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Innovations in Microcredit

As the rise of loans for the global poor has increased, a number of innovations are occurring that suggest dramatic new changes in Microcredit. Some of these innovations include the following:

Types of Loan Products

Microcredit services are being offered above and beyond simply obtaining a loan to start a microenterprise. Some NGOs are giving other types of loans. For example, the Aga Khan Development Network operating in Egypt, Syria, and elsewhere, has started providing health microinsurance for poor families at extremely low costs. They also give school loans so impoverished children can get an education. With support from the World Bank, Aga Khan will be able to grow from its available $35 million in microcredit for small businesses of 25,000 borrowers per year into a larger MFI that offers numerous types of financial loans to the poor. Other NGOs are offering housing loans to improve one's shelter, agriculture-crop loans to insure peasant field work, and so forth.

New Banking Tools

New tools for financial transactions are being provided through microcredit institutions in some countries. For example, ADOPEM in the Dominican Republic, a partner of Women's World Banking, offers ATM services for its poor female clients. And, in a dozen or so countries, microentrepreneurs can now obtain a VISA or MasterCard to access needed capital for growing their enterprise, purchasing raw materials, and so on.

New Institutions

Large, new players are entering the field of microfinance. For instance, the International Finance Corporation (IFC), which overlooked microcredit during its early years, now funds 56 MFIs in 38 nations. Its current portfolio is $25.6 million and the client base consists of over 1.3 million households. For 2006, IFC plans to expand to over $500 million in loan capital for poor families.

Measuring Microcredit

More than a dozen finance agencies are working to create metrics and rate MFIs to determine their performance and assess their systems of effectiveness. They seek to calculate risk and predict future success. These efforts will play a major role in nations whose central banks are beginning to implement microcredit programs. The Impact Assessment Center of the Microfinance Gateway and CGAPS's Poverty Assessment Tool are helping to identify the poorest clients, provide loans, and evaluate how much loans improve family quality of life. BYU and FINCA have been collaborating on field-study impacts for eight years to measure results of microcredit. In another example, Opportunity International uses a performance and benchmarking system to compare its 40 partners around the world on such criteria as outreach, profitability, and sustainability.

Large Scale Plans

Major donor countries in 2005 committed $34 billion to the International Development Association (IDA) to be allocated over the next three years. The funds will serve as low-interest loans and outright grants to 81 of the world's poorest nations. Although the exact amounts for microcredit have not been agreed upon, it is expected that financing of small-enterprise startups will be significant.

Overseas Remittances

Immigrant workers in Europe, Japan, U.S., and other more-developed nations earn and send back to their Third World relatives some $150 billion annually. Most of that money goes to very poor families struggling to survive. The capital from outside benefits some of them greatly; but in some cases, the funds are squandered and create dependence. Hence, CitiGroup and other large banks are attempting to capture some of the remittance total and to channel it to MFIs that will then loan it to the poor, oversee its use, and ensure that the funds are used to help people climb out of poverty, not just to purchase consumer-retail products. According to a recent study by the Inter-American Development Bank (IDB), the capital flows from remittances are larger than the total amount of foreign aid given some Latin American countries. Tapping that source of money to fight poverty promises to generate further innovations in the future.

Government Initiatives

National governments are beginning to experiment with new approaches to microcredit. For instance, the government of Bangladesh has established Palli Karma Sahayak Foundation (PKSF), a national wholesale fund that, in turn, channels monies to NGOs for microcredit purposes. So far, it has extended about $262 million to approximately 200 Bangladeshi NGOs, greatly expanding the availability of microcredit to the nation's poorest regions where, before PKSF, there were no such opportunities. Because of this success, other countries such as Pakistan, Nepal, and the Philippines, have likewise created national wholesale funds, free of government influence, regulation and possible corruption.

From NGOs to Banks

In a growing number of cases, what started as a nonprofit NGO providing humanitarian loans to the poor has evolved into a formal, for-profit bank. Depending on the legal environment and social-political structures of the national government, the trend for doing this seems to be growing. The first example of this was ACCION's project in Bolivia to transform itself beginning in 1984. A partner NGO, PRODEM, was organized, and with a native board of business experts and a skilled staff, training and loans began to be provided. But the demand for microcredit was so huge in a country so poor, PRODEM soon realized it could simply not do the job as an NGO. A committee was formed to launch a new formal financial "institution," Banco Solidario (Solidarity Bank). It opened in 1992 and quickly outgrew its need for donors and unpredictable government support. Instead, profits generated operating capital to fuel its growth. Today Banco Sol is the largest bank in Bolivia, providing a vast array of financial services to the country's poor, while enjoying a high rate of return on its loan portfolio. Banco Sol became the model for a similar formal microcredit bank in Peru called Mibanco. More recently, CARD (Center for Agricultural and Rural Development) in the Philippines and Nirdhan Utthan in Nepal have likewise been established. Pakistan just passed legislation to facilitate its so-called First Microfinance Bank in that country. More such innovations will occur in the future as NGOs seek to enter formal financial markets around the globe.

Green Microcredit

Environmentalists have begun to partner with microcredit NGOs to provide financial services for the poor that are ecologically appropriate and sustainable. They are teaming up with Rotary International to send solar ovens to poor families victimized by the 12/26 Asian Tsunami in Sri Lanka. Another three-way partnership is between Fonkoze, the major microcredit NGO in Haiti, a U.S. green NGO, and a solar-energy vendor piloting equipment that will generate electricity for Haitian microentrepreneurs. Several NGOs and universities are collaborating on research about pro-green policies for microcredit as well as holding conferences and funding student internships in green microcredit. HELP International trains its college-student volunteers to implement Square Foot Garden methods, using compost to double or triple vegetable produce for poor families in Central America. A number of other NGOs are giving loans for environmentally sustainable projects like bio-gas systems, micro-drip irrigation, Lorena Stoves to reduce in-house smoke particles, low-tech water pumps, and so on.

Growing Businesses

A number of business development services are being used throughout the world to help budding microentrepreneurs to have more successful businesses and to learn how to grow their businesses. One new approach takes the idea of successful U.S. franchising and brings it to the microentrepreneur-in a much broader definition of the word. MicroFranchising, provides many of the turnkey systems that remove much of the entrepreneurial burden from the new microbusiness. BYU is researching this new approach with MicroFranchise partners such as the Scojo Foundation (reading glasses) and CFW Shops (medicine distribution).

Accelerating Microcredit

A matter of growing interest is how to expand microcredit from its current important but limited impacts into a major tool for empowering the poor. So far, even though microcredit provides loans to 100 million individuals, this represents a small percent of the projected global demand for microcredit. Unitus has led the charge in showing that most microcredit NGOs serve an average of only 2,500 poor clients. A handful of major NGOs such as FINCA, Grameen, and Acción, serve well over 100,000 borrowers each.

Unitus has launched an innovative acceleration model to exponentially expand microcredit around the world. It evaluates high-potential NGOs that have only a few thousand clients and, upon deciding to partner with them, provides capital and consulting services to enable them to dramatically expand. Unitus typically invests $2-4 million for several new partners annually. So far it has fueled the growth of such MFIs in Kenya, Mexico, and India to a total of over 400,000 clients. Its goal in India alone is to have 10 million poor families receiving microcredit by 2015.

Hi-Tech Innovations

Providers of microcredit services are rapidly embracing the use of new technologies to expand their impact: computers, smart cards, personal digital assistants (PDAs), cell phones and other tools, etc. For instance, the Andhra Pradesh partner of Unitus, Swayam Krishi Sangam (SKS) began using smart cards for each of its clients spread throughout the hard-to-travel rural areas of India. Before this innovation, paper, pencil, and manual ledgers were used. But the SKS staff now uses PDAs to record borrowers' efforts. The clients' loan and savings transactions are recorded automatically. Instead of paper passbooks and collection sheets, everything is computerized. This reduces meeting times, gives management up-to-date reports, decreases errors, and so on. It cuts SKS annual reporting costs and increases back-office staff efficiencies so they can visit more village banks each day.

PDAs are being used by numerous NGOs to manage MFI client data. While out in the field, staff members can review clients ready for upcoming loans, track financial transactions, use scoring techniques to predict customer behavior, identify borrowers whose repayments may be late, plan collection visits, and so forth. They can also fill out loan application forms. All this enables the NGO to standardize credit practices and policies, improve data accuracy, and build loan-officer efficiency as a result of improved management information systems (MIS).

Meanwhile in Uganda and Bangladesh, cell phones have begun to be used, not only to enhance client communication, but as microenterprises that can sell minutes to the public. Such services are a hot commodity in rural villages where there is no regular phone system. Some "phone ladies" in Uganda have incomes of $1,000 per year, a sharp contrast to annual compensation of $300 when they were only raising goats. Grameen Phone began in 1997 with 28 village cell phones. Today it is the largest mobile service provider in Bangladesh. There are over 50,000 Grameen cell phones in Bangladesh villages with some 500,000 subscribers throughout the nation. Smart cards, PDAs, cell phones, and other technologies are enabling microcredit practitioners to leapfrog from 18th Century feudalism to 21st Century high-tech systems.

Disaster Innovations

What happens to NGOs when calamities like the 12/26 Asian Tsunami, the 9/11 World Trade Center attacks, or Hurricane Mitch in Central America occur? A number of NGOs have developed innovative policies and programs to better cope with such events. USAID, for instance, put together a five-phase series of interventions to help MFIs cope with overwhelming challenges. Katalysis, a Stockton, California-based NGO prepared a manual, "When Disaster Strikes," drawing on its experience after the 2001 earthquakes that hit El Salvador. It contains action plans for its U.S. headquarters, regional field office, and local MFI partners.

Other Innovations

In Uganda, FINCA discovered that 80 percent of its 30,000 clients were raising at least one AIDS orphan, and that 75 percent of client incomes went to healthcare providers. So, it started health insurance to treat medical problems, as well as life insurance to mitigate the high burial costs for borrowers and their family members who may die.

In Kenya, the Women Economic Empowerment Consortium, (WEEC) doesn't give financial loans to its borrowers. Instead, it offers Maasai women, most of who are nomadic herders, cattle as the means for growing family income. WEEC buys many cattle at once to enjoy the advantages of bulk purchasing, and then the amount of the loaned cow is repaid from the individual's sale of milk. So far, WEEC enjoys a record of zero delinquency.

Children are becoming microentrepreneurs too. In Bangladesh, street children 11-18 years of age go through training programs on health, AIDS, hygiene, and financial well-being. When graduating, the MFI PMUK gives small loans of $10 or so to those youth who want to start a microenterprise of shining shoes, selling flowers, etc.

In the Philippines, Freedom from Hunger and the World Council of Credit Unions (WOCCU) began to partner so that credit unions could offer microloans to poor clients. WOCCU has seen its Filipino client base mushroom from 2,000 to 13,000 microentrepreneurs over the past several years.

In rural Slovakia where people are spread out too widely for an effective MFI operation to be established in a central location, one NGO has begun taking its services to potential clients as a "Traveling Road Show." The Integra Foundation (TIF) moves around the country, recruiting single mothers and abused women, providing training, accepting loan applications, and disbursing loans.

In perhaps what is the most radical innovation of all, Grameen Bank has responded to the criticisms that microcredit doesn't actually target the very poorest. Dr. Yunus launched its "Struggling Members" program, giving loans to street beggars beginning in 2003. Flood, death of a provider, or disability often dooms a Bangladeshi person to a fate of seeking charity from others. To buttress the claim that credit ought to be a human right, and to serve those on the lowest rungs of poverty's ladder, Grameen now gives such people a loan. Transcending Grameen's rather rigorous rules for most borrowers, this innovation allows the beggar to not join a bank group, or even attend meetings if they don't want to, or simply can't. The average loan is $9.00 and no interest fees are charged. Repayment occurs when and as the borrower can do so. There is no rule, no pressure, and no collection agency. Most continue to be on the street but now they may have a product to sell, such as bread or candy, as well as earn a bit of extra capital.

Grameen also provides blankets, mosquito nets, and other products to help street beggars be more comfortable. Grameen has loaned out approximately $500,000 U.S. through this program, of which nearly half has been repaid. So far some 47,000 Bangladeshi "struggling members" have received support, and 786 have quit begging and have been able to move up to operating their own microenterprise.

Conclusion

Finally, it should be pointed out that the preceding innovations are but a sample of the numerous creative solutions being experimented with by MFIs and others around the world. Many of them are in the early stages of innovation that holds the promise of future breakthroughs on a large scale.