A Little Can go a Long Way Towards Making Life Better
Financial Times, UK
November 15, 2004
By FT reporters
(Amy Yee in New York, Fiona Harvey in London, Amy Kazmin
in Bangkok and Farhan Bokhari in Islamabad)
Not long ago, 46-year-old Than Than Win and her husband eked out a living
by working the fields of landowners in Kangyi, a small village about half
a day's journey from Rangoon. Along with many of Burma's poor, Ms Win
had little means to improve her life or those of her six children.
But Ms Win says receiving microfinance loans to buy a flock of ducks
through the United Nations Development Programme (UNDP) in 1998 changed
Her first loan of $6 (€3.3, £4.6) was used to buy 50 ducks,
whose eggs she sold at the local market for a profit of $1 a day.
Microfinance has traditionally consisted of distributing small loans
worth between $25 and $2,500 to help the urban and rural poor start small
businesses, with typically high rates of repayment of up to 97 per cent
in some developing countries. Successful initiatives show an average rate
of return of about 2.5 per cent of total assets.
The concept evolved in response to the deficiencies of the traditional
banking system whose high overheads often made small loans unaffordable
to relatively poor clients. Microfinance sought to reduce the cost of
lending either by linking lenders to existing development projects where
borrowers had a track record, or by using non-governmental organisations
to vet prospective customers.
Other techniques used to reduce risk have included lending to a group
of poor borrowers who between themselves decided how much money to pass
on to a member and who are collectively responsible for managing a default
by any individual member.
Microfinance has grown at an average annual rate of 25-30 per cent over
the past five years, involving an increasing number of banks such as Citibank,
Deutsche Bank and India's ICICI.
On Thursday the UN will declare 2005 the International Year of Microcredit.
“Microfinance has proved its value, in many countries, as a weapon
against poverty and hunger,” said Kofi Annan, the UN secretary-general,
yesterday. “It really can change peoples' lives for the better especially
the lives of those who need it most.”
The UN International Fund for Agricultural Development (IFAD) says giving
the poor access to basic financial tools will help meet the UN's Millennium
Development Goal of halving extreme poverty by 2015.
But for microfinance schemes to reach “a meaningful number of the
world's poor”, more banks and more NGOs need to get involved, says
Henri Dommel, IFAD's rural development technical adviser.
Critics say, however, that no matter how fashionable, microfinance is
no panacea in the fight against poverty. Such loans often still carry
relatively high rates of interest and the number of poor who can be helped
In the largest micro-finance initiative by any government, Thaksin Shinawatra,
the Thai prime minister, has moved to fulfil a campaign promise made four
years ago to provide each of Thailand's 70,000 villages with a Bt1m ($24,761,
€19,150, £13,413) microcredit fund.
But Thai academics have questioned whether the poorest and most needy
villagers have had access to the funds, and whether money has been used
for productive investment or simply for conspicuous consumption.
Some economists have suggested that some Thai families are being forced
to borrow from money lenders in order to repay the village funds. Kazi
Matin, chief economists for the World Bank in Bangkok, says successful
microfinance projects generally require well-developed regulatory frameworks
to ensure that they are sustainable and do not add to financial pressures
on vulnerable families.
“If you actually give relatively large loans and that money actually
does not get used productively, it could get people into trouble if you
try to enforce the repayment,” says Mr Matin. “They get into
trouble trying to repay, and that is the category of risk that is worst
for the poor households.”
In Pakistan, economists warn of limitations to a plan to expand the role
of microfinance in the country's fight against poverty.
“The idea of microcredit has been fashionable and you would find
many people pleading the case for more such ventures,” concedes
a senior Pakistani government official. “The problem is that there
continue to be practical difficulties. When you give out small loans,
you just can't do this without charging high interest rates. But high
interest costs defeat the purpose of lending to the poor to deal with
Such objections are being met with growing calls within the community
of aid donors for a redefinition of microfinance.
Elizabeth Littlefield, a former banker who runs the Consultative Group
to Assist the Poor, a Washington-based consortium of 30 donor agencies,
says the real challenge is not only to distribute more small loans but
to overhaul entire financial systems. “This means making poor people
central to the financial systems in poor countries,” she says, “whether
in making it easier with the help of new technology for urban workers
to send remittances to family in the countryside or to build local financial
intermediaries to harness savings.”
© Copyright The Financial Times Ltd 2004.