Beyond the hype is hope
Published Aug 15, 2022 12:05 am
FROM THE MARGINS
Microfinance – previously known as microcredit — had a simple premise: giving small loans to the poor would help their microenterprises, which would lift them out of poverty. When they pay back the loan, the money can be lent to other borrowers, improving the lives of more families. For decades, it was touted as the silver bullet to cure global poverty. In 2015, it was estimated that over 125 million people, 80 percent of them women, had availed US$100 billion worth of microloans.
In the Philippines, microfinance also started as microcredit. It was pioneered by NGOs and cooperatives which provided small credit at easy terms to their members. The loan process was simple, allowing borrowers without access to banks to apply for capital to kick-start or keep afloat their microenterprises. With market-based interest rates and flexible repayment (daily, weekly or semi-monthly), it was suited to poor households as no collateral, credit history, or cumbersome documents were required.
From microcredit to microfinance
The business model allowed NGOs and coops to lend to the poor at reasonable returns. It was a win-win solution: poor borrowers were given access to capital without resorting to loan sharks, and providers met their development objectives without depending solely on aid or grants. It disproved the stereotype of the poor being high-risk borrowers, as loan repayment was high and success stories of clients abound. Later, these NGOs and coops encouraged their borrowers to start saving money for future needs, and thus, microcredit was transformed into microfinance.
As their clients’ lives improved and their operations expanded, microfinance institutions (MFIs) departed from the Grameen-based group lending scheme and explored other business models. When their clients’ needs grew more complex, MFIs offered other financial services, like credit, savings, microinsurance, and remittance. Others even ventured beyond microfinance and offered education, health and business development services.
In 2010, Mary Ann Parado, a weaver from Quezon, took a ₱5,000 microfinance loan for a buri-making enterprise. After several loan cycles, she was able to save and became eligible for higher loans. She borrowed funds for expansion. Her handicrafts became popular, especially when she customized them as party souvenirs. By availing of microfinance loans, she was able to grow her business, which now has clients here and abroad.
Mary Ann is a microfinance success story, as she was able to lift her family’s living standard. She is able to help her community by providing livelihood. She is grateful to her microfinance organization for providing her family with loans, savings, microinsurance, health and other services for many years.
Beyond the hype
The narrative of poor people’s transformed lives after accessing small loans – as in Mary Ann’s case – is truly inspiring. But eliminating poverty is incredibly complex. As the development community has learned in recent years, microcredit is not a silver bullet that cures poverty. Studies across different countries and settings showed that it has a positive yet relatively modest impact on people’s lives, but not up to the extent that was expected.
Does this mean that microfinance is a failure? Hardly.
First, the cross-country studies often cited to disparage microfinance as a tool for poverty alleviation only evaluated microcredit programs. Credit is but one component of microfinance, which covers savings, insurance, and fund transfers. Other models, like microfinance-plus, which provides training, health care and other interventions along with credit, have surely improved the lives of the poor, as documented by practitioners worldwide.
Second, it is established that microfinance has opened up financial services to poor people across many countries. More importantly, MFIs are innovating and paving the way for more financial and social services to reach the poor.
Rather than looking at microfinance in the way microcredit was portrayed in its heyday – as a means to get people out of poverty – we should see it through the lens of financial inclusion. Microfinance gives the financially excluded – the poor, the unemployed, the less educated, and the marginalized sectors — access to funds to meet their needs, support their enterprises, and prepare for emergencies. This benefit, along with the sustained growth of MFIs worldwide, prove the continuing importance of microfinance.
Third, microfinance, if provided on a sustainable basis, could help the most marginalized families and communities. Evidence of this has provided the impetus for government regulators in many countries to mainstream microfinance in the banking sector. It was certainly our experience, as documented in “No One Left Behind: the Philippine Financial Inclusion Journey,” which was published by the BSP in 2020.
Hope
The key, then, is managing our expectations. Contrary to the hype, microfinance is not a magic formula that could wipe out poverty at one stroke. But it provides hope for the financially excluded, giving them a chance to improve their lives. With digitalization, microfinance remains a beacon of hope to break more barriers in social and financial inclusion.
This brings to mind Glenda Bayon-on, a microfinance client from Masbate. Glenda grew four different enterprises out of her initial ₱5,000 loan. It enabled her to help her family and community. As she described her microfinance experience, I found her words very inspiring: “The sea is vast; so are the ways we can get out of poverty.”
(Dr. Jaime Aristotle B. Alip is a poverty eradication advocate, He is the founder of the Center for Agriculture and Rural Development Mutually-Reinforcing Institutions (CARD MRI), a group of 23 organizations that provide social development services to eight million economically-disadvantaged Filipinos and insure more than 27 million nationwide.)
Microfinance – previously known as microcredit — had a simple premise: giving small loans to the poor would help their microenterprises, which would lift them out of poverty. When they pay back the loan, the money can be lent to other borrowers, improving the lives of more families. For decades, it was touted as the silver bullet to cure global poverty. In 2015, it was estimated that over 125 million people, 80 percent of them women, had availed US$100 billion worth of microloans.
In the Philippines, microfinance also started as microcredit. It was pioneered by NGOs and cooperatives which provided small credit at easy terms to their members. The loan process was simple, allowing borrowers without access to banks to apply for capital to kick-start or keep afloat their microenterprises. With market-based interest rates and flexible repayment (daily, weekly or semi-monthly), it was suited to poor households as no collateral, credit history, or cumbersome documents were required.
From microcredit to microfinance
The business model allowed NGOs and coops to lend to the poor at reasonable returns. It was a win-win solution: poor borrowers were given access to capital without resorting to loan sharks, and providers met their development objectives without depending solely on aid or grants. It disproved the stereotype of the poor being high-risk borrowers, as loan repayment was high and success stories of clients abound. Later, these NGOs and coops encouraged their borrowers to start saving money for future needs, and thus, microcredit was transformed into microfinance.
As their clients’ lives improved and their operations expanded, microfinance institutions (MFIs) departed from the Grameen-based group lending scheme and explored other business models. When their clients’ needs grew more complex, MFIs offered other financial services, like credit, savings, microinsurance, and remittance. Others even ventured beyond microfinance and offered education, health and business development services.
In 2010, Mary Ann Parado, a weaver from Quezon, took a ₱5,000 microfinance loan for a buri-making enterprise. After several loan cycles, she was able to save and became eligible for higher loans. She borrowed funds for expansion. Her handicrafts became popular, especially when she customized them as party souvenirs. By availing of microfinance loans, she was able to grow her business, which now has clients here and abroad.
Mary Ann is a microfinance success story, as she was able to lift her family’s living standard. She is able to help her community by providing livelihood. She is grateful to her microfinance organization for providing her family with loans, savings, microinsurance, health and other services for many years.
Beyond the hype
The narrative of poor people’s transformed lives after accessing small loans – as in Mary Ann’s case – is truly inspiring. But eliminating poverty is incredibly complex. As the development community has learned in recent years, microcredit is not a silver bullet that cures poverty. Studies across different countries and settings showed that it has a positive yet relatively modest impact on people’s lives, but not up to the extent that was expected.
Does this mean that microfinance is a failure? Hardly.
First, the cross-country studies often cited to disparage microfinance as a tool for poverty alleviation only evaluated microcredit programs. Credit is but one component of microfinance, which covers savings, insurance, and fund transfers. Other models, like microfinance-plus, which provides training, health care and other interventions along with credit, have surely improved the lives of the poor, as documented by practitioners worldwide.
Second, it is established that microfinance has opened up financial services to poor people across many countries. More importantly, MFIs are innovating and paving the way for more financial and social services to reach the poor.
Rather than looking at microfinance in the way microcredit was portrayed in its heyday – as a means to get people out of poverty – we should see it through the lens of financial inclusion. Microfinance gives the financially excluded – the poor, the unemployed, the less educated, and the marginalized sectors — access to funds to meet their needs, support their enterprises, and prepare for emergencies. This benefit, along with the sustained growth of MFIs worldwide, prove the continuing importance of microfinance.
Third, microfinance, if provided on a sustainable basis, could help the most marginalized families and communities. Evidence of this has provided the impetus for government regulators in many countries to mainstream microfinance in the banking sector. It was certainly our experience, as documented in “No One Left Behind: the Philippine Financial Inclusion Journey,” which was published by the BSP in 2020.
Hope
The key, then, is managing our expectations. Contrary to the hype, microfinance is not a magic formula that could wipe out poverty at one stroke. But it provides hope for the financially excluded, giving them a chance to improve their lives. With digitalization, microfinance remains a beacon of hope to break more barriers in social and financial inclusion.
This brings to mind Glenda Bayon-on, a microfinance client from Masbate. Glenda grew four different enterprises out of her initial ₱5,000 loan. It enabled her to help her family and community. As she described her microfinance experience, I found her words very inspiring: “The sea is vast; so are the ways we can get out of poverty.”
(Dr. Jaime Aristotle B. Alip is a poverty eradication advocate, He is the founder of the Center for Agriculture and Rural Development Mutually-Reinforcing Institutions (CARD MRI), a group of 23 organizations that provide social development services to eight million economically-disadvantaged Filipinos and insure more than 27 million nationwide.)