Visible Hand

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Abstract:

The motivation behind microfinance is simple. Financial institutions can extend loans to the poor while making a reasonable profit. Approximately 3,000 microfinance institutions (MFIs) are in operation - the Grameen Bank of Bangladesh alone boasts over US$2 billion in loans, with an average loan size of US$160, used for small business ventures, agricultural improvement, livestock purchases, and trading activity. By charging high interest rates, MFIs can afford the high transaction costs of processing large volumes of loans as small as a few dollars. Many critics, however, are worried that microcredit banks will lose the initial vision, individual client attention, and egalitarian leadership that characterized their beginning in favor of streamline production and lending up away from the most destitute.

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Headnote:

Microcredit's Future

Corporate organization has trickled down: through microcredit, the business of helping others is becoming more efficient.

The motivation behind microfinance is simple. Financial institutions can extend loans to the poor while making a reasonable profit. Approximately 3,000 microfinance institutions (MFIs) are in operation-the Grameen Bank of Bangladesh alone boasts over US$2 billion in loans, with an average loan size of US$160, used for small business ventures, agricultural improvement, livestock purchases, and trading activity. By charging high interest rates, microfinance institutions can afford the high transaction costs of processing large volumes of loans as small as a few dollars. The idea that the free market can help break cycles of debt and foster income-generating market activities within impoverished communities did not gain acceptance until the establishment of the Grameen Bank, the prototype of the now popular "offshoot" MFIs.

Traditionally, several major obstacles have denied poor people's access to credit. Besides lack of collateral, no precedent existed to affirm that financial institutions could benefit from bearing the administrative costs and risks of loaning to the poor. Experience over the past decade has challenged the notion that credit must be offered in large quantities to be profitable: Grameen Bank and its offshoots give loans to "solidarity groups" of about five people, using the opportunity for everyone in the group to secure future credit as collateral, with peer pressure as an additional incentive. By charging market interest rates (or higher), microfinance institutions are able to cover their administrative costs. Most banks, like Grameen, enjoy repayment rates of around 95 percent, higher than commercial bank repayment rates.

In a fiscal climate where "charity" has fallen out of favor and foreign aid budgets have been slashed, microfinance has become the latest trend in the struggle to eradicate poverty. According to the research of Silvia Dorado of the Radcliffe Public Policy Institute on the emergence of microfinance in Bolivia, the idea of democratizing credit is appealing because it cuts across ideologies. In Bolivia, as in other developing nations, NGOs have traditionally filled the role of helping the poor through training, health care, education, and community organizing. Yet because in many developing countries power and wealth are concentrated in the hands of a small, visible elite, the public sector has operated in opposition to the untapped resources in other sectors of society. A rigid social line distinguishes the 60,000 white Bolivian elite who control the land, government, and private sector from the indigenous population. In such a landscape, confrontation, not collaboration, is a common form of engagement. …