November 2008: Urge Senators to Sign the Microfinance Letter to the World Bank
Bank failures, loan defaults, government bailouts . . . these aren’t headlines about developing countries, but about the U.S. and the global financial crisis that has arisen as a result of our reckless financial practices. Unfortunately, small profit margins and a focus on the poor have made many microfinance institutions (MFIs) extremely vulnerable to the current financial crisis. Although the poor in developing countries are the least responsible for it, they are the hardest hit. The global credit crunch is limiting the ability of MFIs to get loans from banks, and private investors are pulling back as they see their portfolios shrink. Now more than ever, public investment in microfinance is needed to mitigate the impact of the crisis on the poorest and ensure MFIs can continue to invest in people. As we reconsider our consumerist culture and what we thought we knew about banking, we should reflect on the priorities and successes of “bankers to the poor” such as Grameen Bank in Bangladesh, Jamii Bora in Kenya and Fonkoze in Haiti. They’ve turned traditional banking on its head, proving that lending to the poorest and even the most destitute is possible. But this success is a result of a different set of priorities: for them, the power of finance is not in making money, but in providing millions of people living in poverty an opportunity to change their lives. Their clients also have a different set of priorities: not to keep up with the Joneses, but to earn income to feed their children and send them to school, to replace their roof of straw with wood or metal, and to access health care. In sum, microfinance offers an opportunity to restore the dignity and hope that poverty strips away. With many successful MFIs reporting enviable average repayment rates of 90 percent and higher, and with nearly 100 million poorest clients reached last year, we could learn much from these revolutionary bankers and clients.[2] As the World Bank considers how to leverage resources and maximize every dollar spent to fight poverty, it should focus on increasing its investment in microfinance through innovative initiatives. It’s not only the smart investment, it’s the right one.
What is microfinance?Microfinance is the provision of small loans (usually starting at $50 or less) and other financial services to the poor, who are deemed too risky by traditional banks and turn to loan sharks. Financial services provide the poorest with the ability to earn profits and provide their families with education, health care, and safe housing. Nobel Peace Prize laureate and founder of Grameen Bank, Muhammad Yunus, notes the first thing a woman does is “bring her children home” from forced servitude. How is the financial crisis impacting microfinance?“Main Street” in many places around the world is an unpaved, unmarked trail through small villages and slums. The local bank is a microfinance institution (MFI), usually not even located in the village, but with dedicated loan officers traveling between villages to meet clients. Though worlds away from Wall Street, MFIs and their clients are still affected by what happens there. The lack of liquidity (credit) in global financial markets is causing many formal banks to decrease loan availability for MFIs and raise interest rates commensurate with the rise in inter-bank loan rates. Private investors are also curtailing their lending to compensate for declining portfolios. As a result, MFIs around the world are faced with dwindling capital to loan to poor clients. To maintain sustainability, many are forced to take steps such as slowing outreach to new clients, limiting access to financial services, and even considering raising interest rates. At the same time, the fluctuations in the cost of food and fuel are straining the resources of MFIs and their clients. With rising inflation and the cost of basic staples increasing, incomes globally are diminishing as purchasing power falls. Many MFIs report that inflation has created hardships for their employees on modest salaries and increased basic business costs, including making it much more expensive to travel, even by motorbike, to small villages to service their clients. Many clients are cutting back on meals and substituting cheaper but less nutritious food. They are taking on extra jobs, demanding greater contributions from family members, and are experiencing increased difficulty saving. On top of that, consumer demand for their goods is falling as everyone is struggling to make ends meet. This downward spiral is making it more difficult for clients to repay their loans, although many MFIs are trying to help with loan adjustments whenever possible.[3] Why is it even more important now for the World Bank to support microfinance?UN Secretary-General Ban Ki-Moon warns that the credit crunch has compounded the ongoing food, energy, and development crises and thus “could be the final blow that many of the poorest of the world’s poor simply cannot survive.” [4] The World Bank warns that the financial crisis will add to the already 100 million people pushed into poverty this year by the food crisis this year, threatening to undo our progress in achieving the Millennium Development Goal to halve poverty by 2015. [5] While not a panacea, microfinance is an important development tool that has been underutilized by the Bank. The U.S. Senate must ask the World Bank to: 1) create a new $200 million grant facility for MFIs trying to reach the very poor; 2) create and support Centers of Excellence, like Grameen Bank and Jamii Bora, where MFIs can go to learn how to increase outreach to the very poor; and 3) create new and support existing wholesale funds (“apex funds”), especially in sub-Saharan Africa, which help to provide MFIs with access to capital. [6] Recent past congressional action on the World Bank and microfinanceIn October 2007, President Zoellick came to Capitol Hill to meet with 27 representatives and two senators (Sens. Enzi and Brown) to discuss Congress’s concerns with the World Bank’s low investment in microfinance. In February 2008, Sens. Bennett (R-UT), Durbin (D-IL), Enzi (R-WY), and Brown (D-OH) initiated a Senate letter calling on World Bank President Zoellick to meet again. Thirty senators signed the February 2008 letter, including 11 Republicans: Bennett (R-UT), Durbin (D-IL), Enzi (R-WY), Brown (D-OH), Murkowski (R-AK), Lieberman (I-CT), Cardin (D-MD), Bayh (D-IN), Murray (D-WA), Boxer (D-CA), Stabenow (D-MI), Hatch (R-UT), Lugar (R-IN), Chambliss (R-GA), Levin (D-MI), Coleman (R-MN), Nelson (D-FL), Casey (D-PA), Mikulski (D-MD), Klobuchar (D-MN), Inhofe (R-OK), Isakson (R-GA), Obama (D-IL), Clinton (D-NY), Schumer (D-NY), Feinstein (D-CA), Burr (R-NC), McCaskill (D-MO), Martinez (R-FL), Cantwell (D-WA). [1] Forbes, “World Bank chief to G7: Don’t forget human rescue,” 9 October 2008, http://www.forbes.com/afxnewslimited/feeds/afx/2008/10/09/afx5531829.html. [2] Microcredit Summit Campaign, “State of the Microcredit Summit Campaign Report 2007.” [3] For more information on the impact of the financial crisis on microfinance, please read the October 2008 issue of Microcredit Summit E-News, “Addressing the global financial crisis and fluctuating food and fuel cost.” [4] Patrick Worsnip, “Global crisis threatens to undo all UN’s work-Bank,” Reuters, 24 October 2008, http://www.alertnet.org/thenews/newsdesk/N242020.htm. [5]http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21943106~pagePK:64257043~piPK:437376~theSitePK:4607,00.html [6] MFIs in Bangladesh may be only slightly impacted, since many borrow from the very successful Bangladeshi apex fund, PKSF. |