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Serving Sri Lanka

This web log is a news and views blog. The primary aim is to provide an avenue for the expression and collection of ideas on sustainable, fair, and just, grassroot level development. Some of the topics that the blog will specifically address are: poverty reduction, rural development, educational issues, social empowerment, post-Tsunami relief and reconstruction, livelihood development, environmental conservation and bio-diversity. 

Friday, December 28, 2007

Microfinance a victim of own success? - report

Daily Mirror: 28/12/2007"

Washington D.C— Microloans to the poor around the world soared to 133 million last year, up from 13 million just nine years ago, according to a report released by the Microcredit Summit Campaign, an initiative of RESULTS Educational Fund.

The dramatic progress was also evident in the Campaign’s focus on loans to the very poor, those living on less than a US$1 a day, which reached 93 million families in 2006, just shy of the Campaign’s goal of reaching 100 million poorest. “We know that by today the 100 million poorest will have been reached,” Microcredit Summit Campaign Director Sam Daley-Harris said, “but we won’t be able to report those results until the 2007 data is collected, verified, and released at the end of 2008.”

The State of the Campaign Report 2007 singles out special praise for Jamii Bora: a microfinance organization in Kenya that started eight years ago with loans to 50 beggars and now reaches 170,000 savers and 60,000 borrowers. The groundbreaking institution started offering health insurance seven years ago when it realized that of those clients who struggled to repay their loans, 93 percent had the same challenge—a close family member in the hospital. “You can’t expect that anyone will let their child die because they have to pay their loan to Jamii Bora,” said the group’s founder Ingrid Munro, “so this was something that we had to solve.” As a result, Jamii Bora covers all in-hospital costs for one adult and four children by linking with mission hospitals. The total cost for the family of five is just 30 cents per week or US$12 per year. This year’s report, however, is the first to assess how the microfinance movement is in danger of becoming a victim of its own success. A tidal wave of commercial capital in recent years is now challenging the very principles on which the microfinance movement was built. The report discusses how Mexico-based microfinance institution Compartamos launched an IPO in April 2007, which netted some US$450 million for its initial investors and raised the company’s valuation to US$1.4 billion.

This was possible partially because of the microfinance institution’s high profits spurred by interest rates and other charges that top 100 percent a year.“I am shocked by the news,” said Nobel Peace Prize Laureate Muhammad Yunus reacting to the IPO. “Microcredit should be about helping the poor to get out of poverty by protecting them from the moneylenders, not creating new ones. A true microcredit organization must keep its interest rate as close to the cost-of-funds as possible. There is no justification for interest rates in the range of 100 percent. My own experience has convinced me that microcredit interest rates can be comfortably under the cost of funds plus ten percent, or plus fifteen percent at the most.’


Daley-Harris, the report’s author, challenges World Bank President Robert Zoellick to stop the Bank’s foot-dragging and invest more money into microcredit programs for the very poor. On October 3, 2007, 29 members of the U.S. House and Senate met with President Zoellick for over an hour to persuade him to get half of World Bank microfinance funds to families living on less than US$1 a day. Zoellick’s main promise to the members of Congress was to meet regularly for more discussion.

“While the World Bank talks,” Daley said, “26,500 children die each day from largely preventable malnutrition and disease and some 77 million children of primary- school age are not in school. Zoellick should agree to the requests from Congress, requests that his two predecessors received from more than 1,200 parliamentarians, to increase World Bank spending for microfinance; ensure that half of Bank spending on microfinance reaches the very poor, those living below US$1 a day; require the use of cost-effective poverty measurement tools to ensure compliance; and report annually on results.”

“The World Bank has a choice,” Daley-Harris says, summarizing the report. “Will it remain stuck in its stingy, Scrooge-like refusal to extend microcredit to the poorest families in the world or will it be transformed and give the gift of microfinance to the very poor thereby helping hundreds of millions of families find a dignified route out of poverty?”


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