The incomes of working people living in poverty are not only low, but also volatile. Poor people, aware of the risks of not having sufficient earnings to meet daily needs, tend to save proportionally more than families with more secure, higher incomes. However, most banks do not offer savings and loan facilities to poor people. Many must hide their savings in cash somewhere and, when they need a loan, resort to the local moneylender for credit at onerous rates of interest. Microfinance is the provision, on a sustainable basis, of financial services such as credit, savings, insurance, payments and guarantees to poor people generally outside the reach of the formal financial market.
Traditional banks are reluctant to cater to poor people for four main reasons. First, self-employed people and micro-enterprises rarely have legal title to assets that banks can use as collateral. Second, banks recover the costs of researching the business prospects or income security of a client by charging it to the interest on the loan, but the costs of research for a small loan are similar to those for larger loans that will yield a much higher return.
Third, small businesses in the informal economy, especially those just starting up, are rarely able to provide statements of accounts required by banks.
Fourth, taking small deposits from a large number of poor people requires maintaining an extensive and costly network of branch offices in poor communities.
By comparison, a small number of branches catering to wealthier clients is a much more attractive business proposition.
Microfinance institutions (MFIs), however, approach the provision of financial services with a different logic. First, they know that most poor people are very diligent in meeting repayments because they may have to borrow again and they want to stay out of the clutches of loan sharks.
Second, small membership-based MFIs have a strong sense of collective selfdiscipline which rests on kinship and community ties. Third, being much closer to their clients, MFIs do not need to carry out costly research. Their experience enables them to take the risk of lending small amounts with little or no collateral because the risk of default is, on average, acceptably small.
Finally, because they are often run in part by volunteers, the costs of collecting deposits and managing loans can be kept very low and adapted to the needs of members.
These powerful advantages have led to a rapid growth in microfinance.
At the end of 2001, 2,186 microfinance institutions reported reaching 55 million clients, of whom 27 million were among the poorest when they took their first loan. This is up from the 7.6 million poorest clients identified by the Microcredit Summit Campaign when it was launched in 1997 with the goal of reaching 100 million of the world’s poorest families with credit for self-employment and other business and financial services. The expansion of microfinance was encouraged by the formation of a 26-member donor network on microfinance, the Consultative Group to Assist the Poorest (CGAP), that includes the ILO and the World Bank. The attractiveness of microfinance to development finance agencies lies in its potential to reduce poverty without perpetual subsidies by expanding the market for financial services to the poor. Many MFIs started with a public or charitable subsidy, and some still require outside support to cover their operating costs with operating revenue. However, MFIs worldwide are moving towards higher degrees of cost recovery and subsidy independence by refining and constantly improving tools for monitoring sustainability.
Microfinance makes an important contribution to the ILO’s decent work approach to poverty reduction in three ways:
● Job creation: Small investments in fixed assets and the provision of working capital to micro and small enterprises facilitate the creation of jobs in poor communities.
● Enhanced security: Savings, emergency loans and insurance products stabilize income levels and reduce the vulnerability of people living near the subsistence level.
● Empowerment: Group formation and other delivery techniques in microfinance develop a sense of responsibility, strengthen social capital and empower the poor, especially women.
The ILO seeks to enhance the capacity of decision makers in government, workers’ and employers’ organizations and banks and private sector agents to develop and implement policies that optimize the social benefits of sustainable microfinance. One of the key issues is the adaptation of banking regulations to the needs of MFIs. For example, the support programme for mutual benefit societies and savings and credit cooperatives (PASMEC), carried out jointly by the ILO and the Central Bank of West African States (BCEAO), also involves grass-roots initiatives, such as village banks and women’s savings groups. The aim of the partnership is to advance microfinance through exchange of information, data collection, training, advisory services, and the creation of an appropriate, incentive-based regulatory framework. Microfinance is now a macro business in Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal and Togo, with over 300 MFIs serving 4.2 million members representing one out of five households in the region.
A microfinance database covers all major MFIs in each of the seven countries, and a “training of trainers” programme, in collaboration with a Cooperative Training Centre (ISPEC) in Benin, strengthens the capacity of MFIs to implement their own training programmes.
The success of microfinance lies in the mutually reinforcing effect of financial resource pooling and social organization. Microfinance institutions overcome the handicap of individually insignificant transactions and bring people together in mutual support. As money is involved, there has to be a measure of trust for such groups to work. The building of trust, or social capital, is vital to the struggle of the working poor for political rights and representation and economic opportunities. By bringing years of experience in building voluntary associations of the cooperative movement, employers’
organizations and trade unions to the microfinance movement, the ILO can contribute to extending the availability of cheap financial services to the 95 per cent of the working poor who, according to estimates by the Microcredit Summit Campaign, still do not have access to banking systems.
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