November 09, 2008

On the Money: The Effective Strategies of Microfinance

This week, I discovered an article summarizing a microfinance summit in San Francisco among leading micro-lenders to discuss organizations that are now incorporating health care education and protection as part of their programs. According to a piece in the San Francisco chronicle, the most common reason for a loan recipient to default is illness or poor health. In order to address this issue, microfinance institutions, such as Freedom from Hunger and Credito con Educacion, are employing doctors who will administer discounted medical care, provide health and wellness seminars, and issue health care loans to borrowers. The hope is to eliminate illness-related loan default, and encourage future lending, spending, repayment, and ultimately, start-up success for their borrowers. If achieved, these health care proposals could dissolve one chief disadvantage to micro-lending. Conversely, this plan could further encumber borrowers, as additional medical loans would place an added strain on timely loan repayment. This potential consequence only encourages the critics of microfinance, who already find its scope too small and too specific, lacking the necessary resources to reach the truly destitute. These are not false accusations, however microfinance has proved to be a largely successful venture when executed properly and provides an alternative to conventional aid organizations, which oftentimes exacerbate the problems of the recipient country. Multilateral finance institutions such as the International Monetary Fund (IMF) and the World Bank do dispense necessary assistance and relief in the presence of nation-wide economic crisis, yet microfinance is a valuable and practical addition to large-scale aid organizations, whose goals are often muddled or lost within the breadth of their subsidies and the inefficiencies with which they are constructed.

Over the past fifty years, $2.3 trillion dollars has been sent in aid packages to various poor and developing countries throughout the world. Unfortunately, the majority of these funds were lost in the inefficient "bureaucracy-to-bureaucracy" aid model implemented by multilateral organizations. What makes these aid agendas ineffective is an overly complex regulatory plan that is impossible for the recipient country to execute with its already strained and overextended administration. Critics of the IMF contend that the required structural adjustments are often too challenging politically and too rigorous, and that the debts acquired through IMF loans only perpetuate poverty, as capital that could have been invested instead was channeled into debt repayment. Another large issue these plans fail to address is the persistent corruption among administrative officials, who often intercept these funds for their own benefit. For instance, in his article entitled “Foreign aid feeds poverty," William Easterly points to the example of the dictator Paul Biya of Cameroon, who “will get 55% of his government revenue from aid after the doubling of aid to Africa.” Thus, the money frequently does not reach its intended beneficiary, and is often sunk into poorly-executed projects, such as the $5-billion Ajaokuta steel mill in Nigeria, which began in 1979 and never operated at more than twenty percent of its capacity, consequently causing the failure of businesses contingent upon its productivity.

With such sweeping fiscal relief efforts from bureaucracy to bureaucracy or multi-lateral organization to bureaucracy, the desired effect becomes lost in legislation, corruption, or ulterior motives. Hence why small-scale, private microfinance organizations are constructive alternatives to the convoluted current system of foreign aid. Microfinance equips marginalized people with the means and resources to create success for themselves, and is based on loans and credit, not charity. Enabling people to achieve their own objectives is sustainable, and the notion of lending eliminates any sense of obligation of the borrower, placing the two involved parties on more equitable ground. While critics of microfinance, such as former World Bank analyst Sudhirendar Sharma, often argue that high-interest rates put them on the same level as moneylenders, Alex Counts and other defenders of the system demonstrate that the interest rates are high because poor people often have no collateral with which to take out a loan, thus making the risk of loan-default higher. In most countries, property rights are not protected, which makes securing loans in general much more difficult. Supporters of micro-lending also point to the clear, unbridled success stories, which have become so prevalent in the field. Arguably the pioneer of microfinance is Dr. Muhammad Yunus, the unofficial founder of Bangladesh's Grameen Bank in 1976, which procures loans to those below the poverty line, particularly women. The recipients of such loans were able to escape poverty at a rate of 48% percent, compared to the previous rate of 4% without assistance, and the bank has a 99% loan recovery rate. Thus, many microfinance initiatives today try to emulate the efficient model created by Dr. Yunus. ACCION International is another private non-profit organization whose partner microfinance institutions today are providing loans as low as $100 to poor men and women entrepreneurs in 25 countries in Latin America, Asia, Africa and the United States. As evident in “Microfinance Leader Launches New Hub in Africa," within the last ten years alone, ACCION partners have provided more than 22.4 million loans totaling $17.4 billion; 97 percent of the loans have been repaid. Even United Colors of Benetton's 2008 aid campaign, as pictured above, promotes a micro-credit program in Senegal called Birima established by Youssou N'Dour.

While microfinance is by no means a flawless system, its incredible accomplishments demand recognition. In fact, its work on the small-scale fosters more personal relations between lenders and recipients, which in turn promote a greater sense of understanding, trust, and commitment among all parties involved. This personal approach lies at the heart of micro-lending success, as does the practice of monetary loans in place of fiscal awards that levels the playing field among all participants in the process. It is difficult to determine how the health care proposals in partnership with microfinance organizations will fare in the future, but it is important to recognize this action as an effort to further improve the system. Despite the shortcomings of multilateral aid organizations, one must appreciate their achievements in delivering large-scale disaster relief. The World Bank has even altered many of its policies after the severe criticism it received in the 1970s and 1980s of its insensitivity regarding the local needs of aid recipients. These institutions remain far from perfect, and are in need of structural and strategic reform, particularly regarding the stipulations they attach to provisional aid plans. In the meantime, microfinance initiatives should be applauded and encouraged as a supplemental type of foreign assistance, which has proven to be successful and sustainable. Spare change to spur change: that is my kind of ingenuity.


Eric Ambler said...

Jessica, this post displays such a high level of sophistication and professionalism that is difficult to criticize. Whereas mainstream journalists tend to write about micro-finance as if it were a new trend or fad, I appreciate that you delve into the heart of the issue and examine it from several different angles. While you could have provided a few words of defense for the IMF and the World Bank, I found that it did not detract from the post as a whole--especially in light of the evidence you provide in regards to the staggering inefficiency of these organizations. Your mention of failed bureaucratic projects "such as the $5-billion Ajaokuta steel mill in Nigeria, which began in 1979 and never operated at more than 20 percent of its capacity" was insightful and intriguing.

I must admit that I had to re-read your explanation of the fiscal framework behind micro-loans; however, this is not because of a lack of clarity on your part. I think you do a good job of minimizing the financial jargon overall, which makes your writing very accessible even as you tackle issues that might be off the radar of many of your peers. The only criticism I have in this segment of the argument concerns the source of your information. I am assuming you received your percentage statistics in the third paragraph from the link to the Grameen Bank, but I am unable to verify since the link you provide did not work when I tried to view it.

What impresses me the most about this post is your sense of historical perspective. By pointing out that successful micro-finance organizations have been operating since the 1970s (and not treating it like a fad, as I stated before), you force the reader to think about why these global economic disparities remain so pervasive. Adding this element of pathos to your strong logical argument makes your post even more effective and exceptional, striking an emotional chord that is not always present in politically-oriented writing. This is an enlightening and enjoyable post, and I look forward to reading the rest of your work.

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