WOMENAID INTERNATIONAL

MICROCREDIT

BRIEFING PAPER

No: MC/BP.01

1.0 The need for micro credit programmer which can deliver the world's smallest loans, at low or very short-term rates, to the world's poorest people has, in recent years, become increasingly recognised. Informal sector activities employ up to 70 per cent of the labour force in the developing world and the growing majority of informal sector workers are women. Women are more likely than men to borrow in the informal financial market and are less likely to engage in the formal financial sector. The informal sector constitutes the largest source of financing for women's enterprises, mainly due to the fact that eligibility requirements, such as collateral or guarantees, usually prevent poor women from having access to institutional credit. An unfortunate consequence of lack of access is the poor have to approach money-lenders whenever they need emergency loans or small investment funds. The price paid for such loans is usually very high; the rate of interest can reach ten percent a day. Very often borrowers are unable to pay back debts contracted in this manner and end up having to sell their small landholdings, household goods and personal belongings and join the ranks of the landless and deprived.

"Poor people are not a problem to be overcome. Rather, they are a
vital force whose productive potential must be unleashed."

 Kofi Annan, United Nations Secretary-General 
Message to the Microcredit Summit.


SECTION I : MICRO LOANS

1.1 It is now acknowledged that women are central to the development process. Women produce up to 50% of the food in many countries - up to 80% in some African states, work long hours for little or no money and are frequently the sole support of countless households. Yet despite the fact that women bear the heaviest burden, their access to land, capital and credit is limited. Women's access to credit is therefore one of the most pressing problems of the developing world today. The development community is increasingly focusing its efforts on devising credit schemes for the poor, and especially poor women, whether they are rural subsistence farmers, workers in the urban informal sector or micro-entrepreneurs producing and selling goods and services out of their homes.

1. 2 Credit programmes targeted at low income women borrowers are intended above all to make their economic activity more productive thereby contributing to the development of impoverished communities. Credit can be used to generate income from household activities such as basket making as well as to acquire time-saving technologies such as milling machines, wells and reforestation which will free women from the hours spent grinding millet, or fetching water and fuel. By freeing women of these time consuming tasks they will be able to seek outside employment, financial independence and better family welfare. That women are a surprisingly good credit risk is backed up by research which shows that female borrowers consistently achieve higher loan repayment rates than do male borrowers: they also tend to use their personal income for family welfare, health and education more than men do. The end result is that women-oriented credit programmes, by creating viable employment opportunities and generating additional income, benefit all aspects of society and make a significant contribution to national development.

1.3 Types of credit available include : women's co-operatives, informal credit institutions and other intermediaries, solidarity group mechanisms, revolving loan funds, outright grants and micro enterprise development projects. Successful credit programmes of the past decade show that group lending is one of the most effective ways to provide credit to the poor : not only does it encourage timely repayment through peer pressure, it also fosters a community spirit and alleviates social tension. Another model for credit programmes is derived from the social structure of the developing world itself: informal credit institutions in the form of savings clubs, co-operatives, perform very well in times of economic hardship and are increasingly adapted for use by the formal financial market in conjunction with development agencies. Credit schemes have been classified into four types based on the institutional arrangements involved. These are: commercial bank schemes, intermediary organisations working with financial institutions, parallel credit programmes administered by non-governmental organisations and poverty-focused development banks.

Solidarity Group Lending Programmes

The Grameen Bank

2.1 The Grameen Bank of Bangladesh is one of the earliest and most successful examples of a local financial institution dedicated to serving the banking and credit needs of the landless poor on the basis of 'solidarity group lending' using the peer pressure inherent in group guarantee arrangements as collateral. The Grameen bank was founded in Bangladesh, in 1976, with one loan of $27 provided to 42 poor people, by Dr. Muhamed Yanus, a former economics professor. He became a crusad

According to Dr. Yanus, "if you are poor, you are disadvantaged but ifyou are poor and also a woman, you are doubly disdvantaged."

Today, Grameen reaches two million borrowers, with more than $1 billion lent and $1818 million generated in savings. It boasts a 98 per cent repayment rate, one of the highest in any credit programme.

2.2 The Grameen has found that female borrowers are more careful with credit, and therefore it prefers to provide credit to female household members when possible. The bank's decentralised structure allows it to take its services to its clients, so that women in particular are not hampered by time or social constraints involved in travelling to the bank. Grameen's policy is to lend to groups of five borrowers which appoint a chief to conduct the weekly meetings and oversee the compliance with the rules. The loans are repayable in 50 weekly instalments. Grameen's present interest rate is 16 per cent which is generally considered realistic in commercial terms.

2.3 The Grameen's objectives include creating self-employment opportunities for its clients by providing them with income-generating assets. Its loans have increased the employment of female borrowers by an average of 128 hours each month in such as activities as paddy husking, the purchase of milk cows and cow fattening. This in turn has provided approximately 80 hours of monthly employment to members of the borrower's immediate families. Thus the credit programme has a "multiplier effect" that contributes to national development goals of creating economic self-sufficiency and improving the standard of living. In order to safeguard women's financial independence, their shares cannot be transferred to men, although men's shares can be transferred to women.

2.4 Despite the undoubted success of the Grameen bank system there is still room for further development. The Grameen system would be strengthened if the 'caps' put on the amount borrowed by the poor was raised. At the moment the potential of borrowers who desire larger loans than the Grameen system can provide is inhibited as they are unable to obtain the loans elsewhere. The system would also be strengthened if the bank could come up with a way to overcome the cultural and social restraints which have resulted in the percentage of female extension workers within the programme remaining low.

2.5 Inspired by the success of the Grameen many other countries have replicated the bank's methods. Developing countries where it has been replicated include Bolivia, Burkina Faso, Colombia, Guinea, Kenya, Malaysia, Mali, Malawi, Nepal, Pakistan, Peru, Philippines, Sri-Lanka and Zambia. The Malaysian version of the Grameen bank is operated by a trust called Amanah Ikhtiar Malaysia (AIM) which now operates in 9 out of 13 Malaysian states covering 612 villages. As of February 1996, AIM had disbursed a total of $640,000 to 3,986 borrowers of whom 98% are women. An initial loan can be up to $180 and second loan up to $360, all subsequent loans are a maximum of $720. The Grameen bank's methods have also been adopted in Canada, France and the United States where it is being used to help people on welfare to become income generators.

"Not long ago, I used to work in other people's houses and go about begging. But now I don't do either. My business enables me to look after myself and the children."  

Sakhina Bewa, Grameen Bank borrower, Bangladesh.

UNRWA

3.1 The United Nations Relief and Works Agency (UNRWA) for Palestine refugees was set up as a 'poverty alleviation' initiative and now operates 21 centres. UNRWA's innovative Solidarity Group Lending Programmes (SGL) offer micro loans of about US$100 each to women in groups of four to eight. It targets women in the informal economy, mostly small traders. Group pressure and hard work ensuresrepayment of the initial loans which can then be followed by others. The system is proving to be very successful with some women even repaying their loans before they were due, leading to a repayment rate of 100 per cent. Every participant goes on a training course which covers everything from financial management to customer relations and also receives home visits to see how their business is progressing.

3.2 The SGL programme is one tier of a three-pronged economic empowerment strategy. The second tier offers loans of up to US$10,000 for micro-enterprises which are at the lowest end of the formal sector, while the top tier targets loans up to US$70,000 for medium sized businesses.

UNHCR : NEW LIFE FOR REFUGEES

4.1 The majority of the world's 30 million refugees are women and children who attempt to survive war, persecution or famine by seeking refuge in neighbouring countries. Many dream of returning home one day and of being reunited with their families but in the meantime their spirits are maintained by preparing themselves for a better tomorrow. For many refugees micro-credit loans or grants are a critical form of support. Training helps them build upon existing skills or even acquire new ones and participation in small income-generating projects helps them contribute to their refugee community.

4.2 Several UN specialised agencies, such as the UN High Commissioner for Refugees, operate micro-credit programmes to assist refugees to rebuild their lives. Over 80 percent of refugees are women and children and often return to their lands alone. The women usually have no assets or collateral so access to credit is critical.

SELF-EMPLOYED WOMEN'S ASSOCIATION : SEWA

5.1  A group of illiterate Indian women working as headloaders, the unofficial porters of the textile industry in the town of Ahmedabad became pioneers of a poverty alleviation strategy. These poor women banded together to provide mutual self help and their organisation, the Self-Employed Women's Association, (SEWA), founded by Ela Bhatt, became a registered labour union in 1972.

5.2 One of SEWA's earliest efforts was the creation in 1974 of banking and credit facilities for its members provided by SEWA's own bank, the Mahila Sahakari Co-Operative Bank, which was the first of its kind and has since been widely imitated. Members can purchase shares in the bank. SEWA's high repayment rate is also due in part to shareholders' involvement in the financial institution itself. SEWA's goals are "to make the socio-economic role of women visible through joint action of labour and co-operatives." It does this by providing direct links for women to raw materials and markets, offering credit at reasonable rates and forming production units that enable co-operative groups to buy the raw materials and sell the finished products on their own terms. The organisation runs vendor and producer co-operatives, trains women to work as artisans, helps them to obtain productive inputs and trains staff in technology and credit and the SEWA Bank has about $3 million in assets - all generated by its members.

5.3 SEWA's first micro-loan in 1975 was about US$ 1.50 to a poor woman to buy herbs which she sold by day making enough profit to buy the family dinner at night. Seed money for loans have been given by non-profit making institutions, donor agencies and private foundations that have, so far, provided the vital subsidy that has resulted in the rapid expansion of micro-enterprise. SEWA today has over a quarter of a million members, mainly poor women workers working in the informal sector in both rural and urban areas. Founder, Ela Bhatt is emphatic that what SEWA provides to its members is not charity. It is simply a set of services, training and financial systems that give self-employed workers the same benefits that others enjoy, enabling them to work more productively.

SECTION II : MICRO GRANTS

6.1  The Trickle-Up Programme(TUP) is based on the belief that poverty poses the main obstacle inhibiting the ingenuity and productivity of millions of disadvantaged people around the world. The Trickle-Up Programme is dedicated to involving the "poorest of the poor" in local economic development, by offering outright grants of $100 to recipients. Why grants and not loans? Because channelling credit to people who have already accumulated a good deal of debt with informal lenders can sometimes be counterproductive. Mildred Leet and her husband began TUP in 1979 with $1000 of their own money, providing $100 grants for ten different small enterprises on the Caribbean island of Dominica. Since then TUP has grown and by the end of 1998 over 100,000 entrepreneurs had begun  TUP assisted enterprises in 106 countries.

6.2 TUP requires that its beneficiary groups all work in the same enterprise. An initial instalment of $50 is paid to the groups (each with five members), who first demonstrate they have planned a business, have secured any needed approvals and anticipate a profit. They must promise to contribute a minimum of 1,000 hours of labour to the business project within three months and to reinvest at least 20 per cent of the profits; most of the recipients actually reinvest an average 70 per cent. To receive the second instalment, the groups must complete a three month business report, after which their relationship with the programme ends.

6.3 TUP encourages the groups to open savings accounts at local banks so that they are not left without additional resources. In addition many groups are then able to borrow money from the formal credit market on the basis of the successful business ventures originally financed by the TUP programme.

(Glen Mildred Leet, Founders,Trickle UpProgramme).

Womenaid International began supporting the Trickle-Up Programme in the late eighties and a Woman of the World Award was presented to Mildred Leet in recognition of the Trickle Up initiative.


100 MILLION BY 2005

7.1 By most accounts, microcredit is an unrivaled success when it comes to helping people out of poverty. But the demand for small loans in the developing world far outstrips supply. The Microcredit Summit set as a goal reaching 100 million of the world's poorest with microcredit by 2005. According to Henry Jackelen, manager of the private sector development at UNDP and creator of MicroStart, a two year pilot programme, "Another problem is the development of the capacity to use the capital available for microfinance organisations." "Building this capacity is the thrust of MicroStart." He sees the goal of reaching 100 million as realistic but it is not going to happen on its own - a global partnership is necessary.

WOMENAID : MICROCREDIT FUND FOR WIDOWS

8.1  Widows need special assistance as a widow has yet another role added to her burdens - that of breadwinner. Widows need longer term development support and income generating activities is one key component of support needed to achieve improvement in the lives of widows and their families. Thousands of women become head of households in the aftermath of war and to them falls the task of helping to rebuild shattered communities and families. If ever a group of people could be identified as vulnerable and in need of supporting partners it is widows and their families.

8.2 A little help at a crucial moment can change the entire future of families. Sometimes it is the small changes that make the biggest difference. WomenAid has established the Microcredit Fund for Widows, and is seeking further financial support. The Fund will provide loans, together with skills training, literacy, group formation and advice, to groups of widows wishing to set up in business. Working directly with groups of widows the WomenAid Microcredit Fund for Widows will ensure a brighter future for thousands of women and children in need.

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