Tag Archives: Microfinance

Who is Poor? Defining Poverty

This was written for the Kiva Fellows blog.  Read the original here.

How do you define poverty?   A basic needs index looks at whether (and to what extent) fundamental needs are fulfilled – food, water, shelter, clothing – and whether people have access to critical services – education, information (newspapers, etc.), sanitation facilities, healthcare, financial services.  This is an absolute poverty calculation, which uses a standard threshold that can be compared across countries and continents.  Another method is to use a national poverty line, usually a percentage of median income.  For example, if the median income is $10,000 USD, and the poverty line is 60% of that, any family making below $6,000 is technically below the poverty line.  This is a relative poverty calculation, because it is country-specific.  Using this method, it doesn’t make sense to compare across countries, since the poverty line in wealthier countries with higher median incomes will allow for greater purchasing power than in much poorer countries.  In microfinance (and development in general), you often hear about the percentage of the population that lives on less than $1/day – the definition of extreme poverty – or $2/day, or some other defining statistic of poverty.

Statistics are important for microfinance institutions (MFIs).  When you know what you are dealing with, you can more effectively target the population with programs that are proven to work.  It is important for an MFI to understand its clients and where they exist on the spectrum of poverty.  This is actually more difficult to assess than you’d think.  It is not feasible to ask clients how many dollars a day they spend, or even try to determine their income relative to the rest of the population.   Instead, MFIs use social performance metrics – simple tools to help them to define exactly what they are as an organization and whom they are serving.  They are basically proxies, which, when examined in aggregate, give the MFIs a profile of the poverty level of their clients.

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25 Years and Counting

In August of this year, Negros Women For Tomorrow celebrated its 25th anniversary.  The organization commemorated the occasion with an extravagant party titled “Handum” (Dream) with 6,000 attendees, including staff, borrowers, partners, and a pre-recorded message from the godfather of microfinance himself, Muhammad Yunus.  Yunus catapulted microfinance into the mainstream in 2005 when he won the Nobel Peace Prize for his work with Grameen Bank in Bangladesh.  Naturally, most people (including myself until a few months ago) think that it is a fresh, new approach to economic development and poverty alleviation.  At 25 years old, however, NWTF is hardly fresh or new.

As a means of immortalizing the 25-year anniversary, the organization created a book of 25 of the most inspiring stories from its borrowers.  In this blog, I’ve tried to lay out the history and mission of the organization to frame or provide context for other stories.  The foreword to the book, written by the founder of the organization Dr. Cecilia del Castillo, offers a much clearer description of the organization.  I quote it in its entirety here: Continue reading

Yunus v. Compartamos

The following is an article I wrote for The Inductive.

Within the international development community, a debate for the heart of the movement recently came to the fore with the IPO of Compartamos, the largest microfinance institution in Mexico.  Divisive and controversial, Compartamos’ decision to sell shares and publicly list on an exchange is perhaps the clearest manifestation of where the two sides diverge.  One side, led by Muhammad Yunus, founder of the Grameen Bank and winner of the Nobel Peace Prize in 2005, contends that, at its core, the sole fundamental mission of microfinance is poverty alleviation.  The other side argues that the goal must be maximizing profit and, more specifically, ROE (return on equity) – extending services to a previously unbanked population and expanding via revenue growth.  Just about everyone has an opinion on the decision and, at the very least, it allows for a great philosophical and economic debate about the most effective way to assist the billions of people who live below the poverty line.

It’s necessary to first give a little background on microfinance and its role in economic development.  Without going into too many specifics, microfinance describes the provision of financial services to individuals below the poverty line with no material collateral.  Microcredit, specifically, refers to the disbursal of small loans – generally between $50 and $1,000, depending on the sophistication of the institution and the industry in general (average loan with Compartamos is $623) – to individuals that cannot access credit via the traditional banking system.  Given their small size, the cost of servicing these loans, as a percentage of the total, is high.  Remember: it costs the same amount to service a $10,000 loan as it does a $100 loan (salaries, office materials, etc.), and these microfinance institutions often have to track down the borrowers on a weekly basis to collect the interest and principle.  In other words, interest on microfinance loans are higher than one might think appropriate.  In the United States, 50% for a loan may seem exorbitant.  But, when you look at it relative to the alternatives (up to 800% from loan sharks) and the fact that these loans are expensive to service, high interest rates are a necessity.  But at what level are interest rates exorbitant, even for an MFI?  This is the question at the heart of the Compartamos debate.

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