Panel 11: Making Micro-Finance Work Thursday, April 20 th (3:35-4:35pm) 13 th Symposium on Development and Social Transformation

Women’s Development Micro-Finance Institutions in India Kathryn Eissfeldt Panel 11: Making Micro-Finance Work 13th Symposium on Development and Social Transformation

Women’s Development MFIs in India Kathryn Eissfeldt April 20, 2006 PPA 756: Policy & Admin. in Developing Countries Professor Jeremy Shiffman

Microfinance Terms A microenterprise is generally a sole proprietorship that has fewer than five employees, has not had access to the commercial banking sector, and can initially utilize a loan of under $15,000. Most of the microenterprises have fewer than three employees, and the majority are operated by the owner alone. A microenterprise development program is generally run by a non- profit organization that provides any combination of credit, technical assistance, training and other business and personal assistance services to microentrepreneurs. A microloan is a very small loan to a microenterprise. Most microloan are under $10,000, with an average loan size of $5,640. Loan terms range from one year to 4.75 years. Programs charge market rates of interest, from eight to 16 percent. Loans are generally secured by non-traditional collateral, flexible collateral requirements or group guarantees.

Problem: Poverty, Women, and Credit Women seen by traditional banking industry as “unbankable” without collateral Resources in economy not maximized human capital of women’s entrepreneurship not fully realized Cycles of poverty, effects on the family, bonded labor Less education investment in next generation

History of Microcredit 1976: Bangladeshi economics professor Dr. Muhammad Yunus used own money and strategy to target poorest of the poor women during a famine in the region. – His approach was formalized in the Grameen Bank model. – Still the world’s largest MFI, with 5 million clients and 10,000 families escaping poverty monthly

History of Microcredit Some attribute aid at end of WW II and Marshall Plan in Europe as foundations of microcredit movement. First official loan (along modern lines): Al Whittaker’s Opportunity International to Carlos Mereno of Columbia in 1971 Parallel development in Brazil in 1973: ACCION International changed its focus from infrastructure projects for the poor to microloans

History of Microcredit 2005: UN declared 2005 the International Year of Microcredit – Kofi Annan: “Microcrdit is a critical anti-poverty tool—a wise investment in human capital. When the poorest, especially women, receive credit, they become economic actors with power. Power to improve not only their own lives but, in a widening circle of impact, their families, their communities, and their nations.”

Microcredit Models Grameen Bank – Begun in Bangladesh – Specifically addresses women – Most microcredit programs today around world modeled on it Village Banking – Begun in Latin America – FINCA – Lets customers make own decisions Global Microfinance Accelerators – UNITUS

Testimonials Ittamma Polkurthi: bonded laborer to plantation owner Govindammal: turned family finances around with loans of $67 and $89 S.K. Pahima: MFI customer who now works for company as loan officer

Child care

INGO Program Localization as a Spin-off Strategy Marta Bogdanic Panel 11: Making Micro-Finance Work 13th Symposium on Development and Social Transformation

Program spin offs as a strategy of International NGOs for Scaling-up Croatian microfinance sector experience Development and Social Transformation Symposium April 2006

What is localization or a spin off? Creation of local institutions that continue the work of the INGO Crucial: perception of success between partner organizations Public policy relevance: maximize use of public funds for the benefit of end users, third sector development and accomplishment of donor goals

Literature review In late 1980s partnership building identified as paradigm for international development cooperation (Ashman) Policy guidelines (ICVA): mutual respect open communication equity of partners trust development cooperative interpersonal relations active communication mutual influence joint learning

Croatian MF sector experience Success: establishment of mutually beneficial working relationship between INGO and local NGO in terms of power, goals, responsibility for future developments and potential for joint learning Three MFIs established by INGOs, all localized as domestic operations Different perception of success by the local MFIs

Issues identified Local legal environment Vision and mission alignment Local team buy-in Accountability

Lessons learned Equality of partners Joint responsibility for success of the operation Accountable to each other, clients, beneficiaries, local community, donors

Evaluation of the Vietnam Bank for Social Policies Phuong Lan Huynh Panel 11: Making Micro-Finance Work 13th Symposium on Development and Social Transformation

Vietnam Bank for Social Policies Subsidized Interest Rate: Good or Harm for the Poor? Phuong Lan Huynh

What is micro-finance? Microfinance is the supply of loans, savings, and other basic financial services to the poor. Financial services needed by the poor include working capital loans, consumer credit, savings, pensions, insurance, and money transfer services Consultative Group to Assist the Poor (CGAP)

Why micro-finance? In Asia, about 90% of the 180 million poor households do not have access to institutional financial services (Asian Development Bank) Financial institutions do not want to work with the poor, because:  higher lending costs involved in small transactions;  higher risk for bad debts; and  the poor's inability to provide marketable collateral for loans.

Micro-finance in Vietnam First introduced in Vietnam in 1980s through international development projects Involvement of the Government of Vietnam started in 1990s. Micro-finance is a part of poverty reduction program, government credit was channeled through various state-owned banks

Key credit providers for the poor Formal sector: Vietnam Bank for Social Policies (VBSP) and Vietnam Bank for Agriculture and Rural Development (VBARD)– largest share of loans to the poor Semi-formal sector: programs and projects sponsored by international NGOs and various mass organizations Informal sector: relative, family members and money-lenders

Comparison of interest rate Type of organization % of borrowersAnnual interest rate VBSP10% of the poor6% % VBARD10% of the poor10.8% % Semi-formal1.5% of the poor9.6% - 18% Money-lenders50% of the poorCan be as high as 48% - 120%

Role of government The role of government is to enable financial services, not to provide them directly. Governments can almost never do a good job of lending, but they can set a supporting policy environment CGAP Key Principles of Micro-finance

Justification for government lending - Market imperfections and failure - Incomplete organizational infrastructure - => G overnment involvement to facilitate the development and performance of financial markets to increase welfare and well-being of the poor Gonzalez-Vega and Graham,Stiglitz, Krahnen and Schmidt

Why does Vietnam need VBSP? Policy lending was performed by various state-owned commercial banks => affects the financial reform in Vietnam A socialism country and sense of equality Lack of social security and risks involved during reform process, farmers are more vulnerable, hence the GoV are under pressure to “defend the poor”

Government View on Micro-finance “It is also a need to create a favorable and stable environment for credit and micro finance operations to help the rural finance system work with flexibility and in such a way that can most meet the poor’s needs. It is as well required to reform and renovate the rural credit and finance systems, diversify credit instruments to make them more attractive to private investment in agricultural product manufacturing and processing” Vietnam CPRGS

So how does the subsidized interest rate policy impact the poor?

Can VPSB sustain itself? Lending rate: 6% annually VS Deposit rate: 6.7% annually Other lending costs as VPSB does not lend directly to the poor but through network of mass organizations

How about the poor? Create a subsidy-dependence attitude among the poor Allow corruption and misuse of fund

And other MFI? Ruling out current MFIs from the market and discourage other commercial banks and new MFIs to enter the market

What can be done? Reform to work towards financial self- sufficiency while reaching the poor  Become more cost effective: use the models of NGOs to deliver and monitor services  Efficiency: staff, organization  Appropriate interest rate: the poor can afford higher interest rate as their loans are often small  Promote savings for the poor safety net

Panel 11: Building Food Security Thursday, April 20th (3:35-4:35pm) Kathryn Eissfeldt Women’s Development Micro-Finance Institutions in India Marta Bogdanic INGO Program Localization as a Spin-off Strategy Phuong Lan Huynh Evaluation of the Vietnam Bank for Social Policies 13th Symposium on Development and Social Transformation