Published on February 21, 2014
MICROCREDIT AND FINANCIAL INSTITUTIONS Rural Livelihoods and Agrarian Change Seminar Atsushi Someya Diana González Botero Jisoo Yun Ramkishan Singh School of International Development, UEA 15.11.2013 1
Microcredit and Financial Institutions Contents: • Introduction and background to the topic • Brief overview of the chosen organization (BRAC) and it‟s microfinance program • Proposal for funding a new microfinance project within BRAC‟s ELA (Empowerment and Livelihoods for Adolescent Girls) program • Debate/critiques of microfinance (in general and case specific) 2
Introduction and Background Micro-credit and Microfinance: Often used interchangeably Micro-credit: Extension of small loans (aka micro lending and microloans) for the poor, who otherwise do not have access to basic financial services. Microfinance: Provision of financial services (e.g. savings, micro-credit, fund transfer/remittance and insurance) for the poor. 3
Introduction and Background Hence microfinance is a broad category of services, which includes micro-credit. Savings Insurance Microfinance Micro-credit (i.e. loan) Fund transfer *Vinod Kothari and Neha Gupta, Micro Credit in India: Overview of regulatory scenario 4
Introduction and Background Financial Institutions Microfinance is offered by many institutions like, Commercial banks, State development banks, MFI banks, Rural banks, Coops, NGOs, NBFI (non-banking financial institutions), Pawn shops, Money lenders, Informal groups etc. etc…. Two main approaches to micro-credit: 1. A “minimalist” approach (Only loan is given) 2. A “credit plus” approach (Trainings, technical support, help with marketing the products of the beneficiary etc. are also offered) (Berger, M., (1989)) 5
Introduction and Background Paradigm shift in microfinance Features Old Paradigm New Paradigm Problem Definition Overcome market imperfections Lower risks and transaction costs Role of Financial Markets Implement State plans Help the poor Intermediate resources efficiently View of users Beneficiary Clients Subsidies Create subsidy dependence Create independence institutions Sustainability Largely ignored A major concern Evaluations Credit impact on beneficiaries Performance of financial institutions Source – Adapted from Meyer & Nagarajan (1999) 6
Introduction and Background Why Micro-credit/Rationales (1/3) Poor are bankable: The success of Grameen Bank in Bangladesh has established the fact and several literatures in this regard also acknowledge the fact that poor are bankable in terms of capacity to save and repay the loans provided the same are collected at the doorstep in small amount at frequent intervals. The Grameen bank experience of Bangadesh has demonstrated that if the poor are supplied with working capital, they can generate productive self-employment (Hussain 1998). “If you can run a bank, lend money, and get it back, cover all your costs, and make a profit, and people get out of poverty, what else do you want?” Mohammad Yunus, Micro-credit pioneer and founder of Grameen Bank.
Introduction and Background Why Micro-credit/Rationales (2/3) The multiplier effect: The multiplier theory occupies an important place in modern economic theory. The basic concept of multiplier says that the effect of investment on income, output or employment is manifold than the original increase in investment. Low investment This vicious cycle can be broken with the injection of credit Low income Credit intended for more investment Low savings More income More savings Low income More investment This is the result that is sought through the credit intervention. More income 8
Introduction and Background Why Micro-credit/Rationales (3/3) Microfinance & MDG: The current literature on microfinance is also dominated by the positive linkages between microfinance and achievement of Millennium Development Goals (MDGs). Microcredit Summit Campaign‟s 2005 report argues that the campaign offers much needed hope for achieving the Millennium Development Goals, especially relating to poverty reduction. Microfinance has a positive impact on the following: Eradicate extreme poverty and hunger Achieve universal primary education Promote gender equality and empower women Reduce child mortality Improve maternal health 9
NGO Overview and Microfinance What is BRAC (Bangladesh Rural Advancement Committee)? • BRAC, which was established in Bangladesh in 1972, is a development organization that aims to reduce poverty by providing the poor with opportunities to make affirmative changes in their lives. • BRAC has 2,661 offices, and covers all 64 districts in Bangladesh. • In Bangladesh, there are 106,507 staff members, including teachers and project staff. • Currently, BRAC‟s microfinance programme is also conducted in Afghanistan, Pakistan, Sri Lanka, Sierra Leone, South Sudan, Uganda, Liberia and Tanzania. 10
NGO Overview and Microfinance Microfinance in BRAC • The microfinance programme is an essential component of BRAC‟s method to support livelihoods of the poor. • For the past 40 years, BRAC has developed to become one of the largest providers of monetary services to the poor by providing tools which a great number of people can use to improve their lives. • Most of the borrowers are women. By using the loans, they control their household finances to have better livelihoods. • The main borrowers are people who are not be able to have access to traditional banks such as marginal farmers and small entrepreneurs. 11
NGO Overview and Microfinance BRAC’s Microfinance Programme in Bangladesh at a Glance Village Organisation (VO) 279,175 VO members (million) 5.84 Total borrowers (million) 4.19 Cumulative disbursement (million) BDT 694,956 (USD 9,034.44) Outstanding loan (million) BDT 60,067 (USD 780) Repayment rate 98.76 % Average loan size BDT18,579 (USD 245.53) Saving Deposits (million) BDT24,907 (USD 323.80) Cost per loan BDT1,716 (USD 22.3 ) Source: BRAC web site issued in December 2012 12
NGO Overview and Microfinance The Impact of BRAC’s Microfinance Programme: A Case Study of a Village Table1: Changes of Occupation Pattern of the Respondents Pattern of Occupation No. of Respondents Before Joining BRAC No. of Respondents After Joining BRAC Unemployed 68 0 Low paid works 66 15 Selfemployment works 74 193 Total 208 208 Table2: Changes of Monthly Income Length of Attachment (Year) No. of Respondents Average per capita Income Before Joining BRAC Average per capita Income After Joining BRAC (Tk) Average Changes of per capita Income (Tk) Average % of Changes 3 to 9 years 208 USD 14.52 USD 51.02 USD 36.50 254(+) Source: Kamal, M. H. 2012. Note: Figures are rounded to the nearest whole number. 13
ELA Project Proposal ELA Uganda In Uganda, where the ELA program is largest, 31,000 adolescent girls are provided with ELA centers, a safe place to read, socialize, play games, sing, dance and exchange views and experiences – all activities that were often frowned upon in there homes. The program, first launched in Uganda in 2008, has increased gradually the number of clubs up to 1,200 and affected girls‟ life in many ways, giving the girls a confidence they need to assert themselves and resolve conflicts and making them aware of their rights. 14
ELA Project Proposal 15
ELA Project Proposal Why adolescent girls in Uganda? - Nearly 60% of Uganda‟s population is aged below 20. - Teenage pregnancy rate in Uganda : 30% - Uganda has one of the highest rates of young women being out of the labor force and most of the works are restricted to household chores. - Uganda is a patriarchal society where women has subordinate roles within a family and community. - Youth population should make smooth transition to adults. - Adolescent is the period when girls tent to lose their mobility, friends, and limited freedom they might had (Amin et al. 2002) - Lives stay in vulnerabilities of early marriage, dowry, frequent pregnancy, abandonment or divorce, domestic violence, marginalization. - Illiteracy, early motherhood have life-long damaging consequences. - To break the vicious cycle, enable girls should take control over their lives and allow them the opportunities that will build human capital.
ELA Project Proposal Proposal Introduction (1/3) 1) Missions of MFELA ● Income increase of adolescent girls for schooling, family support, and livelihood. ● Developing empowerment and awareness of women‟s right. - create empowering opportunities and choices for the girls to support them in defining and implementing their own agenda for changing their situations. ● The provision of life skills and vocational skills - life skills : sexual issues, family planning, negotiation, leadership among peers, legal knowledge on women‟s issues - vocational skills : hair-dressing, tailoring, computing, agriculture, small trade operation. Financial literacy courses included like budgeting, financial services, accounting skills 2) eligibility : aged between 13-21, especially who are out of school
ELA Project Proposal Proposal Introduction (2/3) 3) Target number of participants : 30,000 adolescent girls 4) Target village ● Villages with At least 35 girls are selected for the intervention. ● Anticipate 30 adolescent girls will participate on average. 5) Application procedures ● Adolescents form their own groups and will be offered savings and credit facilities by BRAC (Ex) 30,000 members in 1,000 groups ● Skill training for loan beneficiaries - Income generating activities : hair-dressing, tailoring, computing, agriculture, small trade operation - Microfinance access : financial literacy courses included like budgeting, financial services, accounting skills - Small business owners will be encouraged to take on an adolescent girl as an intern.
ELA Project Proposal Proposal Introduction (3/3) ● Follow-up after lending loan - Facilitated by the Programme supervisor (PS) - For credit activity, meet weekly to pay loan and saving installments. ● Periodic meetings with the parents and community people - To create positive attitude among the parents and community members to the participation of their daughters in activities beyond study and household chores. 5) Installment plan : Weekly basis, interest rate 25% annual (for 6 month, 1 year loan) 6) Savings mobilization : 20% of loan must be deposited.
ELA Project Proposal Institutional Sustainability (1/3) 1) Decision making structure, efficiency and transparency ● Decentralized administrative structure and professional management workforce ● Field-level managers (regional managers) have authority to plan, organize, and implement the organization‟s policies and services at various levels, with little supervision from the head office → increase in flexibility to branch operators ● Governing body : elected from among distinguished individuals with sound reputation in social development, business who have demonstrated their personal commitment to poor causes There are 10 members.
ELA Project Proposal Institutional Sustainability (2/3) 2) Staff development and motivation (professional staff, training) ● Management training to plan, organize, and implement bank programs. ● Entry-level personnel are program organizers and they must be university graduates and are selected only after a careful screening process ● Introductory training at the head office and probationary year in the field ● Staff performance incentive schemes were introduced in Microfinance Program → staff motivation and performance has tremendously improved ● Introduced self insurance fund that help to cover liabilities arising out of death and other injuries of local employees.
ELA Project Proposal Institutional Sustainability (3/3) 3) Partnership with External Stake Holders ● MasterCard Foundation. ● Memorandum of understanding signed with the government of Uganda in 2008. ● Partnership with Ministry of Education in implementation of MasterCard Scholars Program, UN agencies. Signed with agreement with Family Health International USAID community connector project. 4) Program Approach ● Financial and training service adapted to the local context and in high demand by clients described in the mission statement. ● Impact study according to BRAC‟s research and evaluation unit in partnership with the World Bank and London School of Economics expects MFELA is effective in lowering pregnancy rate, increasing the use of contraception, and etc. ● Evaluation system : on-going study with BRAC‟s research and evaluation unit in partnership with the World Bank and London School of Economics.
ELA Project Proposal Financial Sustainability (1/2) 1) Group-based loan as a credit union ● Through interactions with group members, MFELA can offer more personalized services to each borrowers and ensure individual‟s continued access to MF service. ● Group monitoring and social pressure for repayment → savings mobilization → affordable for interest rate → increase in self-sustainability ♣ Final goal : reduce dependence on external resources and realize self-financing and increase internal validity ● Savings are managed by the group itself, resulting in access to both „internal loans and „external loans‟. - „ownership‟ of the fund plays a great role in setting interest rate and repayment ● Savings (20% of loan) are compulsory on monthly basis. - Savings cannot be withdrawn, resulting in significantly higher effective borrowing rates. ● Internal and external audits carried out at regular intervals.
ELA Project Proposal Financial Sustainability (2/2) 2) Installment plan Loan period Repayment Highest loan amount ($US) Lowest loan amount ($US) Interest rate 6 months Weekly basis 100 100 25%/yr, flat 1 year Weekly basis 300 100 25%/yr, flat Budget Plan Programme Expenditure ($US) Income grant 4,500,000 Sub total 4,500,000 Manpower Traveling/transportation 110,000 Training, workshop/seminar 250,000 Occupancy expenses 50,000 Other general expenses Administrative cost ($US) 431,000 280,000 Sub total TOTAL ($US) 1,121,000 Total 5,621,000 * General expenses : stationery, free gift, maintenance and other consumables
ELA Project Proposal The impact of ELA in Uganda (1/2) Changes of Income per person Before ELA After ELA a month USD 12 USD 60 6 months USD 72 USD 360 Loan money: USD 100 for 6-month period Interest rate: 25% Interest: USD 25 Profit for 6 months: USD235 (360-100-25) Profit for a month: USD39.16 (235/6) USD39.16×30,000people=USD1,174,800=OUTREACH/a month Source: UGANDA PeacebuildingData.org 25
ELA Project Proposal The impact of ELA in Uganda (2/2) • According to the research of BRAC and the researchers from London School of Economics, they found that: - 70% INCREASE in rate of average savings of the girls with ELA programme. - 12.6% INCREASE in contraceptive use among ELA participants. - 28.6% DECREASE in pregnancy rates among the participants of ELA programme - 83% DECREASE in rate of unwilling sexual intercourse among girls with ELA programme. - 35% INCREASE in probability that an adolescent girl with ELA would be participated an income-producing activity. - 22.5% LOWER in rate of childbearing by girls with ELA programme than girls without ELA programme. Source: BRAC Uganda Annual Report 2012 26
Critiques of microfinance and the programme Sustainability of microfinance (1/2) • About training- (Berger, 1989) •Error of excess: Training and technical assistance raise the cost of credit projects + add administrative burden. •Diverts the organisation‟s attention away from the effective administration of credit. •Might place a burden on women borrowers Reducing women‟s demand for credit. •Training is often inappropriate to the economic role of women. Recommendation: Institutions should explore ways to separate simple lending from technical assistance and training. 27
Critiques of microfinance and the programme Sustainability of microfinance (2/2) • Donations: Few credit programmes can cover their operating and indirect costs and recover initial investments without repeated donations! (Berger, 1989) • According to rough estimations, only 1–2% of all MFIs in the world (i.e., some 150 organizations) are financially sustainable (Hermes and Lensink, 2011). • As borrowers take larger loans over time, repayment rates drop. • Interest rates must be high enough to cover costs and inflation. •Must operate efficiently maintaining expenses at a minimum level, to keep costs to borrowers low. • Minimalist approach to credit evidence shows that diversification should come after mastering a first activity. Start out simply. 28
Critiques of microfinance and the programme Social outreach of microcredit (1/2) •Breadth: Quantity – Number of borrowers over a period of time •Depth: Quality – Access to credit disbursement to poor people: the poorer, the deeper •Problem: measuring the level of poverty of borrowers •There is a strong positive correlation between the income level and the size of the loan: The poorer the borrower is, the smaller the size of the loan. • In job-trainig programmes selection plays a key role in who participates. • Financial performance has a positive impact on the depth of outreach of an MFI •Do girls have strong enough social networks? 29
Critiques of microfinance and the programme Social outreach of microcredit (2/2) • Financial systems approach vs. Poverty lending approach • FSA claim that lending to the poor can be very costly Need for subsidies = conflict between sustainability and outreach goals. •PLA claim that focusing on financial sustainability goes at the cost of lending to the poor. •Cull et al. (2007) provide evidence for a trade-off between both and stress the importance of institutional design in determining the existence and size of such a trade-off. •124 microfinance institutions in 49 countries 30
Critiques of microfinance and the programme Impact of microfinance: A debate (1/4) There has always been a debate on effectiveness of microfinance programs in reducing poverty. But, more recently, these debates have been extended to the possible implications of such programs for women's empowerment, with some evaluations claiming extremely positive results while others suggesting that microcredit leaves women worse of than before (Kabeer, N., (2001)) 31
Critiques of microfinance and the programme Impact of microfinance: A debate (2/4) Degree of women’s control over loan: The study carried out by Kabeer suggests that a majority of women, particularirly married women have little or no control over their loans (Kabeer, N. (2001)). Goetz and Sen Gupta (1996) developed an index to show the control of women over loan use: Women's control over loan use 21.70% 17.80% Significant 19.40% 17% Full Partial Very Limited 24.10% No Involvement 32
Critiques of microfinance and the programme Impact of microfinance: A debate (3/4) Another study done by Ackerly (1995) with 613 women loanees in the Grameen Bank, Save the Children Fund (USA), and BRAC also suggests loss of direct control over loans. Women‟s control over loan use has a direct correlation with the loan amount. A study done by R. Rehman (1986, p. 33) with Grameen Bank women loanees suggests that women seem to have 100% control over cash if it is small amount (around 1000 TK). This figure can go as low as 46 % if the amount of loan is more than 4000 TK. How do women repay when their loans are not invested by themselves? There could be three possible repayment scenarios (See Goetz and Sen Gupta (1996)): Male member utilizes the loan and agrees to repay. He is unable to repay it fully and woman has to substitute it from other sources. He is unwilling to repay the loan. 33
Critiques of microfinance and the programme Impact of microfinance: A debate (4/4) On these grounds the proposal, with its proposed impact, put forward by BRAC‟s team today can also be debated. One might argue whether or not, these participants would actually be able to utilize the loan themselves (given that these are adolescent girls, aged 13-21, living with their parents)? Also since the program focuses on out of school girls who have very limited or no formal education, what kind of business training will be provided in order for them to become an entrepreneur? Do they have control/access to market to sell their produce? Where and how would they get the raw material required for their business? Can these small businesses provide sufficient returns to cover a high rate of interest? Is there enough support system to help the clients to deal with these challenges? 34
THANK YOU! MICROCREDIT AND FINANCIAL INSTITUTIONS Rural Livelihoods and Agrarian Change Seminar Atsushi Someya Diana González Botero Jisoo Yun Ramkishan Singh School of International Development, UEA 15.11.2013 35
References Kamal, M. H., 2012. Measuring the Impact of BRAC Microfinance Operations: A Case Study of a Village. International Business Research, Vol.5(4), pp.112-123 BRAC, 2013. Overview. [Online]. Available at: http://microfinance.brac.net/overview [accessed: 13 November 2013] BRAC, 2012. BRAC Annual Report 2012. [Online]. Available at: http://www.brac.net/sites/default/files/BRAC-Annual-Report-2012.pdf [accessed: 13 November 2013] BRAC, 2012. BRAC Uganda Annual Report 2012. [Online]. Available at: http://www.brac.net/sites/default/files/ar2012/BRAC%20Uganda%20high%20res.pdf [accessed: 13 November 2013] Ricketts, C., 2013. Investing in girls is paying off BIG in Uganda (thanks to BRAC!). [Online]. Available at: http://kivanews.blogspot.co.uk/2013/01/investing-in-girls-is-payingoff-big-in.html [accessed: 13 November 2013] Anonymous, 2010. Socio-Economic Characteristics. [Online]. Available at: http://www.peacebuildingdata.org/uganda/results/socio-economic-characteristics [accessed: 14 November 2013] 36
Meyer, R.L., & Nagarajan, G. (1999) Rural Financial Markets in Asia: Policies. Paradigms, and Performance, Oxford University Press Microcredit Summit Campaign (2005), State of the Microcredit Summit Campaign Report 2005, Washington, DC Tarique and Thakur, (2007), Growth of Microfinance in India (90th Conference volume of Indian Economic Association) Vinod Kothari and Neha Gupta, Micro Credit in India: Overview of regulatory scenario Economic and Social Commission for Asia and the Pacific and UNDP. 2003. "Promoting the Millennium Development Goals in Asia and the Pacific: Meeting the Challenges of Poverty Reduction, New York. BRAC, 2008. Providing Microfinance and Social Space to Empower Adolescent Girls: An Evaluation of BRAC’s ELA Centres: BRAC Research and Evaluation Division Berger, M., 1989. Giving Women Credit: The Strengths and Limitations of Credit as a Tool for Alleviating Poverty, World Developmet, 17 (7), pp. 1017-1032. 37
Johson, S. and Rogaly, B., 1997. Microfinance & Poverty Reduction. Oxford: Oxfam Khandker. S. R., 1998. Fighting Poverty with Microcredit: Experience in Bangladesh. Washington, D.C: Oxford University Press. Ledgerwood, J., 1999. Microfinance Handbook: An Institutional and Financial Perspective. Washington, D.C: The World Bank UNICEF, 2012. Child Poverty Insights, BRAC’s Empowerment and Livelihood for Adolescent: Changing Mind-sets and Going to Scale with Social and Financial Skills for Girls: UNICEF Quayes, S., 2012. Depth of Outreach and Financial Sustainability of Microfinance Institutions, Applied Economics, 44:26, 3421-3433. Bandiera, o., Goldstein, M., Rasul, I., Burgess, R., Gulesci, S., Sulaiman, M., 2010. Intentions to Participate in Adolescent Training Programs: Evidence from Uganda. Journal of the European Economic Association, 8 (2-3), pp. 548-560. 38
D‟espallier, B., Guerin, I., Mersland, R., 2013. Focus on Women in Microfinance Institutions, The Journal of Development Studies, 49 (5), pp. 589-608. Hermes, N. a nd Lensink, R., 2011. Microfinance: Its Impact, Outreach, and Sustainability. World Development, 39 (6), pp. 875-881. Cull, R., Demirgu c-Kunt, A., & Morduch, J., 2007. Financial performance and outreach: A global analysis of lending microbanks. The Economic Journal, 117(1), F107–F133. 39
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