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Indian micro-credit crisis puts poor women in a bind

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By Rama Lakshmi, Published: April 26

Budhavaripeta, India — Husaina Abdul Nabi turned to micro-credit companies in the past six years to buy a noodle-making machine, pay her disabled husband’s health bills and send her children to school.

But a crisis in India’s private micro-credit industry — fueled by a spate of suicides blamed on abusive lending practices here in the southern state of Andhra Pradesh and a subsequent legal clampdown — is driving women like her back to traditional village moneylenders.

 

(Rama Lakshmi/ WASHINGTON POST ) – NAGALUTI , INDIA:   Lakshmidevi Narayana, 50, runs her own grocery shop which she bought with microcredit a few years ago, in Nagaluti, India.

“There have been no new loans for the last six months. Women are getting desperate now and have no other option,” said Nabi, 40, who runs a business in this hamlet making Indian-style noodles to support her family of six. The moneylender made Nabi pledge her family jewelry and charges her 120 percent interest on the loan.

“The moneylenders are back in demand now,” she said. “They are drinking our blood.”

Analysts say they worry that the prevailing climate of distrust, default and desperation in Andhra Pradesh, which has the highest number of micro-lending businesses in India, may have reversed a decade of work toward the goal of financial inclusion for poor women.

Inspired by Grameen Bank, the Bangladeshi Nobel Peace Prize-winning institution that launched the micro-credit revolution, millions of poor Indian women have organized themselves into groups since the mid-1990s to qualify for small, uncollateralized business loans. India’s formal banking system, with just 30 percent of its branches in rural areas, has long been inadequate to meet the credit needs of most rural households.

In the past few years, scores of for-profit companies have sprung up across rural Andhra Pradesh, handing out small, easily obtained loans. The industry grew at a rate of 70 percent annually, but loan recovery practices were often coercive. The state government attributes at least 93 suicides to abuses and has imposed a strict law that observers say has brought the industry to a halt.

“If there are a few road accidents in the night, you don’t ban all nighttime traffic,” said Vijay Mahajan, the president of the Microfinance Institutions Network and the head of Basix, one of the oldest micro-lending companies. “There is no doubt that there was widespread wrongdoing by three or four companies, but the new law is draconian.”

The political backlash against the companies has also triggered widespread willful default by women across Andhra Pradesh, where about $1.5 billion in unpaid loans has accumulated.

“When the loan recovery officers come to the village, we chase them away,” said Ramanamma Annayya, 35, of Nagaluti village, who runs a granite mine and wears a man’s shirt over her floral-printed sari. She has four unpaid loans. A woman in her village killed herself in September by drinking pesticide after micro-credit companies harassed her when she defaulted.

“Now we want the government to write off all these loans given by the private companies,” Annayya said.

That trend worries many who built the movement.

“It took us so many years to demonstrate that poor women are creditworthy too,” said Vijay Bharati, a woman who developed women’s self-help groups in 27 villages. “But the women who were so regular in repaying for the last 15 years are now waiting for a waiver of their loans. This is damaging our movement.”

The movement’s success is visible in villages such as Oravakallu, where women have used credit not only to alter their lives but also to shape the community’s future, building a new school where children will be taught English.

“When money started coming into our hands, we became fearless,” said Ramakka Lakshmana, 60, who is illiterate and owns a small mango orchard.

 

 

(Rama Lakshmi/ WASHINGTON POST ) – NAGALUTI , INDIA:   Lakshmidevi Narayana, 50, runs her own grocery shop which she bought with microcredit a few years ago, in Nagaluti, India.

Meanwhile, micro-credit companies are also trying to reinvent themselves. Delegates met at a New Delhi conference recently and vowed to set up a complaint-handling system, treat borrowers with dignity and not choose profits over the women’s prosperity.

“When you are dealing with poor, illiterate or semiliterate borrowers, you have to do away with the goal of achieving 100 percent loan-recovery rate,” said R. Prabha, an adviser to Sa-Dhan, a micro-finance company that evolved a code of conduct for the industry. “You have to have a policy to deal with genuine and willful default.”

A few companies have begun looking at different business models — such as giving loans against women’s gold jewelry — in an effort to survive in the state.

Next month, India’s federal reserve bank is expected to announce new national regulatory guidelines for micro-credit firms. But the Andhra Pradesh state law is unlikely to change, say officials.

Under the new state law, firms must submit to a maze of bureaucratic scrutiny before they can give out a fresh loan.

“It was a free-for-all earlier,” said Aviligonda Govindappa, a rural development official in Kurnool district. “We need to ensure that village women’s need for credit is not exploited.” The state government has said it will also soon set up its own finance institution for small loans.

State law now prohibits loan recovery officers from visiting a woman’s home, stipulating that debts can be collected only in the presence of other women.

“When I go to ask for loan repayments, I sit in the village school or the council building and wait for the women to turn up,” said Pamula Pedanna, a manager with the micro-credit company Spandana Sphoorty. “Earlier, they would wait for me on the assigned date with money in their hands. Nowadays, they don’t come even after I send word.”

Microlending has helped make BTPN one of Asia’s most profitable banks – Economist

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Indonesian microfinance -Rich pickings

Apr 20th 2011 | Jakarta | from the print edition

MENTION microfinance in Asia and thoughts usually turn to India, which is struggling to regulate the industry, and Bangladesh, where Muhammad Yunus, the Nobel prize-winning founder of Grameen Bank, has been turfed out of his job. Indonesia offers a brighter picture. There, a range of lenders is successfully funnelling credit to its entrepreneurial poor.

They include Bank Rakyat Indonesia, a state-owned behemoth that had a whopping $7.4 billion in microloans outstanding in September and operates throughout Indonesia’s many islands. Non-profit lenders, pawnshops and co-operatives also swim in the microcredit sea.

So, too, do private-sector banks. Among the keenest of them is Bank Tabungan Pensiunan Nasional (BTPN), which entered the market in 2008 after a buy-out by Texas Pacific Group, a private-equity firm. BTPN’s microloan portfolio doubled in 2010, for the second year in a row, to 4.6 trillion rupiah ($500m) or roughly 20% of the bank’s total loan book. The bank, which was founded in 1959 to serve retired bureaucrats, boasted a racy 4% return on assets in 2010. Microloans, which command higher yields to reflect greater risk, had a 14% net interest margin.

Most of BTPN’s firepower is concentrated on Java, Indonesia’s most populous island, and on the family firms that are the lifeblood of the informal economy: market traders, household producers, repair shops and so on. A typical loan is for $3,000, usually for a year or two, with annual interest rates of around 25%. Many opt for daily or weekly loan repayments. With the economy growing rapidly, many small businesses are eager to expand.

Customers are often too busy to drop in to the branch so BTPN equips its staff with portable electronic devices that have been customised to scan fingerprints as well as bank-issued cards. A fingerprint detector is handy for customers who are illiterate or have an inconsistent signature. The device also zaps data back to head office so that management can keep tabs on loans and deposits in real time, instead of waiting for forms to arrive from BTPN’s 1,000-plus branches, triple the number in 2008.

The new branches are mainly outside city centres and are decidedly bare-bones. At a poky BTPN branch in Ciracas, on the southern rim of Jakarta, a dog-eared sign hangs on the door and the floor could use a polish. This is deliberate, says Jerry Ng, the bank’s chief executive. Low-income customers “don’t dare” to walk into a posh banking hall (BTPN’s branches in central Jakarta are much plusher). Retired people get a tailored approach, too: BTPN operates branches that open at 5.30am on the first of the month, when state pensions are paid.

For its microborrowers, BTPN offers free training courses on financial skills. On a recent afternoon in Ciracas, 20 or so mostly female customers squatted on straw mats as an instructor handed out envelopes marked with different coloured squares to signify things like household expenses and savings. The courses seem to be popular with entrepreneurs. They also give bankers a way to size up borrowers: those who struggle to separate petty cash from capital might not be ready for the big time.

BTPN’s breakneck expansion is bound to slow this year, though Mr Ng predicts the bank’s overall loan-growth rates will still be in the high 20s (from 48% in 2010). Mr Ng is working on a strategy for what he calls the “productive poor”, who are a rung or two below micro-entrepreneurs, and are mostly served by non-profits.

In India some politicians have cast commercial microcredit lenders as villains. So far, there is no whiff of a backlash in Indonesia. Most Indonesians accept the principle that nobody will invest capital unless they expect a return, says Nick Cashmere of CLSA, a brokerage. BTPN’s customers seem happy enough, too. Daniel Ginting, a fruit vendor, already has a 100m rupiah loan charging 2.6% a month. Now he plans to open a string of air-conditioned shops to sell his produce. “I’m sure BTPN will give me the loan because it needs customers like me,” he says.

How For-Profit Lenders Are Serving Microentrepreneurs

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Mar 2011, Gomez, L. & Edgcomb, E.

Examining the microenterprise finance landscape in the U.S

The paper examines the landscape of financial access for microenterprises in the U.S. in the aftermath of the financial crisis. It observes that the funding scenario has changed drastically after the crisis. As funding dried from traditional sources, a number of for-profit organizations working in the retail financial services arena began to fill this void by offering microloans to microbusinesses.

The paper analyzes the approach that for-profits have taken with respect to methodologies, the use of technology, product and pricing features. It explores the impact of the changing market place and emergence of ‘new players’ on the non profit lending industry, in terms of:

  • Overlaps in target markets between existing non profit and emerging ‘new players’;
  • Lessons in Scale Up that nonprofit microlenders can learn from the experiences of for-profit lenders;
  • Opportunities that might exist for collaboration between non profit and for profit lenders.

http://www.microfinancegateway.org/gm/document-1.9.50636/ForProfitLenders-publish.pdf

Poor still benefit when microcredit reaps megaprofits

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Michael Green

IS it right to profit from the poor? This question has sparked a civil war in the business of microcredit – making small loans to the poor in developing countries – and badly tarnished the image of what had been seen as a rare success story in the fight against global poverty. Who wins this battle about how best to deliver aid could determine whether hundreds of millions of people get the chance to escape abject poverty.

The controversy began last year when reports emerged that farmers in the Indian state of Andra Pradesh committed suicide because of the usurious rates of interest being charged by microfinance providers. In October, the state government issued an ordinance that imposed severe restrictions on microlenders in order to, it claimed, protect borrowers from “being exploited by private microfinance institutions through usurious interest rates and coercive means”.

Much of the blame fell on SKS, a microlending business that had expanded rapidly by raising money from the global capital markets. The need to make profits to satisfy these commercial investors, it was alleged, had driven up the loan rate charged to the poor, with fatal consequences.

Related Coverage

SKS’s share price slumped 50 per cent when Andra Pradesh introduced the legislation. Things got worse this year when the man who started the microfinance revolution, Nobel Peace Prize-winner Muhammad Yunus, wrote in The New York Times not to defend but to denounce. “In the 1970s, when I began working [in Bangladesh] on what would eventually be called ‘microcredit’, one of my goals was to eliminate the presence of loan sharks who grow rich by preying on the poor”, he lamented, “I never imagined that one day microcredit would give rise to its own breed of loan sharks.” Ouch.

On the surface, the charges of robbing from the poor to give to the rich look pretty damning. SKS charges interest rates of about 25 per cent, , enough to make your average Australian’s eyes water. One of its commercial backers, California-based venture capitalist Vinod Khosla, made a handsome $117 million profit when the company’s shares went on sale in the middle of last year.

Yet microcredit is an expensive business. With many thousands of borrowers, microfinance institutions need a lot of staff to administer the loans. And since each loan is small, the margins to cover these costs are wafer thin. Even Yunus’s Grameen Bank lends at 20 per cent.

In an ideal world, there might be philanthropic dollars aplenty to help microfinance providers. In the real world, where it is estimated that there are now about 150 million poor people using microfinance but up to one billion reliant on real loan sharks, there’s simply not enough aid money to get the industry to scale. Better, say firms such as SKS, to charge borrowers a bit more and grow the business with commercial capital.

But what about those suicides? The stories are hard to substantiate and SKS vigorously denies that this is a problem among their clients. Its defenders say SKS had started to ruffle feathers in Andra Pradesh by eating into the business of official and unofficial lenders tied to local politicians. In 2003, SKS had 11,000 clients: by last year it had nearly 6 million. It is these vested interests that are alleged to have orchestrated the campaign to blacken SKS’s reputation to teach the upstart a lesson. (Yunus was the victim of the toxic politics of his own country when Bangladesh’s Prime Minister, Sheikh Hasina, had him removed from the board of the Grameen Bank he had founded on the ludicrous charge that his appointment had been unlawful.)

The microfinance business has so far weathered this storm reasonably well. Indeed, it may prove a useful warning to the industry that it needs to be cleaner than clean, given its altruistic goals. But there are bigger battles to come in the debate about the role of profit in serving the poor.

A new wave of business-minded philanthropists, who we call “philanthrocapitalists”, are getting excited about a host of other business opportunities to serve the poor. One of them is Khosla, who has said he will plough most of his fortune back into philanthropy through traditional charity and investments such as the one he made in SKS that paid off so handsomely.

Citing the great Indian economist C.K. Prahalad, author of The Fortune at the Bottom of the Pyramid, philanthrocapitalists believe that it is profit that will drive a massive wave of investment in basic services for the poor such as water and sanitation, healthcare and education. The American bank JPMorgan predicts that these new business opportunities, which it calls “impact investments”, could be worth $1 trillion over the next decade.

We in the developed world might feel uncomfortable with businesses providing services that we expect government to deliver. The critics will quickly leap in with the charge that investors are profiting from the poor. But in a world of limited and dwindling aid money, profit may be our greatest ally in the fight against poverty.

Michael Green is the co-author, with Matthew Bishop, of Philanthrocapitalism: how giving can save the world

To Catch A Dollar: A Sundance Movie Review

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Michelle Malsbury, BSBM, MM
April 01, 2011
Last evening I had the privilege of seeing this wonderful movie about Grameen Bank and Mohammed Yunus. It was called “To Catch A Dollar”. In 2008 Mohammed Yunus won the Nobel Peace Prize for microfinance. His groundbreaking work with Grameen Bank sets him apart from most financiers. However, he still adheres to the adage that it “takes money to make money”, just on a slightly less grand scale. Hence, the dollar theme.

The story revolves around the Nobel Laureate, Mohammed Yunus from Bangledash, India. He has travelled all over the world, but began his plan for change in his home, India. India has a large population and much of that population is quite impoverished. The people there suffer from an array of maladies some of which could be solved if they had some money and hope. Mr. Yunus wanted to change the dynamics of his society for the betterment of ALL her citizenry. His plan was simple and genius! He created what is known as microfinance.

Mr. Yunus saw a need to loan money to women who were under the poverty level in his country because they had no credit, no credit scores, no collateral, and no way for any bank to serve them. He set out to loan between $500 and $3,000 to each one. He did not collateralize these loans, but did make some requirements that would help these lucky ladies to become self-sustaining, productive, members of their society. Here´s how the plan works.

The money was conditionally lent out to groups of five women. All women had to be under the level considered impoverished and could not be on any other state assistance plan. Businesses ranged from hair salons to nail salons and from chicken hatchers or goat herders to shoe sales or catering businesses and more. Each woman served as support for her team and met each week for one hour to see how these new business ladies were progressing. They discussed an array of business topics pertinent to their new positions. One member from the Grameen Bank was also present to check in with these ladies and to collect the funds for repayment of the loans. There were also some other interesting twists to what had to be done by these ladies who were lent funds. Each step was thoughtfully intended to help them get out of poverty and make something of their lives.

Contingencies to money being lent also expressly designed a plan where each lady had to sock away a whopping two dollars each week into savings accounts and make weekly, affordable payments to Grameen for these loans. Larger loans, than the $3,000 max individual loan, could be taken out if all members of the group could concur and continue in the practices that had been outlined for them by their loan officer at Grameen. Over a period of time these loans had a 99% plus payback ratio and have helped many many deserving women in India to achieve their dreams.

This microfinance plan was so successful that it was implemented in Ghana: New York City: Omaha, Nebraska: San Francisco, California. Target women for this microfinance program have typically been new immigrants to the USA because they are so motivated toward making a place for themselves and working hard to achieve that end. Can this type of financing translate into other segments of our society and perhaps be the cure for what ails our banking and investment system? I say I believe so.

To date more than 5,000 loans have been made by Grameen to women of various backgrounds and over $15 million dollars have been invested in this program. For more information about this special man, Mohammed Yunus, or Grameen Bank please preview some of his news video´s on YouTube.