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Village-based banking -- novel alternative

Posted by Matt 
At the heart of the microfinance discourse is the question of sustainable action. A novel, perhaps radical, approach to micro-lending is to remove the external financing mechanism altogether and to form village bank pools from the participants themselves. The Women's Empowerment Program in Nepal, a program combining literacy with commercial training, has created more than 1,000 such village banks or savings circles. Interest income that would have gone to intermediary NGO lenders instead go as dividends to the village members! The circles or solidarity groups are a bit larger, 15-20 participants, to generate enough initial savings for projects. The initiative has had success in stimulating a broad range of grassroots economic activity. For more on this grassroots approach see:
Sustainable Action!
July 13, 2009 09:09PM
Giving, as commonly imagined, usually involves the rich giving to the poor. In some cases, it’s voluntary and in others Robin Hood is involved. Those with less to give are left out wondering how they can make a difference with just $25 or $50. Some organizations, like Save the Children, try to target this group by suggesting donations of $1 a day. But tracing that dollar and witnessing its impact is sometimes difficult.

SeeYourImpact and Jolkona are two new websites that use mobile phones, social networking and online connections to connect donors to people in need. They allow users to organize around issues, causes, or areas of the world they care about. Recipients can take pictures with mobile phones and upload to the website, allowing users to see their donations in action.

Offering free access to content, that is shaped by the users, teachers and students is democratizing education. Virtual classrooms, educational databases, teacher workshops are some of the ways TWB is putting education in the hands of the recipients. Too often educational outreach and aid travels from the West to the world—the rich to the poor—forgetting or ignoring the resources already on the ground.

My suggestion: by putting the power in the hands of the local community. Local leaders will be there learning and growing long after the aid workers pack up and go home.
Re: Village-based banking -- novel alternative
November 15, 2009 05:39PM
I think we should all remember not to let the search for perfection get in the way of doing good! It may sound like Kiva's borrowers are paying very high interest rates to the MFIs, but if the alternative is for these people not to have access to capital, or to pay much higher rates to private money lenders, then I'm not going to stop lending money thru Kiva! And Kiva is not meant to be a cure all to the problems of world poverty, but rather a mechanism for people who want to connect and help others far away to better their lives thru their own efforts. And the more MFIs there are out there, the more competitive the terms of loans will most likely be, so here's to Kiva for its exceptional work, and remember that Kiva is not in the business of aid but rather it facilitates P2P lending... and while it's clear that good intentions are what motivate many Kiva lenders, money does get returned 99% of the time (and mostly loaned out again), and people keep borrowing because they see positive outcomes from their loans!
some succes factors for microlending are that it is locally rooted, otherwise the sustainability is not secured. I do believe in microfinance as a parcial solution for a holistic problem which is being faced by microenterpreneurs. Most agree that microfinance should be provided to these entrepreneurs alongside other services as business development services. furthermore the lending should go accompanied with some kind of training to make the recipient more financially literate. the interest rate seems to be high but cannot be critisized without looking into the factors of cost, be it: funding cost (what is the cost of Kiva funds), transaction cost (which are often high in these remote areas) and other factors as profit margin, provisioning, inflation. Each of these factors should be analyzed before drawing any conclusions. Obviously high profit for an MFI is not a desirable thing as they then could reduce interest rates but sustainability is. Access to funds is a big issue for even these small village initiatives but I do agree on the validity on the model. There are interesting models in several african countries where these village banks at a certain level are assisted with capital of a donor to increase their lending capacity but only after they have the capacity and a certain level
I believe microfinance can be an effective tool, if used correctly, for a sub-set of the poor. I have used Kiva to lend to micro-entrepreneurs, and have worked in the sector for a decade, including in Mozambique where this episode was based. The tool is often portrayed as a miracle cure, which it is not. A casual glance through recent publications, such as Milford Bateman's book, various New York Times articles and the recent Norwegian/Danish documentary on Grameen sheds some serious doubt on some aspects of the microfinance sector.

Not everyone is an entrepreneur. When a micro-enterprise grows, this is often not due to an overall increase in total demand in the region (for tomatoes, for example), but simply displaces another business (a tomato vendor who did not receive a loan). Does the total number of tomatoes sold increase? This crowding out effect is rarely discussed. How many micro-enterprises employ their own children, who may otherwise be at school? This is ignored. On the topic of interest rates, alas the 30% cited in the episode is unusually low. The NYT exposed a case of a Nigerian MFI lending at rates of 126% per year. This was the largest single Kiva partner at the time. Kive defended the institution initially, but three weeks later severed ties with it. One of the biggest investors in this bank is Grameen Foundation, which was somewhat ironic given Muhammed Yunus's usual stance on exploitative interest rates. The Nicaraguan microfinance sector, one of the highest growth sectors ever, collapsed when the poor collectively refused to repay loans. The Indian microfinance sector is in dire trouble, as any shareholder in SKS will confirm. There is substantial evidence of women committing suicide under the burden of debt to avoid the shame of default and the hounding of loan officers, mainly in India and Bangladesh. And while the topic of high interest rates is often mentioned as a criticism of microfinance, isn't it strange that for all the information Kiva is able to post about a borrower (name, story, loan term, loan purpose, photo etc), why are they unable to cite the actual interest rate charged? And a close look at their accounts and 990 form on their website reveals substantial income, some generous salaries to senior management, and $28.5m of users-funds sitting in a Californian bank account generating interest to Kiva.

Kiva cite, instead, the portfolio yield of the MFI partner they use, which they use as a proxy for interest rates. These are often in excess of 60% per year. For this reason I stopped lending via Kiva, and would suggest that anyone lending to the poor via these P2P models investigate carefully the actual interest rates being charged to the poor. I do not find it credible that the poor can benefit in anything other than exceptional cases when they are forced to pay such rates on loans often of short periods, and the academic evidence of mass poverty reduction through microfinance is lacking to date.

Substantial profits are available to the owners of successful MFIs, and these owners, typically the microfinance funds, have a very clear interest in keeping this information discreet. Fortunately initiatives such as Microfinance Transparency do publish the actual interest rates charged by some MFIs in some countries. Increased transparency and improved regulation of the MFIs and the microfinance funds and intermediaries such as Kiva is the only way to ensure the poor receive a fair deal in microfinance. Until this occurs, the media will continue to expose such cases and the entire sector will gradually lose credibility, which I find disappointing, and it is clearly happening currently. I also find it quite incredible that the microfinance sector is almost entirely isolated from regulatory oversight, particularly in the USA. One exception, cited in this same NYT article, is Calvert Foundation/MicroPlace (part of eBay) who are regulated by the SEC. They had also invested in this Nigerian MFI, but as soon as the NYT began investigating they severed relations with the MFI immediately. Is this scant evidence that regulation could be effective?

Let's not throw out the baby with the bathwater, but equally let's not believe in some naive dream of a miracle cure for poverty where everyone is an entrepreneur able to start up a business yielding a return of 50% a year indefinitely and the banks can sometimes be amazingly profitable at the same time. There is no free lunch.


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