MICROFINANCE: A Tool For Economic Justice

INTRODUCTION
Income inequality is often linked to economic and social factors: 1. Educational Opportunities 2. Training Opportunities 3. Job Availability 4. Wage Rates 5. Social Mobility 6. Environmental Factors

Recent Advances in the Theory of Economic Development

The Mystery of Capital by Hernando de Soto --Informal Economy --Capital as the Key to Economic Development Banker to the Poor by Muhammad Yunus --Poor are outside of Banking System --No Collateral --No Access to Credit

Microfinance: Its Origins and Current Operations in LDCs

The Origins of the Grameen Bank

Prior to the 1970s, economic growth and development defined by the increase in GNP 1. Credit Assigned a Passive Role 2. Credit = Facilitator of Trade and Commerce

3. Credit = Tool of the Formal Business Sector

The Poor in Bangladesh before Yunus

Poor in the Villages of Bangladesh involved in Small Businessi.e., Entrepreneurs Outside of the Formal Banking System No Access to Loans or Credit

Muhammad Yunus: Credit is a Powerful Weapon

Key Features of the Grameen System

Peer Lending Model Loans for One YearInstallments Paid Weekly Interest Rate of 20% Repayment = 2% of the Loan per Week Contribute to the Group Fund = 5% of Loan Amount Member = Savers + Borrowers

Microenterprise in Uganda

Success of the Grameen Bank

Over $3.8 Billion in Loans have been provided 2.4 Million Families in Rural Bangladesh have been served 98% Repayment rate Microfinance Initiatives have been started in 100 countries worldwide Global Movement embraced by Governments, NGOs, and International Organizations

Mission of a Grameen Bank

Other Models of Microfinance in LDCs

Rotating Savings and Credit Associations (ROSCA) 1. Members contribute a regular amount of savings each week 2. Members take turns borrowing the funds at no or low interest rates

Womens Entrepreneurial Group-Uganda

Womens Businesses--Uganda

Other Microfinance Models (cont.)

Village Bank Model 1. Community-Managed Credit and Savings Associations 2. Sponsoring Agency will lend Seed Capital 3. Seed Capital becomes the Funds used for Loans 4. All Members Collectively Guarantee the loan

Village Bank in Uganda

Prominent Microfinance Organizations

ACCION International (Americans for Community Cooperation in Other Nations 1. Private, nonprofit organization 2. Peer-Lending Approach 3. Narrow focusprimary emphasis in on loans to micro-entrepreneurs 4. Minimal Training and Advise 5. Transitioning to Self-Sustaining Business

SEWA
SEWA (Self-Employed Womens Association) 1. Established in India in 1972 as a workers cooperative 2. Provides credit through a village bank model 3. Also provides business training to women 4. Key focus: Womens Social Development and Collective Empowerment

FINCA
FINCA (Foundation for International Community Assistance) 1. Pioneered the Village Bank Model 2. Loans provided to help members start and sustain business activities 3. Group loan guarantees substitute for collateral 4. Seed capital comes primarily from USAID

II. Theory of Microfinance in the United States

Migration of Ideas in Public Finance Usually Begin in Developed Countries and Spread to LDCs 1. Microfinance was a break with this pattern 2. Idea of Microfinance was born in Bangladesh and migrated to U.S.

The Third Way

Microfinance Emerged at a time of a Paradigm shift Commitments to: 1. Fiscal Discipline 2. Deregulation 3. Privatization 4. Free Trade 5. Market-Oriented Approaches

The Third Way (cont.)

The Third Way Approach to poverty reduction 1. Market Involvement 2. Foster Community Development Robert Reich: . . . The idea is to make it easier for them (i.e., poor) to obtain good jobs and thus become economic winners. Capital Investment Welfare State Private-Investment Solutions to Social Welfare

Characteristics of Microfinance in the U.S.

First Programs = Modeled after Grameen Bank and Group Lending Concept Shift to Individual Lending Emphasis on Training and Skills Development Mentoring and advice Goals of Microfinance in U.S.: 1. Job Creation and Income Generation 2. Individual and Community Empowerment 3. Relationship Building and Community Development

II. Major U.S. Microfinance Programs

ACCION U.S. 1. Focus on Lending and Loans 2. Lent $100 million to 10,000 people in 33 communities 3. 80% of borrowers are minorities; 50% are women 4. Lends to persons with a proven track record 5. No Training

Microfinance Programs in U.S. (cont.)

Southern Good Faith Fund (SGFF): 1. Nonprofit affiliate of Southern Bancorp 2. Originally modeled after Grameen Bank but has shifted focus overtime 3. Three Primary Areas of Focus: a) Asset Builders Program b) Business Development Center c) Career Pathways Program

Microfinance Programs in U.S. (cont.)

Womens Initiative 1. Economic Empowerment of Women 2. Training-led Organization 3. Foster a Relationship between the Borrower and Business Consultant 4. Expert Business Advice

Microfinance Programs in U.S. (cont.)

Working Assets 1. Credit as a means of community empowerment 2. Peer-Lending Initiative 3. Focus on Self-Employed 4. Emphasizes the Relationship within Lending Groups 5. Social Capital

Microfinance Programs in U.S. (cont.)

ShoreBank Corporation 1. Chicago-Based Bank 2. Leader in Microfinance 3. Loans to NGOs; in turn, lend to individuals

Problems Facing Microfinance in the U.S.

Funding--Donors Sustainability Complexity of the Economy Underclass of Self-Employed Poor Need Savings Not Credit Route Out of Poverty = Education and Wage Jobs

Direction of Microfinance in U.S.

Social Capital/Networking Individual and Community Empowerment Savings Alternatives to Predatory Lending Credit/Loans for Small Enterprises Training/Skills Partnerships with Mainstream Banking Institutions

IV. Policy Proposals

Create Peer Saving/Lending Circles

Culture of Savings and Individual Development Accounts

Low-Cost Banking Services a la Good Faith Fund