Microfinance: A little can go a long way towards making life better by UN News / Financial Times 11:44am 18th Nov, 2004   17 November 2004    International Year of Microcredit spotlights financial services to help poor. (UN News)    Making financial services such as credit, savings and insurance more accessible to poor and low-income people can help lift them out of poverty by enabling them to start businesses, save money and better support their families, the United Nations said today.    With more than one billion people living on less than one dollar a day, microcredit could prove to be a "powerful tool" for achieving the Millennium Development Goal (MDG) of cutting in half extreme poverty by 2015, Mark Malloch-Brown, head of the UN Development Programme (UNDP), said at a press briefing on the eve of the launch of the International Year of Microcredit.    "The year is an effort to bring sustained public attention to one of the great success stories of development," he stressed. "In South Asia and Latin America a dramatic expansion of credit to the poor is taking place. It is creating a revolution at the bottom of society."    In addition, the International Year will promote innovative partnerships among governments, donors, non-governmental organizations (NGOs) and the private sector.    Joining Mr. Malloch Brown at the briefing was Jose Antonio Ocampo, Under-Secretary-General of Economic and Social Affairs, who said: "By viewing poor people as vital contributors to their local and national economies the Year has the potential to unleash a new wave of microentrepreneurship, giving poor and low-income people a chance to build better lives."    The Year observance will begin tomorrow with the ringing of opening bells at stock exchanges around the world. Participants will include recipients of the Global Microentrepreneur Awards coordinated by Harvard Business School and other graduate institutions.    Over the past five years the microfinance sector has grown at an average rate of 25 per cent to 30 percent, with 63 of the world's top microfinance institutions having an average rate of return of about 2.5 per cent of total assets. In countries as diverse as Bangladesh, Benin and the Dominican Republic repayment rates are as high as 97 per cent.    Both Mr. Malloch Brown and Mr. Ocampo said the further expansion in microfinancing would result in cheaper interest rates for the poor, especially women who constitute a vast majority of microcredit clients. Commercial financial institutions such as Citibank in the United States, Triodos Bank of the Netherlands and Germany's Deutsche Bank are now moving into microfinance, attracted by the "double bottom line" of making a profit and reducing global poverty, according to the Rome-based International Fund for Agricultural Development (IFAD).    "Poor people are becoming part of the global financial markets and want to access a greater range of financial services and products. To meet their needs, we have to help microfinance move closer towards the formal financial system," IFAD President Lennart Båge said in a statement.    November 16 2004 (The Financial Times)    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."    (Reporting by Amy Yee in New York, Fiona Harvey in London, Amy Kazmin in Bangkok and Farhan Bokhari in Islamabad).    11 October 2004    Annan calls for greater focus on role of microfinance in helping the poorest.    With only 10 per cent of the world's economically active poor enjoying access to basic financial services, and governments and donors limited in the amount of money they can give, microfinance institutions are an increasingly crucial source of support for the self-employed, Secretary-General Kofi Annan told a regional summit on the issue today.    In a message to the Middle East and Africa Microcredit Summit Meeting in Amman, which began yesterday and runs through Wednesday, Mr. Annan said it is critical that microfinance institutions are able to mobilize resources locally to fill the funding gap. "At the same time, we need to ensure that such institutions apply sound business practices, maintain operational sustainability, adhere to good governance and clear and transparent reporting, and keep in sight the overall goal of serving low-income clients, including the poorest of the poor," he said.    In most developing countries, banks and other mainstream financial bodies are reluctant to accept poor clients as customers because they are perceived as less profitable and more risky. Of the estimated 1 billion poor people classed as economically active, only about 10 per cent have access to basic services, Mr. Annan said. But he said that microcredit - often defined as any programme extending small loans or other financial services such as savings to poor people for self-employment projects that generate income - has been "one of the success stories of the past decade."    The Secretary-General added that "we have seen that, under the right conditions, access to financial services enables poor people to increase their incomes, build assets and reduce their vulnerability to crises." It has also been credited with improvements in education, health, nutrition and women's rights.    Noting that 2005 will be the International Year of Microcredit, Mr. Annan said many microfinance institutions in the Middle East and Africa will remain dependent on external funding.
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