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  1. 1. Microfinance Methodologies: Successes and Failures
  2. 2. Analysis of Poverty <ul><li>World Bank says the poor are those who have a level of consumption of at least $2 per day and, the poorest are those who have a level of consumption of at least $1 </li></ul><ul><li>BAD DEFINITION : Poverty has other dimensions besides income or consumption </li></ul><ul><li>BETTER DEFINITION : Poverty is characterized above all by vulnerability – i.e., inability to meet economic and social needs due to low or fluctuating incomes, and inability to cope with shocks (such as crop failure, fire, earthquakes) due to lack of assets or access to credit. </li></ul><ul><li>Microfinance is just ONE possible solution. </li></ul>
  3. 3. Why is Microfinance Unique? <ul><li>Fewer than 2% of poor people have access to financial services (credit or savings) from sources other than money lenders. </li></ul><ul><li>Problem with a majority of poverty reduction strategies is that they remain the same whether or not they are effectively reaching their goals. </li></ul><ul><li>However, with microfinance people have been willing to recognize when it was not working and change the strategy. </li></ul><ul><li>This has enabled microfinance to become one of the most prominent and sustainable poverty alleviation institutions around the world. </li></ul>
  4. 4. Criticisms <ul><li>Microfinance has become an institution based on “Reaching the Poorest of the Poor” </li></ul><ul><li>Microfinance ideology is limited by the credit worthiness of the client. </li></ul><ul><li>High interest rate, but MFIs still manage 95% return rate; HOW? </li></ul>
  5. 5. Not a New Concept <ul><li>1800s: First concept of the Credit Union by Friedrich Wilhelm Raiffeisen in Europe </li></ul><ul><li>1950s and 70s: Agricultural credit strategy for small farmers </li></ul><ul><li>The global microfinance movement emerged in the mid-1970s with a series of lending experiments in poor villages throughout Asia and Latin America. </li></ul>
  6. 6. Experimentation Gone Right <ul><li>Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil, and a few other countries extended tiny loans to groups of poor women to invest in micro-businesses. </li></ul><ul><li>Two exemplary organizations: Grameen Bank and the Self Employed Women's Association (SEWA)‏ </li></ul><ul><li>Started widespread implementation of &quot;joint-group lending&quot; programs </li></ul>
  7. 7. Ch-ch-ch--Changes <ul><li>Microcredit programs throughout the world improved upon the original methodologies and defied conventional wisdom about financing the poor </li></ul><ul><li>The 1990s saw growing enthusiasm for promoting microfinance as a strategy for poverty alleviation. </li></ul><ul><li>Creation of the village banking unit system through Bank Rakyat Indonesia (BRI), the largest microfinance institution in developing countries. </li></ul><ul><li>BIGGEST CHANGE : Mid-1990s: the term &quot;microcredit&quot; began to be replaced by a new term that included not only credit, but also savings and other financial services. &quot;Microfinance&quot; </li></ul><ul><li>BancoSol, founded in 1992, was the first commercial bank in the world dedicated solely to microfinance. </li></ul>
  8. 8. MFI's in the US: A Big Challenge <ul><li>In Africa, Eastern Europe, Asia, and South America, microfinance programs of all sizes and missions collectively serve millions of poor people. </li></ul><ul><li>Why is microfinance in the US so difficult? </li></ul><ul><li>The microenterprise sector—and thus the potential market for microfinance—is large in the Third World but small in the United States. </li></ul><ul><li>The commonly successful joint-lending strategy does not work in the United States. </li></ul><ul><li>BOTTOM LINE: Poverty in the US is much different from that of other countries. </li></ul><ul><li>Solution: Devise a strategy unique to the poverty situation in the U.S. </li></ul>
  9. 9. Changing the Paradigm <ul><li>The International Rescue Committee (IRC) started the Small Business Development Program for refugees in San Diego </li></ul><ul><li>How does the IRC deal with the challenges of providing microfinance for people that have never lived in the US before? </li></ul><ul><li>Two main aspects of the program are access to financial capital and access to human capital. </li></ul><ul><li>IRC provides a variety of services to the refugees as part of the Small Business Development Program </li></ul><ul><li>Why is the IRC's paradigm more effective than what ACCION did? </li></ul>
  10. 10. So, is Microfinance THE Solution? <ul><li>It depends on the community you're dealing with. </li></ul><ul><li>Microfinance should be carefully evaluated against the alternatives when choosing the most appropriate intervention tool for a specific situation. </li></ul><ul><li>Possible alternatives are: grants, investments in infrastructure, employment programs/job-training, </li></ul>
  11. 11. Global Progress <ul><li>One year after the United Nations called 2005 the International Year of Microcredit, the World Bank estimates that there are more than 7,000 microfinance institutions now operating around the world. </li></ul><ul><li>Microcredit Summit launched a nine-year campaign to reach 100 million of the world’s poorest families, especially the women of those families, with credit for self-employment and other financial and business services by the year 2005. </li></ul>