) power/legal structure - How does the community operate? Critically asses your time range (What is the local culture? Values, commitment and level of resources. ways of communicating, business methods, barter) Are you going through proper - What’s the scenario you’re moving channels? into ? Crisis? Undernourishment? Conclusion Microfinance is not a “magic bullet” More research and ground work needs to be done to successfully integrate MF into wider systems and strategies. Development practitioners must use a checklist to evaluate if conditions are right and implement best practices to ensure an effective programme.
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