Microfinance Unit

[jonSlack]

Microfinance is a term for the practice of providing financial services, usually very small loans, to developing economies. Suggested by the name, most transactions involve small amounts of money, frequently less than 100 USD.

Dr. Muhammad Yunus (Bengali: মুহাম্মদ ইউনুস, pronounced Muhammôd Iunūs) (born June 28, 1940), is a Bangladeshi banker and economist. He is the developer of the concept of microcredit, (founded by Pakistani Dr. Akhter Hameed Khan ), the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans. Yunus is also the founder of Grameen Bank. In 2006, Yunus and the bank were jointly awarded the Nobel Peace Prize, "for
their efforts to create economic and social development from below."

In post-conflict and low intensity environments economic development and/or reconstruction will be needed. While there is, and will continue to be a need, for large multi-million and multi-billion dollar programs, there is also a need support economic activity at the lowest level. Microfinance programs will support that effort.

The unit would consist of teams capable of operating independently and able to disperse and the track funds distributed as well as offer basic business skills training in accounting, inventory management, and other related topics. Collection of the loans would be a goal, but would not decide the success or failure of the teams. Success would be measured by the amount of economic activity the funds dispersed were able to generate.

[pcmfr]

Here's an interesting organization that might be used as a mechanism to support the other side (funding) of the loans.

http://www.kiva.org/

It would be nice to see some requirements for Afghanistan and Iraq showing up on there.

[marct]

I've been following both of them for several years, and they are both quite successful. The micro-loans banks would be *very* useful in Afghanistan and slightly less useful in Iraq. Kiva is a really fantastic program that would work well in both countries. It would probably be a good idea for Yunisto be contacted about ideas for reconstruction.

Marc

[carl]

"Collection of the loans would be a goal, but would not decide the success or failure of the teams."

There are programs like this up and running in the Congo; and they are apparently doing quite well.

The people I talk to about this work indicate repayment of the loan is fundemental to the success of the concept. The object is not only to pump money into the economy, it is to teach the participants business skills and values. One of those skills and values, and an important one it is, is repaying what you owe on time.

My understanding is the recipients start out getting a small loan and if they make their payments on time, the next loan is bigger. They are organized into groups and the groups exert great pressure to make sure the payments are made on time.

Without repayment, the whole thing is just another give away program. Deep down inside I don't think the recipients of give away programs respect them much anywhere.

By the way, the work sounds to be very interesting when I hear about it.

[jonSlack]

"Collection of the loans would be a goal, but would not decide the success or failure of the teams."

I was unclear.

The people recieving the loans need to believe/know that the money is a loan, not a handout.

What I meant by the quoted line, was that when the program is eventually analyzed and audited by a bureaucrat someplace, they must understand that success is defined as generating economic activity and investment, not by a 100% repayment rate. Again, 100% repayment is a goal, but it should not be used as the sole criteria in judging the effectiveness of the program.

[marct]

One of the things I really liked about he micro loan setup was that it wasn't a nameless, faceless bureaucrat who analyzed it - it was your neighbours. Stiffing bureaucrats is, for many people, a game; stiffing your neighbours, however, is another matter.

Marc

[milesce]

The micro-loans banks would be *very* useful in Afghanistan and slightly less useful in Iraq....
Marc

Early last year, I tried to float to an op-ed suggesting that USAID redirect a substantial portion (several billions) of reconstruction funding for Iraq into microloans. While the op-ed didn't go anywhere, I'm still very interested in economic development and what is (or isn't happening).

I'm curious why do you think micro-credit would be less useful in Iraq?

(NOTE: This my first post here -- I first ran across this board a few days ago, and the discussions are fascinating. My only experience with war was NOT a COIN operation, but as an Abrams crewman in the '91 war.)

[tequila]

Microcredit in Iraq

Currently, five microfinance institutions (MFIs) operate in Iraq with the support of USAID and the U.S. military. These MFIs have over 16,500 active clients with a combined outstanding loan portfolio exceeding $18.5 million. These loans are managed through 25 offices in 15 provinces with six new offices to be opened by early 2007.

But the lack of security and banking infrastructure are impeding the development and expansion of the microfinance industry in Iraq. Security is an overriding factor in all aspects of MFI operations. Although implementation of microfinance programs in post-conflict countries such as Sudan, Afghanistan, and Bosnia has generally been successful, there are no real global precedents to draw on for guidance in rolling out successful programs during a war. Security problems have forced MFIs to close their operations in Mosul and Ba’qubah, while offices in Baghdad and Basrah have been severely affected by insurgent activities in those areas.

An underdeveloped banking infrastructure has also hampered the operations of MFIs. The largest MFI uses the state-owned Rafidain Bank to manage the funds for its current $12 million loan portfolio. MFIs cannot transfer funds between branches and have difficulty getting bank staff to process their clients’ loan payments and produce correct monthly bank statements.

[milesce]

Thanks, enlightening response.

[marct]

Hi milesce,

Welcome to the SWC!

On the MFIs, thanks for posting the link to that note, Tequila. It gives a really good Western analysis of why there are problems.

Milesce, I'd made my original statement based on some of those problems but on some other observations as well. When micro-credit first showed up, it was as a neighborhood system with very small amounts of cash - a max of U$200 if I remember correctly. This was used to finance the startup of very small enterprises; basically a street vendor / marketplace type of operation for low cost goods and services.

Given the venue and type of operations, that basically requires that such an economy exists and can provide a reasonable return for an individual. When you start scaling the amounts up, however, you run into the problems that are mentioned in that note Tequila posted. In particular, the note says that "MFIs cannot transfer funds between branches and have difficulty getting bank staff to process their clients’ loan payments and produce correct monthly bank statements". The original marketplace / local neighborhood structure didn't need this type of infrastructure, handling it on a cash basis in local neighborhoods.

The second observation underlying my comments was that in Afghanistan, most of the political / kinship networks were still in place and operating as normal". So, in Afghanistan, you have parts of a marketplace economy and an infrastructure that can mimic the banking infrastructure.

Marc

[selil]

The microfinance loans as done by Yunius is very interesting. There are groups, and commitees, and no culpability. You don't have to pay back the loans. But, almost everybody does. The bank has one of the lowest default rates of any bank and runs as a non-profit. All profits go into a disaster fund. The bank has spun of telephone companies, power companies, education companies, and a lot more. The concept of "making sure they know to pay the loan back", misses the mark. Islam says you can't really loan money, but you can divert a resource for somebody else to use that will be returned at some point. Semantical? Perhaps, but important in considering the cultural values and possible successes.

Another interesting point is almost all of the loans are made to women. Women in primarily Islamic countries creating micro-economies that have direct impacts on health and welfare issues handling the money. This is very powerful change in cultural values.