Reaching the unreached - provision of credit to the world's poor

Hard-headed microfinance institutions are showing that lending money to the world's poorest people is a realistic option

Over the past two decades, local institutions in different parts of the world have developed innovative mechanisms to provide credit and savings facilities for those who were traditionally excluded from the formal financial sector. These "microfinance institutions" (MFIs) have devised original financial services delivery systems for the very poor and have succeeded in reaching segments of the population previously unreached by such facilities. They have demonstrated that, contrary to conventional wisdom, the poor are good credit risks and have high savings propensity.

MFIs are now operating in rural and urban areas of Asia, Latin America and Africa within a wide range of social, cultural and economic environments. They use different methodologies, have a number of institutional arrangements and exist in a variety of policy settings, but share a common concern: the alleviation of poverty.

The methodology most frequently used by the leading MFIs is that of "group lending" to units ranging in size from small three-to-ten member "solidarity groups" to village banks composed of approximately thirty to fifty members. Group members collectively guarantee loan repayment, and access to subsequent loans is dependent on successful repayment by all of them. Risks and administrative costs per borrower are thus reduced and the group guarantee serves as a substitute for collateral requirements.

Growing demand

MFIs provide very small short-term loans, usually for twelve months. The prospect of subsequent larger loans is a strong motivation for repayment. Although most MFIs charge a relatively high rate of interest, the repayment rate is notable and demand is increasing, suggesting that it is not the cost but the timely and continual availability of micro finance which is important for poor clients.

The initial focus was on micro-credit facilities, and it tended to be forgotten that provision for saving can be as important as credit if not more so, for poor rural households. In more recent programmes, however, increased attention is being paid to mobilizing voluntary savings in order to make loans more widely available.

MFIs are based on the principle that provision of financial services for the poor must be situated in localities close to the clients, and function as a set of small local units linked by a central body. Several of them have made a specific policy decision to target poor women, first because access to resources and services is even more difficult for them than it is for men, and second because of their stronger repayment performance and willingness to form groups.

Although successful MFIs in different parts of the world have removed conventional misconceptions about the "bankability" of the poor, it must not be forgotten that their services do not reach the majority of the world's poor. Having overcome the initial obstacles to obtaining funds and authorization to set up their programmes, the MFIs thus face the challenge of expanding their operations. With this in view they are trying to reach a stage where, independent of external funds or subsidies, all their costs are met from interest charges, and loan capital requirements are met by borrowing from local commercial sources.

So far, only a handful of commercial banks have shown interest in taking on the micro finance client group. This is because the legal and regulatory framework within which the formal financial institutions operate is not favourable to microfinance practices. Policies which maintain interest rates artificially low, especially for credit to the poor, do not allow the banks to cover their costs and so they have remained outside this field. A fresh approach to this question would encourage the formal banks to extend their reach to sections of the population they have hitherto ignored.

Social and cultural support programmes

Non-governmental organizations (NGOs) have played a vital role in channelling credit and other services to the poor, and growing numbers of them are moving towards transforming themselves into full-fledged institutions specializing in finance. NGOs working at the grassroots level can help commercial banks to reach the poorest clients in remote areas and, where required, monitor, supervise and collect loans.

But in order to alleviate poverty for more than a billion people today, progress in the field of microfinance will have to be complemented with supporting programmes and services, notably taking into account the social and cultural dimensions of development. The responsibility for devising mechanisms to ensure that these additional services also reach a maximum number of poor households resides not with the MFIs but with other development partners.

UNESCO is exceptionally well placed to take up this challenge. It can contribute to the campaign to explore ways and means of increasing access to microfinance for the poor on a commercially viable basis and to develop new techniques for providing appropriate services to this difficult-to-reach population. With this in view, UNESCO has entered into a co-operation agreement with the Grameen Bank (see page 23). It envisages similar forms of collaboration designed to support the clients of other successful MFIs with complementary programmes in the fields of education, science and technology, and culture and communication.

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