MICROFINANCE: A Tool For Economic Justice

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MICROFINANCE A Tool For Economic
Justice
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INTRODUCTION

• Income inequality is often linked to economic and
  social factors
• 1. Educational Opportunities
• 2. Training Opportunities
• 3. Job Availability
• 4. Wage Rates
• 5. Social Mobility
• 6. Environmental Factors

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Recent Advances in the Theory of Economic
Development

• The Mystery of Capital by Hernando de Soto
• --Informal Economy
• --Capital as the Key to
• Economic
• Development

• Banker to the Poor by Muhammad Yunus
• --Poor are outside of
• Banking System
• --No Collateral
• --No Access to Credit

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I. Microfinance Its Origins and Current
Operations in LDCs
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The Origins of the Grameen Bank

• Prior to the 1970s, economic growth and
  development defined by the increase in GNP
• 1. Credit Assigned a Passive Role
• 2. Credit Facilitator of Trade and
  Commerce
• 3. Credit Tool of the Formal Business
  Sector

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The Poor in Bangladesh before Yunus

• Poor in the Villages of Bangladesh involved in
  Small Businessi.e., Entrepreneurs
• Outside of the Formal Banking System
• No Access to Loans or Credit

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Muhammad Yunus Credit is a Powerful Weapon
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Key Features of the Grameen System

• Peer Lending Model
• Loans for One YearInstallments Paid Weekly
• Interest Rate of 20
• Repayment 2 of the Loan per Week
• Contribute to the Group Fund 5 of Loan Amount
• Member Savers Borrowers

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Microenterprise in Uganda
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Success of the Grameen Bank

• Over 3.8 Billion in Loans have been provided
• 2.4 Million Families in Rural Bangladesh have
  been served
• 98 Repayment rate
• Microfinance Initiatives have been started in 100
  countries worldwide
• Global Movement embraced by Governments, NGOs,
  and International Organizations

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Mission of a Grameen Bank
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Other Models of Microfinance in LDCs

• Rotating Savings and Credit Associations (ROSCA)
• 1. Members contribute a regular amount of
• savings each week
• 2. Members take turns borrowing the funds
• at no or low interest rates

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Womens Entrepreneurial Group--Uganda
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Womens Businesses--Uganda
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Other Microfinance Models (cont.)

• Village Bank Model
• 1. Community-Managed Credit and Savings
• Associations
• 2. Sponsoring Agency will lend Seed
  Capital
• 3. Seed Capital becomes the Funds used for
• Loans
• 4. All Members Collectively Guarantee the
• loan

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Village Bank in Uganda
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Prominent Microfinance Organizations

• ACCION International (Americans for Community
  Cooperation in Other Nations
• 1. Private, nonprofit organization
• 2. Peer-Lending Approach
• 3. Narrow focusprimary emphasis in on
• loans to micro-entrepreneurs
• 4. Minimal Training and Advise
• 5. Transitioning to Self-Sustaining
  Business

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SEWA

• SEWA (Self-Employed Womens Association)
• 1. Established in India in 1972 as a
  workers
• cooperative
• 2. Provides credit through a village bank
• model
• 3. Also provides business training to
  women
• 4. Key focus Womens Social Development
• and Collective Empowerment

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FINCA

• FINCA (Foundation for International Community
  Assistance)
• 1. Pioneered the Village Bank Model
• 2. Loans provided to help members start
  and
• sustain business activities
• 3. Group loan guarantees substitute for
• collateral
• 4. Seed capital comes primarily from USAID

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II. Theory of Microfinance in the United States

• Migration of Ideas in Public Finance Usually
  Begin in Developed Countries and Spread to LDCs
• 1. Microfinance was a break with this
  pattern
• 2. Idea of Microfinance was born in
• Bangladesh and migrated to U.S.

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The Third Way

• Microfinance Emerged at a time of a Paradigm
  shift
• Commitments to
• 1. Fiscal Discipline
• 2. Deregulation
• 3. Privatization
• 4. Free Trade
• 5. Market-Oriented Approaches

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The Third Way (cont.)

• The Third Way Approach to poverty reduction
• 1. Market Involvement
• 2. Foster Community Development
• Robert Reich . . . The idea is to make it
  easier for them (i.e., poor) to obtain good jobs
  and thus become economic winners.
• Capital Investment Welfare State
• Private-Investment Solutions to Social Welfare

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Characteristics of Microfinance in the U.S.

• First Programs Modeled after Grameen Bank and
  Group Lending Concept
• Shift to Individual Lending
• Emphasis on Training and Skills Development
• Mentoring and advice
• Goals of Microfinance in U.S.
• 1. Job Creation and Income Generation
• 2. Individual and Community Empowerment
• 3. Relationship Building and Community
• Development

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II. Major U.S. Microfinance Programs

• ACCION U.S.
• 1. Focus on Lending and Loans
• 2. Lent 100 million to 10,000 people in 33
• communities
• 3. 80 of borrowers are minorities
• 50 are women
• 4. Lends to persons with a proven track
• record
• 5. No Training

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Microfinance Programs in U.S. (cont.)

• Southern Good Faith Fund (SGFF)
• 1. Nonprofit affiliate of Southern Bancorp
• 2. Originally modeled after Grameen Bank
• but has shifted focus overtime
• 3. Three Primary Areas of Focus
• a) Asset Builders Program
• b) Business Development Center
• c) Career Pathways Program

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Microfinance Programs in U.S. (cont.)

• Womens Initiative
• 1. Economic Empowerment of Women
• 2. Training-led Organization
• 3. Foster a Relationship between the
• Borrower and Business Consultant
• 4. Expert Business Advice

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Microfinance Programs in U.S. (cont.)

• Working Assets
• 1. Credit as a means of community
• empowerment
• 2. Peer-Lending Initiative
• 3. Focus on Self-Employed
• 4. Emphasizes the Relationship within
• Lending Groups
• 5. Social Capital

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Microfinance Programs in U.S. (cont.)

• ShoreBank Corporation
• 1. Chicago-Based Bank
• 2. Leader in Microfinance
• 3. Loans to NGOs in turn, lend to
  individuals

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Problems Facing Microfinance in the U.S.

• Funding--Donors
• Sustainability
• Complexity of the Economy
• Underclass of Self-Employed
• Poor Need Savings Not Credit
• Route Out of Poverty Education and Wage Jobs

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Direction of Microfinance in U.S.

• Social Capital/Networking
• Individual and Community Empowerment
• Savings
• Alternatives to Predatory Lending
• Credit/Loans for Small Enterprises
• Training/Skills
• Partnerships with Mainstream Banking Institutions

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IV. Policy Proposals

• Create Peer Saving/Lending Circles
• Culture of Savings and Individual Development
  Accounts
• Low-Cost Banking Services a la Good Faith Fund