In doing this research paper assignment, I do not feel that my research skills were improved significantly at all. I was trained in high school to write at a college level and graded as such. In fact, my last high school paper, that of my senior project, was a college level paper and graded as if it were for a college class - it was reviewed by teachers and community members and received an "A". It should be noted that I did not have previous experience using a database like J-STOR or any of the others we were introduced to, however, they were not difficult to use and they operate similarly to a card catalog in a library - not a new idea (so I don't really think the experience gained was substantial - though it was nice to know we had access to so many other works outside the library).
What I will say about the assignment is that my style was improved, but this was by way of the instructor and not the paper. In pointing out the drawbacks and negative aspects of my paper, I believe Professor Klunk improved my writing.
lunedì 4 maggio 2009
Final Draft, Research Paper: Assessing the Impact of Microfinance Institutions
Originally Written: 4 May 2009
In The Practices of Global Citizenship, Schattle briefly mentions that some businesses (and individuals) engage in the primary concepts of global citizenship – participation, awareness, and responsibility – by becoming involved in microfinance (25). The common perception is that microfinance is utilized in third-world countries as a tool to empower the poor and enable them to become entrepreneurs. Microfinance can, however, be used in other countries (such as France) and does come with limitations. According to Sen,
Microfinance Institutions (MFIs) are financial institutions with a primary objective of making credit available to [a] segment of the population, which has been ignored by the commercial banking system for not having collateral requirements. The efficient functioning of these MFIs on a sustainable basis is important but for MFIs it is equally important that people at or below the poverty line are reached, quality services are provided, and that microfinance improves clients’ lives. (78)
While still a relatively new idea and practice, MFIs have emerged as a way in which individuals from underdeveloped areas can gain access to banking services and money to invest in small businesses. One often hears of the benefits of MFIs, how they change the lives of those who receive loans, and how economies benefit as well as communities. However, quality analyses are needed that compare and contrast the objectives of microfinance with the results of MFI activities. In order to garner a complete, accurate idea of MFI’s abilities to accomplish the social goals they set, a variety of sources must be consulted which make use of data and facts as opposed to idealized arguments that rely solely on theory or deduction. Although MFIs have had several beneficial impacts they still have much work to do to improve company- and industry-wide standards for loans and to improve outreach to rural communities and the poorest members of society.
It is easy to find those who vouch for the benefits of microfinance. Nowak presents many arguments in favor of microfinance and the positive impacts it has made in Europe. She states that Adie, a small French microfinance start-up project created in 1988 by three volunteers, “has been able to finance 52,000 loans with a mere 3% rate of loss. It has facilitated the creation of 45,000 new enterprises with a survival rate (64% after two years) equal to the national average” (28). Adie was able to demonstrate the ability of the poor in France to build their own places in the workforce and repay the money lent to them. This has in turn changed the public’s opinion of France’s poor and brought about a change in the law that has ultimately made it easier for microfinance institutions to operate within France (28-29). Nowak goes on to claim that microfinance is a good fit for the economy of Western and Eastern Europe, as it adequately deals with the unique problems and requirements of their economy. She also cites statistics, saying that “Microenterprises represent 91.5% of the total number of enterprises in the European Union” and account for “12 to 15% of the Gross Domestic Product” (30). Even more impressive is the fact that approximately one third of the new jobs in France are due to new companies just beginning to form, 40% of whose founders are the products of unemployment. Nowak perhaps sums up her argument best in saying “In this case credit is not only an indispensable financial lever. It is also an act of trust…that allows the recipient to regain confidence in himself and project himself into the future” (31). Microcredit is not on its way out of the financial sector, it is to be the norm for the coming era in which we are no longer focused on industry, but on the services that individual members of society are able to provide as well as their intellectual capabilities (32). These positive impacts of microfinance aid in the advocacy of MFI efforts and ultimately make it easier for individuals to see the possibilities that come out of such institutions. The benefits of microfinance do not end here, however.
MFIs have the ability to positively impact the communities within which they operate by educating and training their clients and improving their quality of life. According to Marar, et al., MFIs can do more than just lend money to those in need as well as provide other financial services. They have the innate capacity to change the communities in which they conduct their businesses. HSBC, the writers contend, is one of these companies. The article details “the bank’s stakeholder initiatives for capacity building, which include two schools where rural women learn essential business and technical skills and financial literacy, and an environmental and social village-based initiative for water conservation and livelihood creation” (15). This education reduces the vulnerability of the poor, increasing the individual abilities or capacities of participants. Parents are able to invest in their children’s education and attain better living conditions, which also coincide with a lower incidence of illness. Programs such as these also empower the women in the communities that they take place in. Since opening in 2006, the authors claim that “the HSBC Manndeshi Business School for Rural Women has…trained 5,987 rural poor women, with more than 60% of them starting their own businesses (23). Because of this education, women’s average daily income has risen, their meals and nutrition have improved, and access to monetary resources has allowed women to have a bigger voice in communal and familial life, leading to a decline in the levels of violence against women. Furthermore, the ability to generate an income enables families to build their assets and accumulate capital, which eventually results in a higher standard of living and quality of life. Other data point to these advancements. Clients (and their households) of the Bangladesh Rural Advancement Committee reportedly increased their purchases by 28% and their assets by 112%. Such improvement is remarkable, and may indicate a coming change in the socio-economic status of individuals within third-world countries and their quality of life. Other nations that have seen the positive impacts of MFIs include Indonesia where 90% of Bank Rakyat Indonesia customers moved out of the poverty level, increasing their incomes by an average of 112%, and Mali where clients who had been affiliated “with the program for as little as one year were significantly less likely to have experienced a period of acute food insecurity – and those that had had experienced a shorter period” (17). However, despite all of the positives that come out of MFIs, the negative effects and limitations of microfinance must not be overlooked.
Many negative implications of microfinance must be taken into account when assessing an MFI’s performance. Although they acknowledge the substantial benefits that women and their families incur from microfinance, Hietalahti and Linden indicate that “Recent studies have pointed out several social and economic problems in some of the programmes” (202). Focusing mainly on the Small Enterprise Foundation (SEF) in South Africa, the pair collected data on interest rates charged to individual borrowers and organized their results by loan period. According to Hietalahti and Linden’s study, the highest “effective interest rate” was 82.15% for “8 fortnights”, with all other loan terms having interest rates above 70% as well (204). Although these results are not typical of an MFI, they do illustrate how an MFI could conduct business. The authors mention “Although SEF interest rates are higher than commercial rates…a small change in repayment terms might have an immense impact on the effective interest rate (based on a declining balance) but will be a nearly insignificant factor in the context of the borrower’s welfare” (205). Such high interest rates have the possibility of leading to never-ending cycles of debt, and unstable homes when financed. This outcome is the very thing that MFIs are working to defeat and it seems ironic that they would be responsible for the creation of such unsavory circumstances. Furthermore, the amount of the loan given, as well as the terms on each loan, is different for each borrower. There is no standard or general guidelines keeping such practices from occurring and discontinuities appear even with respect to access to other financial services offered. As a result, large loans exceeding the needs of the borrower were an issue, as they were hard for borrowers to repay. This ultimately affects the borrower, his family, and his community as well as those that depend on his business. These cases are not unique to SEF, as similar problems arise for other MFIs that conduct business that lacks uniformity in loan procedures. Unfortunately, the negatives do not end here, however.
In addition to high interest rates and lack of standardization, other problems and limitations of MFIs exist. According to Johnson and Sharma, MFIs have particular difficulty in reaching the more remote locations of the countries in which they operate. According to the authors, getting to these areas and their poorer citizens “with sustainable and secure financial services means being able to cover the higher transaction costs that arise” (63). Members of these poorer communities typically need access to less profitable services that financial institutions provide. More unfortunately for lenders, these areas typically come with a greater amount of risk, as they have “poorly diversified livelihoods and economies” (63). This has apparently been an issue since the beginning of microfinance, as MFIs have endeavored to serve these areas and found it difficult to do so (63). The emphasis on sustainability of MFIs has ultimately led to these as well as other limitations on what these institutions can accomplish.
Because of the significance of generating revenue for MFIs to be financially self-sustained, other limitations of MFIs have become apparent. Ghate argues that “deceptive interest rates, coercive collection practices, and over-lending” have all occurred (163). Rahman’s findings suggest the problem may not be isolated, as an increasing portion of microfinance customers are not poor, possibly in response to poor clients that cannot repay loans. He claims “About 40 per cent of total microfinance clients…are non-poor” (194). The drive to create profitability has led to these and other predicaments. Rahman cites several problems among the NGOs (Non-Governmental Organizations) in Bangladesh, including the misuse of loan funds, predominance of short-term loans, lack of concern for client satisfaction, and poor oversight and administration of MFIs (193). Despite the existence of black and white cases for and against microfinance and MFIs, the impacts on education are not so unambiguous.
There are some social implications and abilities of microfinance that are neither definitively negative nor positive. According to Maldonado and Gonzalez-Vega, education is one area in which microfinance makes such a mixed impact. The duo claims that there is limited access for rural poor households to any sort of formal financial system, “Consequently, the poor must fund their education out of past wealth or through abstention from productive work or from current consumption rather than with loans” (2441). This comes as a result of the previously mentioned fact that it is unprofitable for MFIs to be present in rural areas. In response to their lack of credit availability, families are forced to prioritize their present needs with those of their children’s education. High opportunity costs play a factor when keeping a child in school keeps him from being productive and contributing to the family income. In addition, child labor is also needed in order to care for the younger children so that older household members can work. This relates to microfinance in that when parents are given a loan to aid their business they have two options. In the first, they can pull their children from school to help either in working for the family business or with taking care of the other children. However, the authors do concede, “Microfinance may also increase the demand for education as a result of income” (2453). The second option given to parents is to keep their children in school because of their recently acquired income. The authors say that microfinance “reduces the probability that children will be pulled from school” because of the added stability that results from a newfound monetary source (2441). Families typically have a tendency to react to income volatility by removing their children from schools, so help in starting a business enables them to not have to engage in such practices. In the end, education is neither hurt nor aided by microfinance, as families deal with their individual situations differently. Further study is needed to obtain a clearer sense of how education is impacted by microfinance. So it is that in addition to the clearly defined positives and negatives of microfinance there exist other effects with implications that are not so easily discerned.
In conclusion, though MFIs have made substantially positive impacts within their spheres of influence, they have yet to establish uniform loan standards within companies or as an industry and have failed to reach the poorest of the poor or the rural communities in need of aid. Several sources were examined, all of which brought different assumptions, statistics, facts, and arguments to the discussion of MFI’s impacts and limitations. The positives noted included the creation of jobs and businesses that were able to turn those who had previously been unemployed into productive members of society, communities that were impacted by the schooling and other such initiatives (i.e. water conservation projects), and better living conditions. One of the most important positives however, was the impact that microfinance has made on the lives of women all over the world in terms of the opportunities and new skills it has given to them. Negatives mentioned consisted of high interest rates, lack of industry standardization (and within individual businesses), and limited presence in small, rural communities. The biggest disappointment of MFIs however, is that although they are still working with the poor, they are failing to reach the poorest of the poor. In addition to these impacts and limitations, education was deemed to be one area in which the impact was not so clearly defined, being both positively and negatively impacted by MFIs. Continued research is suggested pertaining to methods of assessing the outcomes of MFIs as well as the impact of microfinance on education. Unfortunately, because microfinance is a relatively new industry, time is the missing ingredient that could prove to be the key factor for further useful analysis that would answer the questions posed here.
Annotated Bibliography
Dichter, Thomas (ed.). What's wrong with microfinance? Rugby: Practical Action Pub., 2008.
This anthology provided several authors from which I could get some arguments against microfinance. It proved to be a very useful resource, and I’m glad I ordered it from interlibrary loan. Numerous authors were included in the work, as well as its editor, Thomas Dichter. This yielded the unique opportunity to bring several writers together, concerning this one subject area, all from a broad array of backgrounds, specialties, and areas that they studied.
Ghate, Prabhu. “Learning from the Andhra Pradesh crisis.” What's wrong with microfinance? Ed. Thomas W. Dichter. Rugby: Practical Action Pub., 2008. 163.
Hietalahti1, Johanna, and Mikael Linden. "Socio-economic Impacts of Microfinance and Repayment Performance: A Case Study of the Small Enterprise Foundation, South Africa." Progress in Development Studies, 6.3 (2006): 201-210.
This served as a substantial argument against microfinance, despite the fact that the article also mentioned the empowerment of women. Focusing on the SEF, these two researchers were able to gain some facts and knowledge on the microfinance situation in South Africa. However, at the end of their paper, much like I with mine, they acknowledge that they really cannot give any general answer as to whether or not microfinance is bad or good, because the issue is so muddled.
Johnson, Susan, and Namrata Sharma. “‘Institutionalizing suspicion’: The management and governance challenge in user-owned microfinance groups.” What's wrong with microfinance? Ed. Thomas W. Dichter. Rugby: Practical Action Pub., 2008. 63.
Maldonado, Jorge H., and Claudio Gonzalez-Vega. “Impact of Microfinance on Schooling: Evidence from Poor Rural Households in Bolivia.” World Development 36.11 (2008): 2440-2455. ScienceDirect (Elsevier). U of the Pacific Lib., CA. 11 March 2009.
This work consisted of many inferences that were then supported by much research and meticulously collected data. The authors knew the “positives” of microfinance operations, but were interested in seeing the negative impacts as well, in order to get a more balanced perspective. With the idea in mind that a child’s education is negatively impacted by microfinance, they set out to prove their thesis. This work enabled me to see that microfinance does enable the neglect of a child’s education, as a new-found business prospect necessitates the child helping in the enterprise and foregoing school. This became a key point among the negative impacts of microfinance. However, the authors presented evidence to the contrary and it became apparent that the situation was not black and white.
Marar, Pramod, Balaji S. Iyer, and Unmesh Brahme. “HSBC Brings a Business Model of Banking to the Doorsteps of the Poor.” Global Business and Organization Excellence 28.2 (2008): 15-26. EBSCO. U of the Pacific Lib., CA. 11 March 2009.
The work detailed the actions of one company in particular, and their efforts, methodologies, and strategies (in particular regard to sustainability of the businesses they helped to start). This article also gave me a succinct list of several positive impacts of microfinance on which to elaborate. There were relatively few statistics to support the claims of these positive impacts, however, I still found the list to be useful and the contents of the article to be helpful. If I were to be using any of the other information from this article, I would be worried about the credibility and impartiality, because this assessment (the article) was conducted by those who ran the company.
Nowak, Maria. “Microcredits in Europe.” Revista De Economia Mundial 19 (2008): 25-32. EBSCO. U of the Pacific Lib., CA. 11 March 2009.
Nowak presents a very compelling argument for the proper place and benefits of microfinance in Europe. She cites several statistics in which she supports her theories very well and is able to provide a reasonable path of logic for her reader. It is clear that microfinance works well for Europe and that it is perhaps a vision of the future more than of a relic. I made particular use of her statistics and used Europe as an example (outside of 3rd world countries) where microfinance had an impact worth mentioning. This could possibly extend the case to America – aiding someone in arguing that we should be more actively engaged in microfinance operations here.
Rahman, S.M. “A practioner’s view of the challenges facing NGO-based microfinance in Bangladesh.” What's wrong with microfinance? Ed. Thomas W. Dichter. Rugby: Practical Action Pub., 2008. 193.
Schattle, Hans. The Practices of GLOBAL CITIZENSHIP. Lanham: Rowman & Littlefield Publishers, Inc., 2008.
This was of course the book that created the basis for this and all of the other research papers for the class. I argued that people put Schattle’s primary concepts of global citizenship into action by participating in microfinance, the paper then developed on its own from there. The idea originally came out of this book when Schattle talked about a corporation participating in microfinance programs.
Sen, Mitali. “Assessing Social Performance of Microfinance Institutions in India.” ICFAI Journal of Applied Finance 14.7 (2008): 78-86. EBSCO. U of the Pacific Lib., CA. 11 March 2009. This article provided a basic, easily understood definition and explanation of microfinance with which I could begin my paper. However, it also delved into the necessity of ongoing assessment so that MFIs could reach their goals, and at the same time be held accountable for the work that they are doing. He claimed that this was necessary for progress and advancement. I used this article as a justification for the fact that impact analysis is essential in determining the effectiveness of an MFI.
In The Practices of Global Citizenship, Schattle briefly mentions that some businesses (and individuals) engage in the primary concepts of global citizenship – participation, awareness, and responsibility – by becoming involved in microfinance (25). The common perception is that microfinance is utilized in third-world countries as a tool to empower the poor and enable them to become entrepreneurs. Microfinance can, however, be used in other countries (such as France) and does come with limitations. According to Sen,
Microfinance Institutions (MFIs) are financial institutions with a primary objective of making credit available to [a] segment of the population, which has been ignored by the commercial banking system for not having collateral requirements. The efficient functioning of these MFIs on a sustainable basis is important but for MFIs it is equally important that people at or below the poverty line are reached, quality services are provided, and that microfinance improves clients’ lives. (78)
While still a relatively new idea and practice, MFIs have emerged as a way in which individuals from underdeveloped areas can gain access to banking services and money to invest in small businesses. One often hears of the benefits of MFIs, how they change the lives of those who receive loans, and how economies benefit as well as communities. However, quality analyses are needed that compare and contrast the objectives of microfinance with the results of MFI activities. In order to garner a complete, accurate idea of MFI’s abilities to accomplish the social goals they set, a variety of sources must be consulted which make use of data and facts as opposed to idealized arguments that rely solely on theory or deduction. Although MFIs have had several beneficial impacts they still have much work to do to improve company- and industry-wide standards for loans and to improve outreach to rural communities and the poorest members of society.
It is easy to find those who vouch for the benefits of microfinance. Nowak presents many arguments in favor of microfinance and the positive impacts it has made in Europe. She states that Adie, a small French microfinance start-up project created in 1988 by three volunteers, “has been able to finance 52,000 loans with a mere 3% rate of loss. It has facilitated the creation of 45,000 new enterprises with a survival rate (64% after two years) equal to the national average” (28). Adie was able to demonstrate the ability of the poor in France to build their own places in the workforce and repay the money lent to them. This has in turn changed the public’s opinion of France’s poor and brought about a change in the law that has ultimately made it easier for microfinance institutions to operate within France (28-29). Nowak goes on to claim that microfinance is a good fit for the economy of Western and Eastern Europe, as it adequately deals with the unique problems and requirements of their economy. She also cites statistics, saying that “Microenterprises represent 91.5% of the total number of enterprises in the European Union” and account for “12 to 15% of the Gross Domestic Product” (30). Even more impressive is the fact that approximately one third of the new jobs in France are due to new companies just beginning to form, 40% of whose founders are the products of unemployment. Nowak perhaps sums up her argument best in saying “In this case credit is not only an indispensable financial lever. It is also an act of trust…that allows the recipient to regain confidence in himself and project himself into the future” (31). Microcredit is not on its way out of the financial sector, it is to be the norm for the coming era in which we are no longer focused on industry, but on the services that individual members of society are able to provide as well as their intellectual capabilities (32). These positive impacts of microfinance aid in the advocacy of MFI efforts and ultimately make it easier for individuals to see the possibilities that come out of such institutions. The benefits of microfinance do not end here, however.
MFIs have the ability to positively impact the communities within which they operate by educating and training their clients and improving their quality of life. According to Marar, et al., MFIs can do more than just lend money to those in need as well as provide other financial services. They have the innate capacity to change the communities in which they conduct their businesses. HSBC, the writers contend, is one of these companies. The article details “the bank’s stakeholder initiatives for capacity building, which include two schools where rural women learn essential business and technical skills and financial literacy, and an environmental and social village-based initiative for water conservation and livelihood creation” (15). This education reduces the vulnerability of the poor, increasing the individual abilities or capacities of participants. Parents are able to invest in their children’s education and attain better living conditions, which also coincide with a lower incidence of illness. Programs such as these also empower the women in the communities that they take place in. Since opening in 2006, the authors claim that “the HSBC Manndeshi Business School for Rural Women has…trained 5,987 rural poor women, with more than 60% of them starting their own businesses (23). Because of this education, women’s average daily income has risen, their meals and nutrition have improved, and access to monetary resources has allowed women to have a bigger voice in communal and familial life, leading to a decline in the levels of violence against women. Furthermore, the ability to generate an income enables families to build their assets and accumulate capital, which eventually results in a higher standard of living and quality of life. Other data point to these advancements. Clients (and their households) of the Bangladesh Rural Advancement Committee reportedly increased their purchases by 28% and their assets by 112%. Such improvement is remarkable, and may indicate a coming change in the socio-economic status of individuals within third-world countries and their quality of life. Other nations that have seen the positive impacts of MFIs include Indonesia where 90% of Bank Rakyat Indonesia customers moved out of the poverty level, increasing their incomes by an average of 112%, and Mali where clients who had been affiliated “with the program for as little as one year were significantly less likely to have experienced a period of acute food insecurity – and those that had had experienced a shorter period” (17). However, despite all of the positives that come out of MFIs, the negative effects and limitations of microfinance must not be overlooked.
Many negative implications of microfinance must be taken into account when assessing an MFI’s performance. Although they acknowledge the substantial benefits that women and their families incur from microfinance, Hietalahti and Linden indicate that “Recent studies have pointed out several social and economic problems in some of the programmes” (202). Focusing mainly on the Small Enterprise Foundation (SEF) in South Africa, the pair collected data on interest rates charged to individual borrowers and organized their results by loan period. According to Hietalahti and Linden’s study, the highest “effective interest rate” was 82.15% for “8 fortnights”, with all other loan terms having interest rates above 70% as well (204). Although these results are not typical of an MFI, they do illustrate how an MFI could conduct business. The authors mention “Although SEF interest rates are higher than commercial rates…a small change in repayment terms might have an immense impact on the effective interest rate (based on a declining balance) but will be a nearly insignificant factor in the context of the borrower’s welfare” (205). Such high interest rates have the possibility of leading to never-ending cycles of debt, and unstable homes when financed. This outcome is the very thing that MFIs are working to defeat and it seems ironic that they would be responsible for the creation of such unsavory circumstances. Furthermore, the amount of the loan given, as well as the terms on each loan, is different for each borrower. There is no standard or general guidelines keeping such practices from occurring and discontinuities appear even with respect to access to other financial services offered. As a result, large loans exceeding the needs of the borrower were an issue, as they were hard for borrowers to repay. This ultimately affects the borrower, his family, and his community as well as those that depend on his business. These cases are not unique to SEF, as similar problems arise for other MFIs that conduct business that lacks uniformity in loan procedures. Unfortunately, the negatives do not end here, however.
In addition to high interest rates and lack of standardization, other problems and limitations of MFIs exist. According to Johnson and Sharma, MFIs have particular difficulty in reaching the more remote locations of the countries in which they operate. According to the authors, getting to these areas and their poorer citizens “with sustainable and secure financial services means being able to cover the higher transaction costs that arise” (63). Members of these poorer communities typically need access to less profitable services that financial institutions provide. More unfortunately for lenders, these areas typically come with a greater amount of risk, as they have “poorly diversified livelihoods and economies” (63). This has apparently been an issue since the beginning of microfinance, as MFIs have endeavored to serve these areas and found it difficult to do so (63). The emphasis on sustainability of MFIs has ultimately led to these as well as other limitations on what these institutions can accomplish.
Because of the significance of generating revenue for MFIs to be financially self-sustained, other limitations of MFIs have become apparent. Ghate argues that “deceptive interest rates, coercive collection practices, and over-lending” have all occurred (163). Rahman’s findings suggest the problem may not be isolated, as an increasing portion of microfinance customers are not poor, possibly in response to poor clients that cannot repay loans. He claims “About 40 per cent of total microfinance clients…are non-poor” (194). The drive to create profitability has led to these and other predicaments. Rahman cites several problems among the NGOs (Non-Governmental Organizations) in Bangladesh, including the misuse of loan funds, predominance of short-term loans, lack of concern for client satisfaction, and poor oversight and administration of MFIs (193). Despite the existence of black and white cases for and against microfinance and MFIs, the impacts on education are not so unambiguous.
There are some social implications and abilities of microfinance that are neither definitively negative nor positive. According to Maldonado and Gonzalez-Vega, education is one area in which microfinance makes such a mixed impact. The duo claims that there is limited access for rural poor households to any sort of formal financial system, “Consequently, the poor must fund their education out of past wealth or through abstention from productive work or from current consumption rather than with loans” (2441). This comes as a result of the previously mentioned fact that it is unprofitable for MFIs to be present in rural areas. In response to their lack of credit availability, families are forced to prioritize their present needs with those of their children’s education. High opportunity costs play a factor when keeping a child in school keeps him from being productive and contributing to the family income. In addition, child labor is also needed in order to care for the younger children so that older household members can work. This relates to microfinance in that when parents are given a loan to aid their business they have two options. In the first, they can pull their children from school to help either in working for the family business or with taking care of the other children. However, the authors do concede, “Microfinance may also increase the demand for education as a result of income” (2453). The second option given to parents is to keep their children in school because of their recently acquired income. The authors say that microfinance “reduces the probability that children will be pulled from school” because of the added stability that results from a newfound monetary source (2441). Families typically have a tendency to react to income volatility by removing their children from schools, so help in starting a business enables them to not have to engage in such practices. In the end, education is neither hurt nor aided by microfinance, as families deal with their individual situations differently. Further study is needed to obtain a clearer sense of how education is impacted by microfinance. So it is that in addition to the clearly defined positives and negatives of microfinance there exist other effects with implications that are not so easily discerned.
In conclusion, though MFIs have made substantially positive impacts within their spheres of influence, they have yet to establish uniform loan standards within companies or as an industry and have failed to reach the poorest of the poor or the rural communities in need of aid. Several sources were examined, all of which brought different assumptions, statistics, facts, and arguments to the discussion of MFI’s impacts and limitations. The positives noted included the creation of jobs and businesses that were able to turn those who had previously been unemployed into productive members of society, communities that were impacted by the schooling and other such initiatives (i.e. water conservation projects), and better living conditions. One of the most important positives however, was the impact that microfinance has made on the lives of women all over the world in terms of the opportunities and new skills it has given to them. Negatives mentioned consisted of high interest rates, lack of industry standardization (and within individual businesses), and limited presence in small, rural communities. The biggest disappointment of MFIs however, is that although they are still working with the poor, they are failing to reach the poorest of the poor. In addition to these impacts and limitations, education was deemed to be one area in which the impact was not so clearly defined, being both positively and negatively impacted by MFIs. Continued research is suggested pertaining to methods of assessing the outcomes of MFIs as well as the impact of microfinance on education. Unfortunately, because microfinance is a relatively new industry, time is the missing ingredient that could prove to be the key factor for further useful analysis that would answer the questions posed here.
Annotated Bibliography
Dichter, Thomas (ed.). What's wrong with microfinance? Rugby: Practical Action Pub., 2008.
This anthology provided several authors from which I could get some arguments against microfinance. It proved to be a very useful resource, and I’m glad I ordered it from interlibrary loan. Numerous authors were included in the work, as well as its editor, Thomas Dichter. This yielded the unique opportunity to bring several writers together, concerning this one subject area, all from a broad array of backgrounds, specialties, and areas that they studied.
Ghate, Prabhu. “Learning from the Andhra Pradesh crisis.” What's wrong with microfinance? Ed. Thomas W. Dichter. Rugby: Practical Action Pub., 2008. 163.
Hietalahti1, Johanna, and Mikael Linden. "Socio-economic Impacts of Microfinance and Repayment Performance: A Case Study of the Small Enterprise Foundation, South Africa." Progress in Development Studies, 6.3 (2006): 201-210.
This served as a substantial argument against microfinance, despite the fact that the article also mentioned the empowerment of women. Focusing on the SEF, these two researchers were able to gain some facts and knowledge on the microfinance situation in South Africa. However, at the end of their paper, much like I with mine, they acknowledge that they really cannot give any general answer as to whether or not microfinance is bad or good, because the issue is so muddled.
Johnson, Susan, and Namrata Sharma. “‘Institutionalizing suspicion’: The management and governance challenge in user-owned microfinance groups.” What's wrong with microfinance? Ed. Thomas W. Dichter. Rugby: Practical Action Pub., 2008. 63.
Maldonado, Jorge H., and Claudio Gonzalez-Vega. “Impact of Microfinance on Schooling: Evidence from Poor Rural Households in Bolivia.” World Development 36.11 (2008): 2440-2455. ScienceDirect (Elsevier). U of the Pacific Lib., CA. 11 March 2009.
This work consisted of many inferences that were then supported by much research and meticulously collected data. The authors knew the “positives” of microfinance operations, but were interested in seeing the negative impacts as well, in order to get a more balanced perspective. With the idea in mind that a child’s education is negatively impacted by microfinance, they set out to prove their thesis. This work enabled me to see that microfinance does enable the neglect of a child’s education, as a new-found business prospect necessitates the child helping in the enterprise and foregoing school. This became a key point among the negative impacts of microfinance. However, the authors presented evidence to the contrary and it became apparent that the situation was not black and white.
Marar, Pramod, Balaji S. Iyer, and Unmesh Brahme. “HSBC Brings a Business Model of Banking to the Doorsteps of the Poor.” Global Business and Organization Excellence 28.2 (2008): 15-26. EBSCO. U of the Pacific Lib., CA. 11 March 2009.
The work detailed the actions of one company in particular, and their efforts, methodologies, and strategies (in particular regard to sustainability of the businesses they helped to start). This article also gave me a succinct list of several positive impacts of microfinance on which to elaborate. There were relatively few statistics to support the claims of these positive impacts, however, I still found the list to be useful and the contents of the article to be helpful. If I were to be using any of the other information from this article, I would be worried about the credibility and impartiality, because this assessment (the article) was conducted by those who ran the company.
Nowak, Maria. “Microcredits in Europe.” Revista De Economia Mundial 19 (2008): 25-32. EBSCO. U of the Pacific Lib., CA. 11 March 2009.
Nowak presents a very compelling argument for the proper place and benefits of microfinance in Europe. She cites several statistics in which she supports her theories very well and is able to provide a reasonable path of logic for her reader. It is clear that microfinance works well for Europe and that it is perhaps a vision of the future more than of a relic. I made particular use of her statistics and used Europe as an example (outside of 3rd world countries) where microfinance had an impact worth mentioning. This could possibly extend the case to America – aiding someone in arguing that we should be more actively engaged in microfinance operations here.
Rahman, S.M. “A practioner’s view of the challenges facing NGO-based microfinance in Bangladesh.” What's wrong with microfinance? Ed. Thomas W. Dichter. Rugby: Practical Action Pub., 2008. 193.
Schattle, Hans. The Practices of GLOBAL CITIZENSHIP. Lanham: Rowman & Littlefield Publishers, Inc., 2008.
This was of course the book that created the basis for this and all of the other research papers for the class. I argued that people put Schattle’s primary concepts of global citizenship into action by participating in microfinance, the paper then developed on its own from there. The idea originally came out of this book when Schattle talked about a corporation participating in microfinance programs.
Sen, Mitali. “Assessing Social Performance of Microfinance Institutions in India.” ICFAI Journal of Applied Finance 14.7 (2008): 78-86. EBSCO. U of the Pacific Lib., CA. 11 March 2009. This article provided a basic, easily understood definition and explanation of microfinance with which I could begin my paper. However, it also delved into the necessity of ongoing assessment so that MFIs could reach their goals, and at the same time be held accountable for the work that they are doing. He claimed that this was necessary for progress and advancement. I used this article as a justification for the fact that impact analysis is essential in determining the effectiveness of an MFI.
First Draft, Research Paper: Assessing the Impact of Microfinance Institutions
Originally Written: 11 March 2009
“Microfinance Institutions (MFIs) are financial institutions with a primary objective of making credit available to [a] segment of the population, which has been ignored by the commercial banking system for not having collateral requirements. The efficient functioning of these MFIs in a sustainable basis is important but for MFIs it is equally important that people at or below the poverty line are reached, quality services are provided, and that microfinance improves clients’ lives. Financial sustainability does not ensure the automatic fulfillment of social objectives expected of a typical MFI. In other words, both financial performance and social performance matter” (Sen 78). In Hans Schattle’s book, The Practices of Global Citizenship, he briefly mentions the fact that some businesses (and individuals) engage in the primary concepts of global citizenship – participation, awareness, and responsibility – by becoming involved in microfinance (Schattle 25). While still a relatively new idea and practice, MFIs have emerged as a primary way in which individuals from underdeveloped areas can gain access to monetary funds and services. One often hears of the benefits of MFIs, how they change the lives of those who receive loans, and how economies benefit as well as communities. However, quality analyses are needed that compare and contrast the objectives of microfinance with the results garnered from MFI activities. Despite the fact that a MFI may be achieving its societal goals, it must also be able to ensure its own prosperity and well being so that it may continue to exist for future generations. A balance must be struck between profit-seeking behavior and advancement of an agenda of social change and positive progression. In order to garner a complete, accurate idea of MFIs abilities to create sustainable businesses, ensure their own continued prosperity, and accomplish the social goals they set, a variety of sources must be consulted which make use of data and facts, as opposed to idealized arguments that rely solely on theory or deduction. However, because of the fact that microfinance is still a relatively new area for social entrepreneurship and despite there being a large body of research on microfinance, there is still no definitive answer as to whether or not MFIs are succeeding overall in regards to the social goals they have set for themselves.
“Microfinance Institutions (MFIs) are financial institutions with a primary objective of making credit available to [a] segment of the population, which has been ignored by the commercial banking system for not having collateral requirements. The efficient functioning of these MFIs in a sustainable basis is important but for MFIs it is equally important that people at or below the poverty line are reached, quality services are provided, and that microfinance improves clients’ lives. Financial sustainability does not ensure the automatic fulfillment of social objectives expected of a typical MFI. In other words, both financial performance and social performance matter” (Sen 78). In Hans Schattle’s book, The Practices of Global Citizenship, he briefly mentions the fact that some businesses (and individuals) engage in the primary concepts of global citizenship – participation, awareness, and responsibility – by becoming involved in microfinance (Schattle 25). While still a relatively new idea and practice, MFIs have emerged as a primary way in which individuals from underdeveloped areas can gain access to monetary funds and services. One often hears of the benefits of MFIs, how they change the lives of those who receive loans, and how economies benefit as well as communities. However, quality analyses are needed that compare and contrast the objectives of microfinance with the results garnered from MFI activities. Despite the fact that a MFI may be achieving its societal goals, it must also be able to ensure its own prosperity and well being so that it may continue to exist for future generations. A balance must be struck between profit-seeking behavior and advancement of an agenda of social change and positive progression. In order to garner a complete, accurate idea of MFIs abilities to create sustainable businesses, ensure their own continued prosperity, and accomplish the social goals they set, a variety of sources must be consulted which make use of data and facts, as opposed to idealized arguments that rely solely on theory or deduction. However, because of the fact that microfinance is still a relatively new area for social entrepreneurship and despite there being a large body of research on microfinance, there is still no definitive answer as to whether or not MFIs are succeeding overall in regards to the social goals they have set for themselves.
To begin with, an MFI must be able to adequately balance the practices of profit-seeking behavior with its goals for social change and advancement. Not only does it need to act as a business, being conscious of its own self-preservation, but an MFI must also act as a non-profit organization would with regard to achieving social objectives. According to Todd Arena, J.D. Candidate 2009, Columbia Law School, “Many academics and practitioners in the MF [microfinance] movement worry that the push for financial self-sustainability will detract from the social development aspect on which the movement has traditionally focused”, a legitimate concern (Arena 272). However, these organizations must be self-sustainable if they wish to remain operating for an extended period of time. Mitali Sen, a faculty member in the Department of Management Studies at the Indian School of Mines University, echoes these sentiments and brings up a couple of new points in his paper, Assessing Social Performance of Microfinance Institutions in India. It seems that although financial outcomes are measured and performance evaluated, methods for evaluating social enterprise and change are rather undeveloped. Despite the fact that MFIs are all different and may have different wordings for their specific goals, in the end they all seek to help the poor, improve society, and stay in business (Sen 78). There are however, Sen says, many scholars who have objections to such attempts at measurement of achievement of social goals, “They are not certain if it is possible to standardize measures of social performance” (Sen 79). However, it is possible and necessary to measure the social achievements and progress that come about as a result of MFIs. By taking a case-by-case look at microfinance, one can get a clearer sense of what it is that MFIs do, and the power that they have within a community. According to Sen, “We need to look at the quality of services, client satisfaction, and actual improvements in clients’ conditions” (Sen 79). He even goes so far as to say that a MFIs performance with regard to its social agenda ought to be reported and treated just like financial performance assessments. According to Arena, “The solution…is to implement good corporate governance mechanisms…[as it] enables an MFI to manage the tradeoff between outreach and financial self-sustainability, to the detriment of neither” (Arena 283). Bearing this information in mind, an analysis of recent research conducted across the globe will yield more information on the impacts and changes that MFIs bring about.
As previously mentioned, one would not be hard-pressed to find those who vouch for the benefits of microfinance. One such person, Maria Nowak, President of the Association for le Droit à l'Initiative Economique (Adie), the Red Europea de Microñnanza, and author of Microcredits in Europe, presented many arguments in favor of microfinance and the positive impacts it has made in Europe. Nowak states that Adie, a small French microfinance start-up project created in 1988 by three volunteers, “has been able to finance 52,000 loans with a mere 3% rate of loss. It has facilitated the creation of 45,000 new enterprises with a survival rate (64% after two years) equal to the national average” (Nowak 28). Adie was able to demonstrate the ability of the poor in France to build their own places in the workforce and repay the money lent to them. This has in turn changed the public’s opinion of France’s poor and brought about a change in the law that has ultimately made it easier for microfinance institutions to operate within France (Nowak 28-29). Nowak goes on to proclaim that microfinance is a good fit for the economy of Western and Eastern Europe, as it adequately deals with the unique problems and requirements of their economy. She also cites statistics, saying that “Microenterprises represent 91.5% of the total number of enterprises in the European Union” and account for “12 to 15% of the Gross Domestic Product” (Nowak 30). Even more impressive is the fact that approximately one third of the new jobs in France are due to new companies just beginning to form, 40% of whose founders are the products of unemployment. Nowak perhaps sums up her argument best in saying “In this case credit is not only an indispensable financial lever. It is also an act of trust…that allows the recipient to regain confidence in himself and project himself into the future” (Nowak 31). Microcredit is not on its way out of the financial sector, it is to be the norm for the coming era in which we are no longer focused on industry, but on specific services and intellectual capabilities of the populace (Nowak 32). These positive impacts of microfinance aid in the advocacy of MFI efforts and ultimately make it easier for individuals to see the possibilities that come out of such institutions. The benefits of microfinance do not end here, however.
MFIs have the ability to positively impact the communities within which they operate in sustainable ways that result in the reduction of poverty. According to Pramod Marar, senior vice president and head of microfinance, Balaji S. Iyer, assistant vice president of microfinance, and Unmesh Brahme, senior vice president of corporate sustainability for the Hongkong and Shanghai Banking Corporation Limited in Mumbai, India, and authors of HSBC Brings a Business Model of Banking to the Doorsteps of the Poor, MFIs can do more than just lend money to those in need as well as provide other financial services. They have the innate capacity to change the communities that they conduct their businesses in. HSBC, the writers contend, is one of these companies. The article details “the bank’s stakeholder initiatives for capacity building, which include two schools where rural women learn essential business and technical skills and financial literacy, and an environmental and social village-based initiative for water conservation and livelihood creation” (Marar, et al., 15). This education reduces the vulnerability of the poor, as parents are able to invest in their children’s education and attain better living conditions, which also coincide with a lower incidence of illness. Programs such as these also empower the women in the communities that they take place in. Since opening in 2006, the authors claim that “the HSBC Manndeshi Business School for Rural Women has…trained 5,987 rural poor women, with more than 60% of them starting their own businesses (Marar, et al., 23). Because of this education, women’s average daily income has risen, their meals and nutrition have improved, and access to monetary resources has allowed women to have a bigger voice in communal and familial life, leading to a decline in the levels of violence against women. Furthermore, the ability to generate an income enables families to build their assets and accumulate capital, which eventually results in a higher standard of living and quality of life. Statistics have also surfaced which reflect these advancements. Clients (and their households) of the Bangladesh Rural Advancement Committee reportedly increased their expenses by 28% and their assets by 112%. Such improvement is remarkable, and may indicate a change in the social dynamic of third-world countries. Other nations that have seen the positive impacts of MFIs include Indonesia, where 90% of Bank Rakyat Indonesia customers moved out of the poverty level, increasing their incomes by an average of 112%, and Mali, where clients who had been affiliated “with the program for as little as one year were significantly less likely to have experienced a period of acute food insecurity – and those that had had experienced a shorter period” (Marar, et al., 17). However, despite all of the positives that come out of MFIs, the negative effects of microfinance must not be overlooked.
There are numerous negative implications of microfinance that must be taken into account when assessing a MFIs performance. Although they acknowledge the substantial benefits that women incur from microfinance, Johanna Hietalahti, from the University of Helsinki, Institute for Development Studies, and Mikael Linden, of the University of Joensuu, Department of Business and Economics, also mention several negative aspects of microfinance in their paper, Socio-economic impacts of microfinance and repayment performance, as well. Focusing mainly on the Small Enterprise Foundation in South Africa, the pair noted that, “Recent studies have pointed out several social and economic problems in some of the programmes” (Hietalahti & Linden, 202). Having collected data on interest rates charged to individual borrowers, the two reported their findings, organizing their results by loan period. According to Hietalahti and Linden’s study, the highest “Effective interest rate” was 82.15% for “8 fortnights”, with all other loan terms having interest rates above 70% as well (Hietalahti and Linden, 204). Such high interest rates have the possibility of leading to never-ending cycles of debt, and unstable homes when financed. This outcome is the very thing that MFIs are working to defeat and it seems ironic that they would be responsible for the creation of such unsavory circumstances. Furthermore, the amount of the loan given, as well as the terms on each loan, is different for each borrower. There is no standard or general guidelines keeping such practices from occurring and discontinuities appear even with respect to access to other financial services offered. As a result, large loans exceeding the needs of the borrower were an issue, as they were hard for borrowers to repay. These effects of MFIs must be addressed, and contribute to the conclusion that microfinance is neither good, nor bad overall, when weighed against the positives. Unfortunately, the negatives do not end here, however.
In addition to high interest rates and lack of standardization, other problems with MFIs exist.
According to authors Susan Johnson, Ph.D. in development studies with a background in economics (particularly agricultural), and Namrata Sharma, former founding managing director of the Center for Microfinance Nepal as well as former director of the Indian School of Microfinance for Women, Ahmedabad, MFIs have particular difficulty with regards to reaching the more remote locations of the countries within which they operate. According to the authors, getting to these areas and their poorer citizens “with sustainable and secure financial services means being able to cover the higher transactions costs that arise” (Johnson & Sharma, 63). Members of these poorer communities typically need access to less profitable services that financial institutions provide. More unfortunately for lenders, these areas typically come with a greater amount of risk, as they have “poorly diversified livelihoods and economies” (Johnson & Sharma, 63). This has apparently been an issue since the beginning of microfinance, as MFIs have endeavored to serve these areas and found it difficult to do so (Johnson & Sharma, 63). Because of this immense emphasis on generating revenue to keep MFIs alive, Prabhu Ghate, author of Learning from the Andhra Pradesh crisis and Ph.D. in public policy and former Senior Economist with the Asian Development Bank, argues that “deceptive interest rates, coercive collection practices, and over-lending” have all occurred (Ghate 163). Perhaps this is why S.M. Rahman, educated in business administration and statistics and author of A practitioner’s view of the challenges facing NGO-based microfinance in Bangladesh, found that there are increasing portions of microfinance customers that are not poor. The drive to create profitability has led to such statistics as well as other disconcerting pieces of information. Rahman cites, among others, the misuse of loan funds, predominance of short-term loans, lack of concern for client satisfaction, and poor oversight and administration of MFIs as several problems among the NGOs (Non-Governmental Organizations) in Bangladesh (Rahman 193). Despite the existence of black and white cases for and against microfinance and MFIs, there are some instances and effects that are not so easily classified, and require scrutiny.
MFIs have varied goals as far as social change and progression; however, there are some social implications of microfinance that are neither definitively negative nor positive. According to Jorge Maldonado, of Universidad de los Andes, and Claudio Gonzalez-Vega, from Ohio State University, and authors of Impact of Microfinance on Schooling: Evidence from Poor Rural Households in Bolivia, education is one area in which microfinance makes such a mixed impact. According to Maldonado and Gonzalez-Vega, there is limited access for rural poor households to any sort of formal financial system, “Consequently, the poor must fund their education out of past wealth or through abstention from productive work or from current consumption rather than with loans” (Maldonado and Gonzalez-Vega 2441). High opportunity costs, however, play a factor when removing a child from school keeps him from being productive and contributing to the family income. In addition, child labor is also needed in order to care for the younger children so that older household members can work. This relates to microfinance in that when parents are given a loan to aid their business, they subsequently pull their children from school to help either in working for the business or with taking care of the other children. However, the authors do concede, “Microfinance may also increase the demand for education as a result of income” (Maldonado and Gonzalez-Vega 2453). They say that parents having the ability to access financial services “reduces the probability that children will be pulled from school” because of the added stability that results from a newfound source of monetary aid (Maldonado and Gonzalez-Vega 2441). Families typically have a tendency to react to income volatility by removing their children from schools, so help in starting a business enables them to not have to engage in such practices. In the end, education is neither hurt nor aided by microfinance, as families deal with their individual situations differently. So it is that in addition to the clearly defined positive and negative impacts of microfinance there exists other effects which are no so easily discerned when it comes to their benefits or drawbacks.
In conclusion, microfinance is a fairly new practice in developing parts of the world and although much research has been conducted on the issue, a clearly defined impact assessment is still not within reach in regards to the social goals that MFIs have created for themselves. Several sources were examined, all of which brought different assumptions, statistics, facts, and arguments to the discussion of microfinance’s impact. There are many positive and negative impacts, as well as those which are not so easily classified, that have come about as a result of microfinance and the various institutions that exist to bring it to developing areas of the world. Unfortunately, time is the missing ingredient that could prove to be the key factor for further useful analysis that would answer the question posed here.
Annotated Bibliography
Arena, Todd. "Social Corporate Governance and the Problem of Mission Drift in Socially-Oriented Microfinance Institutions." Columbia Journal of Law & Social Problems, 41.3 (2008): 269-316.
This article provided half of the background needed for paragraph two of my paper, in which I describe the careful balancing act required between social and financial goals of MFIs. Although it appears to have been written by a fairly unknown writer, the information was very well put together, and there was an extensive list of resources – indicating much research. I felt the source was most likely reliable, and decided to use it.
Dichter, Thomas (ed.). What's wrong with microfinance? Rugby: Practical Action Pub., 2008.
This anthology provided several authors from which I could get some arguments against microfinance. It proved to be a very useful resource, and I’m glad I ordered it from interlibrary loan. Numerous authors were included in the work, as well as its editor, Thomas Dichter. This yielded the unique opportunity to bring several writers together, concerning this one subject area, all from a broad array of backgrounds, specialties, and areas that they studied.
Ghate, Prabhu. “Learning from the Andhra Pradesh crisis.” What's wrong with microfinance? Ed. Thomas W. Dichter. Rugby: Practical Action Pub., 2008. 163.
Hietalahti1, Johanna, and Mikael Linden. "Socio-economic Impacts of Microfinance and Repayment Performance: A Case Study of the Small Enterprise Foundation, South Africa." Progress in Development Studies, 6.3 (2006): 201-210.
This served as a substantial argument against microfinance, despite the fact that the article also mentioned the empowerment of women. Focusing on the SEF, these two researchers were able to gain some facts and knowledge on the microfinance situation in South Africa. However, at the end of their paper, much like I with mine, they acknowledge that they really cannot give any general answer as to whether or not microfinance is bad or good, because the issue is so muddled.
Johnson, Susan, and Namrata Sharma. “‘Instiutionalizing suspicion’: The management and governance challenge in user-owned microfinance groups.” What's wrong with microfinance? Ed. Thomas W. Dichter. Rugby: Practical Action Pub., 2008. 63.
Maldonado, Jorge H., and Claudio Gonzalez-Vega. “Impact of Microfinance on Schooling: Evidence from Poor Rural Households in Bolivia.” World Development 36.11 (2008): 2440-2455. ScienceDirect (Elsevier). U of the Pacific Lib., CA. 11 March 2009.
This work consisted of many inferences that were then supported by much research and meticulously collected data. The authors knew the “positives” of microfinance operations, but were interested in seeing the negative impacts as well, in order to get a more balanced perspective. With the idea in mind that a child’s education is negatively impacted by microfinance, they set out to prove their thesis. This work enabled me to see that microfinance does enable the neglect of a child’s education, as a new-found business prospect necessitates the child helping in the enterprise and foregoing school. This became a key point among the negative impacts of microfinance. However, the authors presented evidence to the contrary and it became apparent that the situation was not black and white.
Marar, Pramod, Balaji S. Iyer, and Unmesh Brahme. “HSBC Brings a Business Model of Banking to the Doorsteps of the Poor.” Global Business and Organization Excellence 28.2 (2008): 15-26. EBSCO. U of the Pacific Lib., CA. 11 March 2009.
The work detailed the actions of one company in particular, and their efforts, methodologies, and strategies (in particular regard to sustainability of the businesses they helped to start). This article also gave me a succinct list of several positive impacts of microfinance on which to elaborate. There were relatively few statistics to support the claims of these positive impacts, however, I still found the list to be useful and the contents of the article to be helpful. If I were to be using any of the other information from this article, I would be worried about the credibility and impartiality, because this assessment (the article) was conducted by those who ran the company.
Nowak, Maria. “Microcredits in Europe.” Revista De Economia Mundial 19 (2008): 25-32. EBSCO. U of the Pacific Lib., CA. 11 March 2009.
Nowak presents a very compelling argument for the proper place and benefits of microfinance in Europe. She cites several statistics in which she supports her theories very well and is able to provide a reasonable path of logic for her reader. It is clear that microfinance works well for Europe and that it is perhaps a vision of the future more than of a relic. I made particular use of her statistics and used Europe as an example (outside of 3rd world countries) where microfinance had an impact worth mentioning. This could possibly extend the case to America – aiding someone in arguing that we should be more actively engaged in microfinance operations here.
Rahman, S.M. “A practioner’s view of the challenges facing NGO-based microfinance in Bangladesh.” What's wrong with microfinance? Ed. Thomas W. Dichter. Rugby: Practical Action Pub., 2008. 193.
Schattle, Hans. The Practices of GLOBAL CITIZENSHIP. Lanham: Rowman & Littlefield Publishers, Inc., 2008.
This was of course the book that created the basis for this and all of the other research papers for the class. I argued that people put Schattle’s primary concepts of global citizenship into action by participating in microfinance, the paper then developed on its own from there. The idea originally came out of this book when Schattle talked about a corporation participating in microfinance programs.
Sen, Mitali. “Assessing Social Performance of Microfinance Institutions in India.” ICFAI Journal of Applied Finance 14.7 (2008): 78-86. EBSCO. U of the Pacific Lib., CA. 11 March 2009. This article provided a basic, easily understood definition and explanation of microfinance with which I could begin my paper. However, it also delved into the necessity of ongoing assessment so that MFIs could reach their goals, and at the same time be held accountable for the work that they are doing. He claimed that this was necessary for progress and advancement. I used this article as a justification for the fact that impact analysis is essential in determining the effectiveness of an MFI.
As previously mentioned, one would not be hard-pressed to find those who vouch for the benefits of microfinance. One such person, Maria Nowak, President of the Association for le Droit à l'Initiative Economique (Adie), the Red Europea de Microñnanza, and author of Microcredits in Europe, presented many arguments in favor of microfinance and the positive impacts it has made in Europe. Nowak states that Adie, a small French microfinance start-up project created in 1988 by three volunteers, “has been able to finance 52,000 loans with a mere 3% rate of loss. It has facilitated the creation of 45,000 new enterprises with a survival rate (64% after two years) equal to the national average” (Nowak 28). Adie was able to demonstrate the ability of the poor in France to build their own places in the workforce and repay the money lent to them. This has in turn changed the public’s opinion of France’s poor and brought about a change in the law that has ultimately made it easier for microfinance institutions to operate within France (Nowak 28-29). Nowak goes on to proclaim that microfinance is a good fit for the economy of Western and Eastern Europe, as it adequately deals with the unique problems and requirements of their economy. She also cites statistics, saying that “Microenterprises represent 91.5% of the total number of enterprises in the European Union” and account for “12 to 15% of the Gross Domestic Product” (Nowak 30). Even more impressive is the fact that approximately one third of the new jobs in France are due to new companies just beginning to form, 40% of whose founders are the products of unemployment. Nowak perhaps sums up her argument best in saying “In this case credit is not only an indispensable financial lever. It is also an act of trust…that allows the recipient to regain confidence in himself and project himself into the future” (Nowak 31). Microcredit is not on its way out of the financial sector, it is to be the norm for the coming era in which we are no longer focused on industry, but on specific services and intellectual capabilities of the populace (Nowak 32). These positive impacts of microfinance aid in the advocacy of MFI efforts and ultimately make it easier for individuals to see the possibilities that come out of such institutions. The benefits of microfinance do not end here, however.
MFIs have the ability to positively impact the communities within which they operate in sustainable ways that result in the reduction of poverty. According to Pramod Marar, senior vice president and head of microfinance, Balaji S. Iyer, assistant vice president of microfinance, and Unmesh Brahme, senior vice president of corporate sustainability for the Hongkong and Shanghai Banking Corporation Limited in Mumbai, India, and authors of HSBC Brings a Business Model of Banking to the Doorsteps of the Poor, MFIs can do more than just lend money to those in need as well as provide other financial services. They have the innate capacity to change the communities that they conduct their businesses in. HSBC, the writers contend, is one of these companies. The article details “the bank’s stakeholder initiatives for capacity building, which include two schools where rural women learn essential business and technical skills and financial literacy, and an environmental and social village-based initiative for water conservation and livelihood creation” (Marar, et al., 15). This education reduces the vulnerability of the poor, as parents are able to invest in their children’s education and attain better living conditions, which also coincide with a lower incidence of illness. Programs such as these also empower the women in the communities that they take place in. Since opening in 2006, the authors claim that “the HSBC Manndeshi Business School for Rural Women has…trained 5,987 rural poor women, with more than 60% of them starting their own businesses (Marar, et al., 23). Because of this education, women’s average daily income has risen, their meals and nutrition have improved, and access to monetary resources has allowed women to have a bigger voice in communal and familial life, leading to a decline in the levels of violence against women. Furthermore, the ability to generate an income enables families to build their assets and accumulate capital, which eventually results in a higher standard of living and quality of life. Statistics have also surfaced which reflect these advancements. Clients (and their households) of the Bangladesh Rural Advancement Committee reportedly increased their expenses by 28% and their assets by 112%. Such improvement is remarkable, and may indicate a change in the social dynamic of third-world countries. Other nations that have seen the positive impacts of MFIs include Indonesia, where 90% of Bank Rakyat Indonesia customers moved out of the poverty level, increasing their incomes by an average of 112%, and Mali, where clients who had been affiliated “with the program for as little as one year were significantly less likely to have experienced a period of acute food insecurity – and those that had had experienced a shorter period” (Marar, et al., 17). However, despite all of the positives that come out of MFIs, the negative effects of microfinance must not be overlooked.
There are numerous negative implications of microfinance that must be taken into account when assessing a MFIs performance. Although they acknowledge the substantial benefits that women incur from microfinance, Johanna Hietalahti, from the University of Helsinki, Institute for Development Studies, and Mikael Linden, of the University of Joensuu, Department of Business and Economics, also mention several negative aspects of microfinance in their paper, Socio-economic impacts of microfinance and repayment performance, as well. Focusing mainly on the Small Enterprise Foundation in South Africa, the pair noted that, “Recent studies have pointed out several social and economic problems in some of the programmes” (Hietalahti & Linden, 202). Having collected data on interest rates charged to individual borrowers, the two reported their findings, organizing their results by loan period. According to Hietalahti and Linden’s study, the highest “Effective interest rate” was 82.15% for “8 fortnights”, with all other loan terms having interest rates above 70% as well (Hietalahti and Linden, 204). Such high interest rates have the possibility of leading to never-ending cycles of debt, and unstable homes when financed. This outcome is the very thing that MFIs are working to defeat and it seems ironic that they would be responsible for the creation of such unsavory circumstances. Furthermore, the amount of the loan given, as well as the terms on each loan, is different for each borrower. There is no standard or general guidelines keeping such practices from occurring and discontinuities appear even with respect to access to other financial services offered. As a result, large loans exceeding the needs of the borrower were an issue, as they were hard for borrowers to repay. These effects of MFIs must be addressed, and contribute to the conclusion that microfinance is neither good, nor bad overall, when weighed against the positives. Unfortunately, the negatives do not end here, however.
In addition to high interest rates and lack of standardization, other problems with MFIs exist.
According to authors Susan Johnson, Ph.D. in development studies with a background in economics (particularly agricultural), and Namrata Sharma, former founding managing director of the Center for Microfinance Nepal as well as former director of the Indian School of Microfinance for Women, Ahmedabad, MFIs have particular difficulty with regards to reaching the more remote locations of the countries within which they operate. According to the authors, getting to these areas and their poorer citizens “with sustainable and secure financial services means being able to cover the higher transactions costs that arise” (Johnson & Sharma, 63). Members of these poorer communities typically need access to less profitable services that financial institutions provide. More unfortunately for lenders, these areas typically come with a greater amount of risk, as they have “poorly diversified livelihoods and economies” (Johnson & Sharma, 63). This has apparently been an issue since the beginning of microfinance, as MFIs have endeavored to serve these areas and found it difficult to do so (Johnson & Sharma, 63). Because of this immense emphasis on generating revenue to keep MFIs alive, Prabhu Ghate, author of Learning from the Andhra Pradesh crisis and Ph.D. in public policy and former Senior Economist with the Asian Development Bank, argues that “deceptive interest rates, coercive collection practices, and over-lending” have all occurred (Ghate 163). Perhaps this is why S.M. Rahman, educated in business administration and statistics and author of A practitioner’s view of the challenges facing NGO-based microfinance in Bangladesh, found that there are increasing portions of microfinance customers that are not poor. The drive to create profitability has led to such statistics as well as other disconcerting pieces of information. Rahman cites, among others, the misuse of loan funds, predominance of short-term loans, lack of concern for client satisfaction, and poor oversight and administration of MFIs as several problems among the NGOs (Non-Governmental Organizations) in Bangladesh (Rahman 193). Despite the existence of black and white cases for and against microfinance and MFIs, there are some instances and effects that are not so easily classified, and require scrutiny.
MFIs have varied goals as far as social change and progression; however, there are some social implications of microfinance that are neither definitively negative nor positive. According to Jorge Maldonado, of Universidad de los Andes, and Claudio Gonzalez-Vega, from Ohio State University, and authors of Impact of Microfinance on Schooling: Evidence from Poor Rural Households in Bolivia, education is one area in which microfinance makes such a mixed impact. According to Maldonado and Gonzalez-Vega, there is limited access for rural poor households to any sort of formal financial system, “Consequently, the poor must fund their education out of past wealth or through abstention from productive work or from current consumption rather than with loans” (Maldonado and Gonzalez-Vega 2441). High opportunity costs, however, play a factor when removing a child from school keeps him from being productive and contributing to the family income. In addition, child labor is also needed in order to care for the younger children so that older household members can work. This relates to microfinance in that when parents are given a loan to aid their business, they subsequently pull their children from school to help either in working for the business or with taking care of the other children. However, the authors do concede, “Microfinance may also increase the demand for education as a result of income” (Maldonado and Gonzalez-Vega 2453). They say that parents having the ability to access financial services “reduces the probability that children will be pulled from school” because of the added stability that results from a newfound source of monetary aid (Maldonado and Gonzalez-Vega 2441). Families typically have a tendency to react to income volatility by removing their children from schools, so help in starting a business enables them to not have to engage in such practices. In the end, education is neither hurt nor aided by microfinance, as families deal with their individual situations differently. So it is that in addition to the clearly defined positive and negative impacts of microfinance there exists other effects which are no so easily discerned when it comes to their benefits or drawbacks.
In conclusion, microfinance is a fairly new practice in developing parts of the world and although much research has been conducted on the issue, a clearly defined impact assessment is still not within reach in regards to the social goals that MFIs have created for themselves. Several sources were examined, all of which brought different assumptions, statistics, facts, and arguments to the discussion of microfinance’s impact. There are many positive and negative impacts, as well as those which are not so easily classified, that have come about as a result of microfinance and the various institutions that exist to bring it to developing areas of the world. Unfortunately, time is the missing ingredient that could prove to be the key factor for further useful analysis that would answer the question posed here.
Annotated Bibliography
Arena, Todd. "Social Corporate Governance and the Problem of Mission Drift in Socially-Oriented Microfinance Institutions." Columbia Journal of Law & Social Problems, 41.3 (2008): 269-316.
This article provided half of the background needed for paragraph two of my paper, in which I describe the careful balancing act required between social and financial goals of MFIs. Although it appears to have been written by a fairly unknown writer, the information was very well put together, and there was an extensive list of resources – indicating much research. I felt the source was most likely reliable, and decided to use it.
Dichter, Thomas (ed.). What's wrong with microfinance? Rugby: Practical Action Pub., 2008.
This anthology provided several authors from which I could get some arguments against microfinance. It proved to be a very useful resource, and I’m glad I ordered it from interlibrary loan. Numerous authors were included in the work, as well as its editor, Thomas Dichter. This yielded the unique opportunity to bring several writers together, concerning this one subject area, all from a broad array of backgrounds, specialties, and areas that they studied.
Ghate, Prabhu. “Learning from the Andhra Pradesh crisis.” What's wrong with microfinance? Ed. Thomas W. Dichter. Rugby: Practical Action Pub., 2008. 163.
Hietalahti1, Johanna, and Mikael Linden. "Socio-economic Impacts of Microfinance and Repayment Performance: A Case Study of the Small Enterprise Foundation, South Africa." Progress in Development Studies, 6.3 (2006): 201-210.
This served as a substantial argument against microfinance, despite the fact that the article also mentioned the empowerment of women. Focusing on the SEF, these two researchers were able to gain some facts and knowledge on the microfinance situation in South Africa. However, at the end of their paper, much like I with mine, they acknowledge that they really cannot give any general answer as to whether or not microfinance is bad or good, because the issue is so muddled.
Johnson, Susan, and Namrata Sharma. “‘Instiutionalizing suspicion’: The management and governance challenge in user-owned microfinance groups.” What's wrong with microfinance? Ed. Thomas W. Dichter. Rugby: Practical Action Pub., 2008. 63.
Maldonado, Jorge H., and Claudio Gonzalez-Vega. “Impact of Microfinance on Schooling: Evidence from Poor Rural Households in Bolivia.” World Development 36.11 (2008): 2440-2455. ScienceDirect (Elsevier). U of the Pacific Lib., CA. 11 March 2009.
This work consisted of many inferences that were then supported by much research and meticulously collected data. The authors knew the “positives” of microfinance operations, but were interested in seeing the negative impacts as well, in order to get a more balanced perspective. With the idea in mind that a child’s education is negatively impacted by microfinance, they set out to prove their thesis. This work enabled me to see that microfinance does enable the neglect of a child’s education, as a new-found business prospect necessitates the child helping in the enterprise and foregoing school. This became a key point among the negative impacts of microfinance. However, the authors presented evidence to the contrary and it became apparent that the situation was not black and white.
Marar, Pramod, Balaji S. Iyer, and Unmesh Brahme. “HSBC Brings a Business Model of Banking to the Doorsteps of the Poor.” Global Business and Organization Excellence 28.2 (2008): 15-26. EBSCO. U of the Pacific Lib., CA. 11 March 2009.
The work detailed the actions of one company in particular, and their efforts, methodologies, and strategies (in particular regard to sustainability of the businesses they helped to start). This article also gave me a succinct list of several positive impacts of microfinance on which to elaborate. There were relatively few statistics to support the claims of these positive impacts, however, I still found the list to be useful and the contents of the article to be helpful. If I were to be using any of the other information from this article, I would be worried about the credibility and impartiality, because this assessment (the article) was conducted by those who ran the company.
Nowak, Maria. “Microcredits in Europe.” Revista De Economia Mundial 19 (2008): 25-32. EBSCO. U of the Pacific Lib., CA. 11 March 2009.
Nowak presents a very compelling argument for the proper place and benefits of microfinance in Europe. She cites several statistics in which she supports her theories very well and is able to provide a reasonable path of logic for her reader. It is clear that microfinance works well for Europe and that it is perhaps a vision of the future more than of a relic. I made particular use of her statistics and used Europe as an example (outside of 3rd world countries) where microfinance had an impact worth mentioning. This could possibly extend the case to America – aiding someone in arguing that we should be more actively engaged in microfinance operations here.
Rahman, S.M. “A practioner’s view of the challenges facing NGO-based microfinance in Bangladesh.” What's wrong with microfinance? Ed. Thomas W. Dichter. Rugby: Practical Action Pub., 2008. 193.
Schattle, Hans. The Practices of GLOBAL CITIZENSHIP. Lanham: Rowman & Littlefield Publishers, Inc., 2008.
This was of course the book that created the basis for this and all of the other research papers for the class. I argued that people put Schattle’s primary concepts of global citizenship into action by participating in microfinance, the paper then developed on its own from there. The idea originally came out of this book when Schattle talked about a corporation participating in microfinance programs.
Sen, Mitali. “Assessing Social Performance of Microfinance Institutions in India.” ICFAI Journal of Applied Finance 14.7 (2008): 78-86. EBSCO. U of the Pacific Lib., CA. 11 March 2009. This article provided a basic, easily understood definition and explanation of microfinance with which I could begin my paper. However, it also delved into the necessity of ongoing assessment so that MFIs could reach their goals, and at the same time be held accountable for the work that they are doing. He claimed that this was necessary for progress and advancement. I used this article as a justification for the fact that impact analysis is essential in determining the effectiveness of an MFI.
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