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Micro finance has developed beyond just providing loans…..David Daly
Governments are driving individuals to take more control of their long-term finance, offering incentives through additional tax breaks to finesse change. Scandals within the pension industry and the current economic malaise have all shifted personal financial behaviour, although it is too early to say whether this is a permanent feature. Certainly, the technological and information revolution has made such independence possible.
If individuals can take ownership of their financial futures, surely this can be extended into other aspects of their lives. How about the age-old practice of charity? All societies consider it a conscionable act to aid those less fortunate than themselves. Today a multitude of various national and international charitable organisations exist providing succour across a mind-bobbling range of righteous causes.
Funding comes from international organisations, governments, sponsoring businesses and individuals. The latter provides via one-off appeals and, preferred by the charities themselves, monthly subscribed donations. All the monies are pooled and allocated to the area of most need, be that ongoing work or urgent response.
Many individuals fret about being able to identify where their donations go and to what uses they are made. While some charities cater to these people eg, sponsoring a child in the developing world while receiving regular communication, most don’t.
Where the world of Finance meets those in a world of need, someone has stood up to the plate and been awarded the Noble Peace Prize (2006) for his work. Muhammad Yunus is the creator of micro finance, where small and cheap loans are provided to the poorest people, the admirable ethos being the development of self reliance to defeat poverty. It is sometimes called micro credit.
Micro finance provides minute loans to the poorest who sit outside the conventional banking system. The concept was launched by Yunus, then a young professor of economics in Bangladesh in 1976. Realising that the local craft industry was hampered by access to reasonably charged investment capital and beholden to crippling loan sharks often charging interest as astronomical as 5-10 per cent a day for the raw materials of production, he began by providing loans of $27 each to 42 families for the purpose of expansion. These women, as so it largely remains today (circa 90 per cent), proved extremely capable of managing their new capital and paid the monies back with almost perfect reliability.
Micro finance has developed beyond just providing loans. It now provides deposit and money transfer services. Additionally, loans are secured against a peer group of borrowers, in the case of default the whole group may suffer should a member fail to honour their commitments.
Many banks, Standard Chartered and Barclay’s among others, provide their clients with the opportunity to engage in micro finance. Monies are used to provide credit to individual entrepreneurs or invested in the micro finance lenders themselves through the taking of share positions.
For the individual who wishes to get closer interaction, the World Bank runs an online market platform called the MIX (Micro Finance Information Exchange) Market. They advise that the micro credit providers listed have circa 80 millions clients and an average loan of circa $500. Micro finance is not a panacea for poverty. Experience shows that it is not useful in all cases, some using the loans on consumption rather than wealth creation that can sustain. The poorest can often be too vulnerable and exploited or lack the skills, education or basic contacts to realise entrepreneurial expectations. It tends to match the needs of the moderately poor that have basic skills but lack access to funding to moderately expand their enterprises. Sadly, in India some moneylenders have moved from the role of moneylender to loan recovery, pressures put on individuals leading to suicide in extreme cases denting the image of such schemes.
There are detractors who point out that this is neither an effective nor efficient method of delivering large numbers of people out of poverty; but then it doesn’t claim too. The common ground shares the view that not all impoverished people are Richard Branson clones with either the ability or gumption to start a business. Poverty has been alleviated through engagement with the global economy competing where a competitive advantage exists. Nations such as China and South Korea, when compared to their economic position 30 years ago, are indicative. The raging debate is one where the development of industries or entrepreneurs is the path to follow? Why not both?
This sector has not gone unnoticed in the wider world; the pressure for socially responsible investment has led to interest from established players who have identified low default coupled with reasonable rates of return as basis to enter this market. Expansion of providers has led to accusations that new lenders are sometimes indistinguishable from the loan sharks who’ve been shunted aside. Yunus condemned the floated Mexican company Compartamos Banco for charging interest on loans that bordered on 100 per cent a year. Worryingly some commentators are concerned that in search of business growth providers are potentially creating a bubble consistent with that of the sub prime market.
The old adage “give a man a fish and he eats for a day, teach him to fish and he eats forever” is one that arises when conversations about the fundamentals of micro finance arise.
There is no pretence by anyone that micro finance will solve and lift vast quantities of people out of poverty, but without doubt what is does do is to allow those with ability to take advantage of their entrepreneurial flair thus building the foundation of a modern trading society. These people deserve our support, their products need access to all markets and their hope is an example to anyone who dares to dream for a better and fairer way of delivering any good or service.
Yunus has said: “This is not charity. This is business: business with a social objective, which is to help people get out of poverty.”
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