Thursday, July 27, 2006

Microfinance: lesson and video

A former student who was always interested in micro finance forwarded me the following video.

A brief "lesson" on Microfinance will serve as a means of introducing this video.

What is microfinance? It is banking on a very small scale where small (often short-term) loans are made to individuals who would generally not be able to get loans from traditional financial institutions. Adding to the difference is that while the loan is made to individuals, others in the group are also responsible for the loan and hence serve to monitor behavior (lower moral hazard problems).

From Grameen (one of the leaders in the field):
"Microfinance consists of making small loans, usually less than $200, to individuals, usually women, to establish or expand a small, self-sustaining business. For example, a woman may borrow $50 to buy chickens so she can sell eggs. As the chickens multiply, she will have more eggs to sell. Soon she can sell the chicks."
From Wikipedia:
"The primary differentiator between microfinance and the conventional credit disbursal mechanism lies in the "joint liability" concept. A group of individuals (almost always women), get together to form an association of persons. The Groups in India.for instance are called "Self Help Groups' (SHG), all the members of which undergo a training programme on the basic procedures and system requirements. Loans to individuals within the SHG, is approved by the others members of the Group , who are also jointly responsible for its repayment"
While few would argue that availability of external financing is a valuable asset. There is a debate as to whether microfinancing is cost effective and whether it is really different from traditional finance except that microfinance organizations have merely figured out ways to lower the risks (credit risk in particular) while keeping transaction costs low.

While most believe these programs to work (for instance see Schreiner 2003 and Sachs 2005), this is not a universally held position. In 1998, Murdoch found that after controlling for selection bias, there appeared no difference in average income or the percentage of children attending school for those with access to micro finance and those without. However, he did find that consumption was smoothed (possibly less dependent on agriculture and weather) which was positive. He also pointed out many problems with studying the success or failure of such programs. For instance:
"An additional concern is given by non-random program placement. Upward biases arise when programs choose regions that are already doing well, and downward biases arise when programs favor disadvantaged areas."
As to whether microfinance is different than traditional finance, exactly one month ago I posted on this:
CyberLibris argues that microfinance is nothing more than finance that tight controls: "With microfinance, lenders are in the ideal situation: First, they can discriminate among borrowers, they simply don't lend (in many instances) to men (who run with the money to have a good drink). Women are reliable, hence they get the money. To make sure that the money is well-spent contractual provisions often involve the community in which the lending woman live. For instance, if she fails to pay, the community may be on the hook and have to repay for her or be punished by having a more difficult access to the next loan. The community plays a monitoring and a supportive role to ensure success. This is the dream situation for any banker!"
Which is true, but this is not necessarily a bad thing. Traditional finance is pretty good ;) and if micro-lending agencies have found ways to massage the traditional system to get meet unsatisfied needs, then whether it is different or not is largely a moot point.

Ok, so if you made it this far, you have at least an idea of what microfinance is and what it can (or can not) do. So now the video you have been waiting for:

Breaking Through Poverty with Microfinance - Grameen Foundation

Additional multimedia presentations on microfinance:
  • BYU TV has a short video (for PBS) on how microfinance can lift the poor out of poverty.
  • NPR has an interesting (short, 4 minute) NPR newscast on micro finance in which "a group of bankers and MBA students assemble to talk about micro-financing. The group tries to imagine what life would be like without insurance, credit cards and bank accounts"

1 comment:

Anonymous said...

From Harvard: