Helping proliferate indebtedness (the new birthright) for the entire planet, a little at a time.............
MICROCREDIT
feer.com
Grassroots Capitalism
Across Asia, the growing spread of microlending is
helping poor people gain access to credit for the
first time. Its success in reducing poverty is catching
the attention of governments and businesses alike
By Alkman Granitsas and Deidre Sheehan/MANILA
Issue cover-dated July 12, 2001
IT'S ABOUT AS FAR AWAY from the world of
banking as you can imagine. Down a mud path, past the
broken jeepney and right next to the fighting cocks, is
an open-walled shack with a tin roof and a rough
concrete floor. Inside, forty-four women ranging in age
from 18 to their late 40s, stand in unison and
collectively chant a series of sacred pledges to their
local banker.
Among them: pledges to send their kids to school,
practise cleanliness and birth control, and keep their
drinking water clean. The heat and the humidity are
stifling, and the fighting cocks make an unholy racket
outside, but the women inside are nicely groomed,
some with makeup, and all of them wearing a clean
white T-shirt. A sign of their membership in the local
bank programme.
Welcome to the weekly meeting of Santa Cruz Village
Centre 3, one of the local "branch" offices of CARD
Bank, the Philippines' biggest microbank with some
38,890 customers and $4.7 million in loans outstanding.
The women inside the shack are its core customers, the
poorest of the poor, each earning only about 66 cents a
day.
And yet, this is a banking success story. Thanks to the
microloans--some as little as $60--many of these
women have been able to lift their families out of abject
poverty and cross the universal poverty line of $1 a
day.
Like Pearla Briz. The 29-year-old's family had been
scraping by on the income her husband earned driving a
jeepney, but it was never enough. A year ago, Briz
borrowed $300 from CARD Bank to open a sari-sari,
or neighbourhood provision store. The profits from her
store ensure her family doesn't have to do without the
basic necessities of life anymore. "The money from the
store serves as additional income to buy basic needs,
things like food, clothing and especially schooling for
my two daughters," she says.
Her aunt, Gertrudes Briz, 41, has received a series of
loans from CARD Bank over the past seven years
which have helped her set up her own trading business,
carting fruits and vegetables from fertile Laguna
province south of Manila to customers in northern
Luzon. Gertrudes grumbles a bit about how hard life is,
but business is not bad, and her profits have helped put
her 19 year-old daughter, Sarah, in college. She smiles
shyly when you point to the gold-plated earrings and
matching sports watch she dons for the weekly
meetings.
Make no mistake, the women of Santa Cruz remain
poor by almost any measure. But they have been able
to rise from the ranks of the deeply impoverished, an
affliction that affects some 25 million Filipinos in a
country with one of the most skewed income patterns in
all of Asia. And in the past decade, microfinance has
made the difference. The Philippine government and
Filipino non-governmental organizations have put in
place an extensive, but disparate network of
microlending programmes, with some 120,000
borrowers across the country.
"The Philippines is ahead of many, many other countries
around the world in developing microfinance," says
Muhammad Yunus, the founder of Grameen Bank in
Bangladesh and the intellectual godfather of the
movement. "Today the Philippines is at a stage where
many other countries could come here and learn from
it."
Now Philippine President Gloria Macapagal-Arroyo
plans to make microfinance a cornerstone of her fight
against poverty, lifting 2.5 million households--about 12
million people--out of poverty within three years.
"Microfinance is a major component of the
poverty-reduction programme," says presidential
spokesman Rigoberto Tiglao. Look for details of the
plan possibly during Arroyo's state-of-the-nation
address to the new Congress on July 23.
But the world of microlending faces its own challenges.
In the 25 years since Grameen Bank was founded, the
bank and others like it have helped millions get on their
feet and out of poverty. But considering that 1.2 billion
people around the world live on less than $1 a day and
3 billion people live on less than $2 a day, microlending,
for all its promise, has yet to make a real dent in global
poverty.
The problem is scale. Can microlending programmes
grow big enough and fast enough to make a difference?
Can they become profitable and self-sustaining? The
problem lies in the complexities of finance, like cost of
capital, bank regulation and fantastically high operating
costs.
Ever since the 1997 global Microcredit Summit in
Washington microfinance has really come into its own.
At that time, there were some 7 million borrowers and
some 600 microfinance programmes around the world.
This year, the number of borrowers is expected to
reach 20 million--with Grameen Bank alone accounting
for 2.4 million--and the number of programmes to top
1,000. The summit participants set a goal of 100 million
borrowers worldwide by 2005.
In Asia, where most of the world's poor live, the
number of microfinance programmes has also grown
dramatically, albeit on a very small scale. In Vietnam,
there are some 57,000 borrowers compared with less
than half that number at the beginning of 1997, while in
Indonesia, the number of borrowers has increased to
just under 9,000 from less than 1,500 five years ago.
In China, where some 60 million people live below the
official poverty line of $74 a year, the number of
borrowers has leapt ten-fold in the past five years to
27,500 and the government has made microfinance a
major component of its anti-poverty programme.
"There is quite an active microfinance sector in China,
and there is clearly a need for banking the poor," says
Georges Desvaux, a partner at McKinsey & Company
in Beijing. "And microfinance is one of the tools the
government has been using since 1993 to alleviate
poverty. There is absolutely no question that the
government will continue to encourage it."
But the trouble with microlending is that just getting
more people to join isn't enough. To grow from, say,
50,000 borrowers to 500,000, the microlenders need
to dramatically increase their capital. A normal bank
would grow in one of three ways: by increasing the
amount of deposits it holds, by dipping into profits or
by raising money on the capital markets.
But microlenders generally don't have those options. To
begin with, since they are not banks they are not
licensed to accept deposits. A regular bank makes
profits by lending out the funds it holds as deposits, and
then charging interest on the loans. Microlenders rely on
government or multilateral grants for start-up capital
and the interest they charge on loans is hardly enough to
cover operating costs.
That means there isn't much in the way of profits to
invest in expanding. And with no assets of their own, it's
very difficult for microlenders to borrow money--in
some countries it is even illegal for them to do so. That's
largely because microfinance institutions lend to people
who have no collateral. Grameen Bank proved that you
could lend to the asset-less poor and still get your
money back. Indeed, almost every microfinance
programme in the world has a repayment rate of over
98%.
Instead, Grameen-style banks demand a sort of "social
collateral"--in effect, peer pressure. It works like this:
Each of the women (most microloans are only made to
women) is tied to four others in her lending circle. The
first loan is made to one woman, but all five members of
the group are collectively responsible for repaying the
loan. Until the first borrower has paid back at least half
of the loan, the second in line won't get a cent, and so
on. Each week, all new loans, all loan repayments and
all family financial problems have to be aired at the
weekly centre meetings in full view of a roomful of
gossipy village women. Peer pressure and potential loss
of "face" keeps repayments high.
But ironically, keeping up the peer pressure is costly.
Each loan officer is responsible for visiting just 200 to
300 clients every week. But some of those clients are
miles apart down rutted dirt roads and where travel
between villages can take the better part of a day. And
with no mechanical aids, each and every transaction
must be laboriously copied and recopied by hand in
ledger books.
With loans of just $150 a piece on average and interest
earnings of just a few cents a week, administrative costs
can eat up as much as one third of the total value of the
loan. In effect, microlenders are operating with a cost
structure more closely related to private banking than
general retail banking. So although the loans are
profitable, the incremental profits are so small that it
usually takes over 10 years for the microlender to grow
to sufficient critical mass and break even.
Even then, the small capital base constrains growth. In
East Malaysia's Sabah state, for example, the Yayasan
Usaha Maju microfinance programme grew too fast.
Last year, the programme lent out some $10.7 million in
loans to 12,732 borrowers. But interest income on
those loans was only $115,000 and operating costs
were over $1.2 million. The programme is now faced
with cutting the number of branch offices by half.
Here is where governments can help. They can provide
the capital needed for microfinance programmes to
scale up, through grants and donations to worthy
programmes, or, better yet, by acting as an
intermediary between the NGOs on the one hand and
capital markets or international lending institutions on
the other. In fact, the Philippines is one of only a handful
of governments worldwide to have taken the latter
approach. In 1995, the Ramos administration set up the
People's Credit and Finance Corporation, which acts
as a commercial wholesale lender to microfinance
programmes.
The fund administers $34.7 million in loans from the
Asian Development Bank and the International Fund
for Agricultural Development, an agency of the United
Nations. The funds are lent on to microfinance
programmes with the Philippine government acting as a
guarantor. Eventually, the government plans to privatize
the PCFC, which would remove some of the political
interference that has affected its lending in the past.
Teresita Quintos Velez, lead convener of the National
Anti-Poverty Commission says there is more work to
be done, however. "One of the things we are doing is
mapping and locating all the microfinance funds in
government so that they may be consolidated in some
way," Velez says. "There has never been any attempt to
set policy directions for microfinance, but that is what
we are attempting to do now."
A second area where government can help is in
regulation. The central bank can allow microfinance
institutions to accept deposits, in effect, to become
microbanks. For instance, Bangko Sentral ng Pilipinas
has already allowed that to happen in select
cases--CARD Bank is one example; other
microlenders are applying now.
Commercial banks also have a role to play. One
promising area is in loan securitization. With repayment
rates of 98% or higher, many of the loans held by
microfinance programmes could be packaged as bonds
and sold to investors. In India, Citibank is looking at
ways to securitize a loan made to SPARC, a
microfinance group that is working with Bombay's Slum
Dwellers Association to build new housing in the city's
giant Dharavi slum.
But there's also a human cost to scaling up. For one
thing, how many of the NGOs that now run
microlending programmes have the skills and mindset to
become giant lending institutions? After all, for many of
the good Samaritans that help make the programmes
tick, the job is a tough one--hours are long, pay is low
and loan officers have been robbed or even killed for
the money they carry between meetings (including one
in Santa Cruz village). It's no surprise that many leave
after just two years.
Eugene Diares, a branch manager for Filipino
microlender, ASHI, says he loves his job, but he knows
he won't be able to stay. With his wife due to give birth
to their first child soon, the 28 year-old Diares
calculates he can only afford to stay with ASHI for a
few more years before finding a less-demanding job.
"This work requires ample time," he says, "and in five
years I'll have a family."
But then, banking for the poor can have its own
long-term rewards. Like for Rodel Barrera, an ASHI
field credit officer, who spends his days in the plywood
shacks of Muntinlupa, a Manila shantytown built
alongside the city's railroad tracks. His mother got her
break from a microfinance programme years ago--and
used the profits from her small business to send Barrera
to college at Laguna State Polytechnic, where he
received a degree in agricultural science. He says
gratefully: "I'll do this for as long as they want me."
CHARITABLE BANKING
Microfinance is a way to give something back to local
communities. In the Philippines, tax breaks have
encouraged banks to set up charities focusing on
microfinance. Citibank, the largest contributor to
microfinance, has been extending loans and grants from
Latin America to Asia for the past 15 years. Says Frits
Seegers, Asia-Pacific chief of consumer banking at
Citibank: "Microfinance fits with our corporate
philosophy of helping people help themselves." |
