Microfinance - financial services for the poor

Microfinance is regarded as an effective tool for poverty alleviation and regional disparity reduction. It refers to the practice of providing financial services, such as microcredit, microsavings or microinsurance to poor people. By helping them to accumulate usably large sums of money, this expands their choices and reduces the risks they face. Suggested by the name, most transactions involve small amounts of money, frequently less than 100 USD.

It's generally accepted that a successful microfinance program should stand two tests, first, to show that poor people can be relied on to repay their loans, and second, to show that it's possible to provide financial services to poor people through market-based enterprises without subsidy.

Does anyone here know more details of some well-run microfinance programs, e.g. the financial instruments adopted in a program, the planning and operating procedures, lessons learned etc.?

Yes, we talked about Kiva and I started with a German friend to lend out money all over the world. Not much, but most don't need much (in poor countries) and they collect from a great number of lenders.

You should read up on the Nobel prize winner who micromanaged his way into proving this would work.

Wikipedia has something on it: http://en.wikipedia.org/wiki/Microfinance

I found it fascinating that when they began to only accept women as creditors (i.e. in India or Turkey), they would almost never default.

Edit: The Economist has a public article on microlending in India: http://www.economist.com/finance/displayst...tory_id=7803631

Go to the website of the International Labour Organization (ILO) (www.ilo.org), there's enough on microfinance there to keep you busy for weeks on end. Look up their magazine "World of Work" (do a search on the site or simply Google it), in a recent issue there was a series of articles on microfinance - probably the last issue for 2006, published following the award of the Nobel Peace Prize to Muhammad Yunus.

Thank you for the infos. I would like to participate in such a program, though firstly I have to pass their examination. That's why I asked the question.

Are you wanting to borrow a 100 bucks or do you want to donate a 100 bucks?

Nope, I would like to work for such a program.

You also might want to check out the website of Grameen, the foundation and bank of the nobel laureate named above, Yunus. Here is the link:
http://www.grameenfoundation.org/?gclid=CO...CFQjaXgodrjqf7Q

When I studied at the Kennedy School in USA in 1999-2000 one of my professors there, Iris Bohnet also did a lot of research and publishing on this topic, you certainly google her and if you email her some particular questions she is usually willing to help you with some answers.

In least developped countries, microfinance helps establish SME and infrastructure (for instance by financing a mobile phone for a person who then leases it for call by call charge to people in the village without telecommunication) in certain ways in a unique way. While the interest rates are quite high (for European standards) they are much lower than from local loan sharks. At an average the default quote is only 1-3 %. In certain countries, part of becoming eligble for loans from Grameen Bank also requires to adher to a set of rules which include sending your children to school, accept minimum sanitary standards, learn about contraception (where it makes sense from a religious and social perspective) and so on.

But Microfinance is not only reserved for the very poor. There has been some success with Microfinancing in areas of the former Soviet Union and it is also a topic in some of the US gettos in order to get people from social welfare programs into some form of business again. Of course there the amounts are somewhat higher, usually around 10.000.- USD.

One quite interesting approach in a similar direction but without too much of a social goal is SMAVA, a new internet plattform where people can lend and loan money P2P. There are also some requests listed there where projects in develloping countries shall be supported and each lender can decide whether he wants to have an interest rate for his money or not. I would always recommend to ask for interest since one might destroy the existence or growth of local Microfinance unwillingly by refraining from asking for interest. Same as you can destroy local farmers by sending huge shippments of food as a form of aid.

I might still have some reading material from my studies, Strawberry, if you need some scientific information about Microfinance, contact me and some time next week I can provide you with copies or leads. Good luck with your endavour!

Cheerio
Pat

Took a course in grad school where we covered this topic and discussed the various MFI's out there. The Grameen website is a good start for loads of information on the topic. MFI's had done a great good to enpowering women and essentially getting people a good start in creating a life for supporting themselves and not totally relying on the governement for support.

Thank you for the above replies. The idea "microfinance" sounds great indeed. But anyone out there had experiences in running such a program? If so, how do you think of the idea? What kind of difficultites did you have during the program? I assume it wouldn't be easy to persuade the poor to pay back loans. Some rural residents are really tough, for instance in China, AFAIK. Some incentives must be adopted since there's no collateral in a microloan. btw, how far can such poverty alleviation programs go?

Pat, thank you for the detailed explanation. The above sounds interesting. Low interest is no good for a microcredit program. Though, I personally believe that social goal is the most important. Vitality is next to it. I'm just puzzled about the self-evident dilemma in the idea. What's more, each country has its own culture. In some countries like China, people tend to be more individualized, i.e. who cares about your credit if I've got the loan? So, group lending is meaningless. I do wonder how to push the program forward under such conditions in a couple of weeks.

Any insights into such things? Thank you in advance.

I think the Grameen model deserves further exploration because the bank is located in a Muslim country, i.e., no interest is charged on its loans, and most of the bank's equity is owned by its customers . I guess it is a fair question to ask whether or not a microfinance system must be interest-based. Risk is also an issue, as mentioned above, although I found it interesting that in years past in the Philippines, microfinance was in some places provided by Indian entrepreneurs using the most low-tech of business models. Starshollow makes a great point about possible crowding-out effects.