Micro-finance : Pros and Cons

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


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


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


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


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.


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


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


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


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


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


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.


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


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.


●

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.


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.


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.


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.


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.


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


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


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


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


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


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


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


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


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


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
BRAC, 2012. BRAC Uganda Annual Report 2012. [Online]. Available at:
http://www.brac.net/sites/default/files/ar2012/BRAC%20Uganda%20high%20res.pdf
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
Anonymous, 2010. Socio-Economic Characteristics. [Online]. Available at:
http://www.peacebuildingdata.org/uganda/results/socio-economic-characteristics

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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