A new report claims that more than half a billion people could be benefiting from microcredit around the world, but that the microfinance movement was in danger of becoming a victim of its own success

Microcredit -- tiny loans to the world's poorest people -- has caught on in a big way and now benefits over half a billion people, a quantum leap from just 13 million about a decade ago, according to a new survey. However, the bulk of the beneficiaries are the poor in Asia, rather than in Africa and Latin America where unscrupulous lenders are cashing in on the boom.

The Microcredit Summit Campaign, an initiative of RESULTS Educational Fund, surveyed more than 3,000 microcredit bodies around the world from small banks to community groups and found they reported reaching 133 million people by the end of 2006.

Assuming that each recipient was probably supporting four other people (almost invariably family), that would mean more than half a billion worldwide -- equivalent to the population of the European Union -- were benefiting.

Compare this to a mere 13 million recipients nine years ago, when the poorest were simply dismissed as being unworthy of credit and so, unbankable.

The dramatic progress made by this poverty alleviation measure was also evident in the focus on loans to the very poor, those living on less than 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 and author of the report 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."

According to the latest available figures, the World Bank estimates 985 million people were living on less than a dollar a day in 2004, with 2.6 billion in total living on less than US$ 2 a day. "It is a massive increase in just nine years," Daley-Harris said. "The bottom line is people are being reached in Asia but they are not being reached in Africa or Latin America."

He said some 90% of the poor reached by microcredit were in Asia -- whereas only 60% of the poorest who needed it most were Asian. In Asia, microcredit had reached critical mass and was growing organically at a local level, he said, while in Africa and Latin America it was driven primarily by western donors.

"A tiny institution in the Philippines visits Bangladesh and they have their minds blown and go back and do the same thing back home," he said. "That doesn't happen so much in Africa or Latin America."

In part, as a result, interest rates on microcredit loans in Asia were much lower, at 10%-20% compared to as high as 80% in Mexico, where private firms describing themselves as microlenders were therefore making fat profits.

In fact, this year's report 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% a year.

"I am shocked by the news," said microcredit pioneer and Nobel Peace Prize laureate Dr 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 organisation 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%. My own experience has convinced me that microcredit interest rates can be comfortably under the cost of funds, plus 10%, or plus 15% at the most."

In Africa, meanwhile, there were some signs of change, Daley-Harris said, citing the example of a Kenyan microcredit group that had slashed the number of people defaulting on its loans by offering basic health insurance after discovering that ill-health of a family member was the main reason for failure to repay.

Jamii Bora has been singled out for special praise. The microfinance organisation in Kenya that started eight years ago with loans to 50 beggars now reaches 170,000 savers and 60,000 borrowers. The groundbreaking institution started offering health insurance seven years ago when it realised that of those clients who struggled to repay their loans, 93% had the same challenge --- a close family member in 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 a family of five is just 30 cents per week, or US$ 12 per year.

Western banking firms such as Citigroup have also expressed an interest in the microfinance sector, but Daley-Harris said they would inevitably target the slightly richer -- those living on more than US$ 2 a day -- thereby running the risk of pricing themselves out of the reach of the poorest. "The field is moving towards the commercialisation of microfinance, which is fine unless it leaves out the very poor," he said.

Daley-Harris has also challenged World Bank President Robert Zoellick to stop the Bank's foot-dragging and invest more money in microcredit programmes for the very poor.

"It's up to public institutions like the World Bank and the African Development Bank to give enough for their development funds to those living below a dollar a day. The World Bank has a choice," Daley-Harris says, summarising 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?"

Source: www.alertnet.org, December 18, 2007
             www.earthtimes.org, December 18, 2007