What ever happened to microfinance?
Editor's Note: This op-ed was originally published on BRAC's Blog on October 17, 2016.
Photo credit: BRAC
You’d be forgiven for thinking microfinance has gone wildly out of fashion. The “development caravan”—defined as the wagon train of poverty interventions that excite donors—has pulled away from micro-lending, drawn to more powerful things like BRAC-style graduation programmes (which aim to “graduate” people from extreme poverty into a sustainable livelihood) and bKash-like mobile money, according to recent coverage in The Economist.
But as the same article points out, microfinance is actually booming. The number of borrowers grew 16 per cent worldwide in 2015 compared to the previous year. This is despite last year’s release of a set of randomised studies conducted in six countries showing only “modest, but not transformative, improvement in the lives of borrowers.” (These results, as we wrote when they came out, are not actually all that surprising.)
Despite the boom, The Economist laments that microfinance has become rather boring—or, at the very least, too inflexible. The average microloan is a “vanilla product,” the magazine quotes Ratna Vishwanathan of MFIN, a self-regulating industry body in India, as saying. In other words, most loans are of a fixed amount, have a set repayment period, with zero frills and hardly any flexibility. To be more effective, The Economist argues, microlenders need to be looser in their collection schedules. Small entrepreneurs need loans that can be repaid not when the lender dictates, but when their businesses actually start making money. It cites One Acre Fund as a successful model in sub-Saharan Africa.
This all sounds good so far. One Acre Fund combines credit with other services, such as access to seeds and fertilizer, training for farmers, help in bringing their goods to market, and flexibility in repayment—a successful and exciting formula. One could even imagine layering this on top of a graduation programme to reach the poorest segment of the population: Once participants get the one-time boost they need to lift themselves from the mire of extreme poverty, they could avail of these more market-oriented services to continue climbing the economic ladder.
But we do feel the need to push back on what seems to be The Economist’s underlying premise—that somehow microfinance is stuck in the doldrums or otherwise ineffective, because it raises people’s incomes only modestly.
A recalibration of the expectations of microfinance is long overdue. A micro-borrower might take a loan to pay school fees up front, cover emergency healthcare costs, or repair a leaky roof. These may not have a “transformative” effect, and they may not even have any effect on income at all. Yet each is likely to raise the overall wellbeing of a borrower, even if only modestly.
It’s a shame we’re still stuck on income as the only indicator of poverty. It isn’t. In the words of BRAC’s founder, poverty is “not just poverty of money or income” but also “a poverty self-esteem, hope, opportunity and freedom.” And indeed, sometimes poverty is a leaky roof.
In that vein, microfinance has in fact seen plenty of innovation over the past decade. In sub-Saharan Africa, loan products for adolescent girls—offered in a club setting, where the girls receive peer support, health awareness and skills training—have had a huge impact on things like teen pregnancy rates. We’ve experimented with loans tailored for tenant and smallholder farmers in Bangladesh and Tanzania, including flexible repayment periods and group loans. In Sierra Leone, there are loans specifically for drivers of “okadas,” or motorcycle taxis; many of them are former child soldiers, and all were hit badly during the Ebola outbreak.
The list goes on. Medical treatment loans are designed specifically for families enduring a sudden health shock—an illness needing immediate treatment, for instance. The repayment rate on these loans is 99%. There are even safe migration loans, tailor-made for people seeking jobs abroad—say, a Bangladeshi worker keen on making money in Dubai, so he can send some back home to support his family. This includes a service to check the validity of workers’ contract and travel documents to make sure they don’t fall victim to exploitative recruiters and employers.
All of the above happen to be BRAC products, but it’s not like we’re the only ones innovating. One Acre, BRAC, and four others in the Propagate Coalition are looking for better ways to use microfinance to help smallholder farmers specifically, for example.
Finally, it’s worth pointing out that those eye-catching interventions mentioned earlier—graduation programmes and mobile money—are both, in fact, part of the microfinance universe. The original graduation programme, BRAC’s Targeting the Ultra Poor, already integrates microcredit for about 70 per cent of its participants. They receive their assets—cows, goats, chickens, or goods for small trade—not as straight-out grants but as ‘soft loans,’ which they must repay over the course of two years. This in itself is a microfinance innovation, one that’s reached about 1.2 million households already.
As Shameran Abed, the director of BRAC’s microfinance programme, writes in the Center for Financial Inclusion’s blog, the graduation approach probably makes the strongest case so far for why financial services must be part of the solution to extreme poverty.
Photo credit: BRAC
As for mobile money (the subject of a companion Economist piece), the cost of micro-borrowing is likely to fall further thanks to mobile technology. It’s no coincidence that Bangladesh’s bKash, which recently surpassed Kenya’s M-Pesa as the world’s largest mobile money provider as ranked by number of customers (now more than 24 million), is a service of BRAC Bank, which itself is owned by one of the world’s largest microlenders. In the future, a bKash algorithm could determine, based on usage patterns, if a user is a good enough credit risk. This would allow her to borrow a small amount of money to repair her leaky roof—or for whatever reason she deems fit.
Scott MacMillan is a senior writer and communications specialist at BRAC USA.