Flip through the latest issue of Gulf Weekly.
The growing realisation of the importance and positive effects of microfinance on poverty, on micro-enterprises or on households has generated considerable interest in its potential to reach low-income families who have traditionally been sidelined by formal financial institutions.
Above all when big financial institutions of all sorts are going bust across the globe, micro-finance remains unaffected.
Even as the global financial system freezes and giants like Lehman Brothers collapse, micro-finance institutions (MFIs) are expanding merrily.
Famous financiers face defaults big enough to wipe them out, but MFIs report virtually zero default.
For instance big financiers lend against collateral, a back-up if their borrower defaults while MFIs lend with no collateral at all. Big financiers lend to the most creditworthy corporations.
MFIs lend to poor women who nobody in history considered creditworthy before. Yet the secured loans to big corporations suffer default, while unsecured loans to poor women are being repaid in full.
How so? What lessons does micro-finance have for Wall Street?
The big lesson for Wall Street is that simply lending against collateral is not failsafe. One has to check the repayment capacity of borrowers too. US banks blissfully gave mortgages of 100 per cent of the value of houses during the housing bubble, and suffered when house prices fell. So did premier institutions buying mortgage derivatives.
Some, like Lehman Brothers, borrowed massively to invest in AAA mortgage-backed securities, and went bust when the value of these securities plummeted.
The trillion-dollar house of cards built on collateral collapsed when the collateral value fell.
Microfinance, by contrast, has no collateral at all. MFIs deliberately keep loans small, well within repayment capacity.
Some MFIs give first loans of just BD38 a year.
Those who repay qualify for a higher second loan, maybe BD53, and the third loan can be still higher. But MFIs set an absolute loan limit, ranging from BD91 to BD190, depending on local economic opportunities, to guard against over-borrowing.
US housing brokers get commissions from banks based on the size and interest rate of loans. This gives them incentives to manipulate documents and data to lend excessive sums at excessive rates of interest, increasing default risk. But MFIs have a fixed interest rate, and fixed ceilings on the first, second and subsequent loans. MFI field agents are trained to ensure that loans do not exceed repayment capacity.
MFIs lend to groups of poor women. If any borrower defaults, the whole group is barred from credit, so other members put social pressure on the defaulter to repay. This is remarkably effective.
Microfinance is not a new idea. Lending small amounts to entrepreneurs too poor to qualify for traditional loans has been traced back in one form or another as far back as feudal times.
What is groundbreaking about its most recent incarnation is a fundamental understanding that people on low incomes are bankable: or, in the words of Dr Muhammad Yunus, that 'poor people can, and do, repay loans'.
Yunus is largely credited with making microfinance a socially responsible and viable business model, winning a Nobel peace prize in the process. He set up the Grameen Bank in Bangladesh, and since its foundation in 1982, it has issued $6.38 billion to 7.4 million borrowers.
Yunus says the sustained success of Grameen lies in the fact that 'we have made the system easy for borrowers to access, with a no-hassle, no-documents, no-credit-check policy. There is nothing threatening about the Grameen methodology'.
Opportunities to invest in funds geared towards microfinance have thus increased over the last few years, particularly focusing on investments that support sustainable development activities at the local level.
Interest has also been focused on decentralised investment - where the local economy is emphasised, and local profits and benefits go back to the local economy.
Today, there are more than 100 MFIs in the Arab region providing financial services to approximately 3.5 million Arab micro-entrepreneurs.
Over the past five years, these MFIs have achieved exponential growth and strong performance. Together, MFIs from Morocco to Yemen, from Egypt to Saudi Arabia have an outstanding loan portfolio of $1.5 billion (as of year-end 2007).
The International Finance Corporation (IFC), a member of World Bank Group, has dispersed almost $600 million (BD225 million) in the greater Middle East region, while working with 11 microfinance institutions.
IFC has invested $72 million (BD27 million) in the institutions based in countries in the region that have low access to finance, especially Morocco, Pakistan and Afghanistan.
The institutions have provided microfinance to 1.25 million clients.
Most people have not had access to financing before. In the case of Muslim countries, almost 60 per cent of the clients are women.
So, the MFI model is small but sound. But there are issues to be addressed there also. Western banks lend far too much. But Indian lenders - including MFIs - lend far too little.
Rural studies suggest that poor rural households need BD190 or credit per year. MFIs provide far less.
The balance is made up by borrowing from relatives and moneylenders. MFIs should provide more credit.
