evaluation on mfi
TRANSCRIPT
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2010
SPEA Honors Thesis
Jennifer Lindsay
[An Evaluation on the Effectiveness
of Micro Finance Institutions]Mentored by Senior Judge David L Welch
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Table of Contents
Introduction .................................................................................................................................... 3
Objective ......................................................................................................................................... 4
Thesis .............................................................................................................................................. 4
The History of Micro Finance .......................................................................................................... 4
Types of Micro Finance Institutions ............................................................................................... 6
How Micro Finance Works .......................................................................................................... 12
Criticism of Micro Finance........................................................................................................... 13
Measurements of Effectiveness ................................................................................................... 16
Figure 1 ......................................................................................................................................... 19
Conclusion and Analysis .............................................................................................................. 20
Suggestions ................................................................................................................................... 22
Bibliography .................................................................................................................................. 25
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Introduction
Living in the United States, a country of excess, it is sometimes easy to forget that in
other places in the world people are suffering from a severe lack of basic needs. Not to say that
poverty does not exist in America, but we are fortunate that it does not exist to such an extreme
extent as it does in other nations. People talk about the need to reduce poverty, but the argument
behind micro finance is that the way to bring people out of poverty and into a better standard of
living is to focus on creating wealth; not just reducing poverty. Because the poor will always be
with you, it is more attainable and measurable to enable the poorest people access to basic needs
like shelter, food and water than to simply make a goal of reducingpoverty. This paper will
evaluate the ways that micro finance attempts try to create wealth in underdeveloped countries.
Micro finance developed from banking systems dating back to the early 1700s, but it
wasnt until the 1970s that it began to branch into the three forms of micro finance institutions
used today. Micro Finance Institutions (MFIs) are classified into commercial, quasi-commercial,
and nonprofit micro finance institutions. Each types characteristics equip it to serve its
members differently. As micro finance institutions are developing, they are becoming
overwhelmingly commercialized. Though commercial MFIs have the most financial support,
their desire to profit prohibits them from being as effective as nonprofit organizations that only
seek to help the poor. On the other hand, nonprofit micro finance institutions only seek social
return, but do not have as much capital to execute their goals as commercialized MFIs. This
evaluation will seek to determine which type of microfinance institution best serves the poor in
terms of wealth creation.
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Objective
This thesis will evaluate the effectiveness of different types of micro finance institutions;
differentiated by their motivation to or not to profit from their services. After identifying the
types of micro finance institutions and determining their differences, the effectiveness of each
one will be compared. This thesis will evaluate the effectiveness of micro finance institutions in
measurable terms like loan repayment rates and number of people served. Evaluating the
strengths and weaknesses of each type of micro finance institution will expose which institution
type should be used to create wealth in impoverished nations today and in the future.
Thesis
The structure of nonprofit organizations is best suited to help the most number of poor
people get and stay out of poverty and help others do the same.
The History of Micro Finance
The history of micro credit is traced back to the early 1700s when Jonathan Swift, an
Irishmen, had the idea to create a banking system that would reach the poor. He created the Irish
Loan Fund, which gave small short term loans to the poorest people in Ireland who were not
being served by commercial banks, in hopes of creating wealth in the rural areas of Ireland. This
idea took years to catch on, but then grew quickly and expanded globally. By the 1800s, the
Irish Loan Fund had over 300 banks for the poor and was serving over 20% of the Irish
population. In the 1800s similar banking systems showed up all across Europe targeting the rural
and urban poor. Friedrich Wilhelm Raiffeisen of Germany realized that the poor farmers were
being taken advantage of by loan sharks. He acknowledged that under the current lending
system, the poor would never be able to create wealth; they would be stuck in a cycle of
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borrowing and repaying without ever making personal economic development. He founded the
first rural credit union in 1864 to break this trend. This system was different than previous banks
because it was owned by its members, provided reasonable lending rates and was created to be a
sustainable means ofcommunity economic development.
The idea of credit unions spread globally and by the end of the 1800s, these micro credit
systems had spread all the way from Ireland to Indonesia. At the turn of the century similar
systems were opening in Latin America. Whereas in Europe the credit unions were owned by its
members, in Latin America the institutions were owned by the government or private banks and
were not as efficient as they were in Europe. In the 1950s donors and government subsidies
were used to fund loans primarily for agricultural workers to stimulate economic growth but
these efforts were short lived. The loans were not reaching the poorest farmers; they were often
ending up in the hands of the farmers who were better off and didnt need the loans as critically
as others. Funds were being lent out with an interest rate much below the market rate and there
were not enough funds to make this viable long term. These loans were rarely being repaid, so
the banks capital was depleting quickly and when the subsidized funds ran out, there was no
more money to pump into the agricultural economy in the form of micro credit.
In the 1970s the biggest developments in micro finance occurred. Grameen Bank in
Bangladesh started off as an action based research project by a professor who conducted an
experiment credit program. This nonprofit program dispersed and recovered thousands of loans
in hundreds of villages. The professor tried to extend this idea to other bankers in Bangladesh,
but they were afraid that it was too risky as a business and turned down the offer. Grameen Bank
is now one of the worlds largest micro finance institutions with over 4 million lenders. By the
1990s lenders had learned how to increase loan repayment rates enough to make micro finance
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institutions sustainable. They targeted women as borrowers and gave them money to invest in
businesses that would increase their income and charged very low interest rates so the borrowers
could pay back their loans and still have money, i.e. create wealth, for themselves. This is when
the term micro finance was coined to replace micro credit, because the new institutions were
doing more than making loans; they were offering other financial services to the poor like
savings accounts, insurance and money transfers.
Aforementioned, banks are increasingly becoming commercialized. The first commercial
microfinance institution was founded in Bolivia in 1992. The founders of this commercial MFI
were originally the founders of a nonprofit MFI in 1986 called PRODEM. PRODEM grew so
rapidly that after 2 years, it had more people desiring loans than they could support. They then
created BancoSol to meet the growing needs of the borrowers in Bolivia and became the first
ever MFI to issue dividends. Nonprofit micro finance institutions are successful, but reach a
capacity of lending when they run out of donations. There are currently over 10,000 micro
finance institutions serving 16 million people. The trend now in 2010 is shifting away from
donating to nonprofits and towards investing in commercial micro finance institutions.
Types of Micro Finance Institutions
The original type of micro finance organization was the nonprofit MFI. The source of
funding for nonprofit MFIs is the publics money; mainly donations from philanthropists who
are not seeking a return on their money. Nonprofit micro finance institutions have been critical
in the experimental phases of micro finance development. These organizations are able to take
more risks because they are not trying to make money to pay back their investors (in this case
donors); they are merely trying to make enough money to continue operating their organization.
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Nonprofits primarily rely on donations and subsidies to operate their organization, but this
money eventually runs out especially now that there is an option to invest in commercial MFIs
and get a return on investment. Loans from nonprofit MFIs are unsecured, which means they
are lent out without collateral. This makes lending very risky because in the chance that the loan
isnt repaid, the MFI has no means of collecting the money they lost on the loan. The nonprofit
MFIs simply lose the money. The repayment structures of loans from nonprofits are generally
very simple and lent with interest rates below market price.
Grameen Bank was a very successful nonprofit MFI, however it has not been able to be
mimicked on such a large scale. An example of a typical nonprofit micro finance institution is
Jamii Bora which began in 1999 in Nairobi, Kenya. In the mission statement of Jamii Bora
(which in Swahili means Good Families) it is expressed that their goal is not to profit, but rather
to assist members in getting out of poverty and making a better life for themselves and their
families. Ingrid Munro began this organization by loaning money to 50 beggars and in 11 years
it has grown to have over 60 branches and serves 130,000 people. Though the people who
borrow from them dont always pay back their loans quickly, they always pay them back
eventually. The fast climbers as Munro calls them, climb out of poverty in a year to a year,
but some of the slower climbers take 5 or 6 years to pay back their loans.
The average loan that Jamii Bora lends out is $95 and 85% of the loans they give out are
for less than $100. Munro explained that the institution loses money on the small loans, but has
so much confidence in its programs impact that it is willing to take the loss because they know
everyone will eventually climb out of poverty. Though this is admirable, an organization cannot
sustain itself on this type of mentality. Administration costs are high for micro finance
institutions, but Jamii Bora has been very innovative in trying to keep administrative costs low.
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They continue to provide services and help people who have climbed out of poverty stay there
and help others do the same. Jamii Bora seeks social return rather than monetary return which is
exemplified in its structure that is set up to benefit the poor in every way possible. Aside from
Munro, the founder, every worker in Jamii Bora was a former beggar from the slums of Nairobi
who climbed out of poverty from a loan from the institution. Munro believes that a person who
has lived in poverty and made an effort to get out has much more knowledge in how to help
others do the same than any MBA she could hire. The organization survives because it is
employed by its own members. Jamii Bora only hires its own members because they believe
money isnt the only way to assist people to create wealth; they believe treating someone with
dignity and giving them responsibilities to help others is just as critical to the process.
Jamii Bora is clearly more concerned with the personal development of each of its
members than it is to profit from their services. They offer counseling for poor people struggling
with alcoholism, medical insurance for people with AIDS who cannot get coverage and is
currently working on getting its members clean water and a place to live. Their most recent
project is creating a town for the poor made by the poor. Not only does this provide shelter for
the people in Nairobi; it creates jobs for its people too. To get a loan, a person must become a
member of Jamii Bora and save money in their bank until they have saved half the amount of the
loan they wish to borrow. Before taking out a small loan, Jamii Bora employees help the
borrower find a way to turn their specialties into a profitable business. When the loan has been
repaid and the borrower has started making money, they can purchase a home with plumbing,
two bedrooms, a kitchen, a gathering room and a room for storage for a very low price. The poor
people are building these homes, and many of the jobs are paid in terms of shillings for a roof or
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bricks for the foundation of their home. Jamii Bora is committed to the social and economic
development of all its members, which exemplifies the nonprofit MFIs goal of social return.
Though Jamii Bora is the largest nonprofit micro finance institution in Kenya, parts of
their system are seriously flawed. One benefit of commercialized banking is that they are
required to be transparent and are accountable for their lending decisions. Nonprofits dont have
these requirements. Jamii Boras website is the main way people learn about the MFI, but it is
not kept up to date with information on loans being lent out and when they are being repaid.
Their most beneficial information is a few years old. Another flaw in their structure is that they
are constantly losing money on the loans they give out. Since they are a nonprofit institution,
they do not give loans based on whether a borrower has collateral, so they dont have any way to
guarantee they will be repaid. Loaning in good faith is admirable, but cannot sustain itself long
term.
KIVA is another nonprofit organization whose goal is to connect people who are
investing and people who are borrowing all across the world via the internet. KIVA resembles a
quasi-commercial institution because although it is a nonprofit organization, it gets funding from
private investors and decides loan size on the borrowers collateral. Lending is done online to
connect the most number of people possible, and there are currently lenders and borrowers in
195 countries connected through the website. Potential borrowers go to KIVA representatives
and give them a brief history of themselves, an amount they would like to borrow and an
explanation of their plan for the money, and set up a repayment schedule. This information is
translated into English and posted with their picture on the website. Lenders can search the
website for a person they want to sponsor and can pay as little as $25 to sponsor an entrepreneur.
Lenders are given updates on the person they sponsored so they can see how their money is
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being used every time they log onto their account. Lenders and borrowers are able to email each
other to share how the loan is helping the borrower. When a lender gets their money back they
can either take it to sponsor another person or donate that money to KIVA to cover operational
costs.
KIVA requires high interest rates (around 11%) because they need to secure that they will
get their initial investment back. Some interest rates in KIVA are as high as 36% because they
need to cover the transaction cost of the loan. These rates are low compared to the loan sharks in
poor African villages who charge up to 300% interest. Interest rates are highes (36%) for small
loans. Unique to quasi- commercialized institutions and commercialized banking, investors in
KIVA can get a return on their money. KIVAs average return on assets in 5.5% which is
appealing to investors. The negative side of an attractive rate of return is that it can affect the
people who are lenders select online. Investors in micro finance want to get the most back on
their investment as possible, so they are more likely to select someone who wants to borrow a
large sum of money because they are likely to have a higher return than on a loan of the
minimum $25. To ask for a large loan you need to have more collateral, which means the
people who are asking for higher loans are already better off than those needing small loans.
This causes the poorest people to receive less help even though they are in more critical need of
the loans. Though KIVA itself is a nonprofit organization, its average rate of return of 5.5% is
similar to rates of return in commercialized banking.
Investors realized they could get a financial return on micro finance in the 1990s. This
meant growth for the bank, therefore a higher capacity to lend. Commercialized micro finance
institutions take deposits and offer opportunities for investments which enables them to lend
more than nonprofits. In many countries, nonprofits cannot accept deposits; it is only a
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characteristic of banks which means commercialized banks have more opportunity to collect
capital for loans. Investors provide financial stability for the bank; however the motive of
investing for a financial return often jeopardizes the banks social mission.
Commercialized banks as micro finance institutions are more transparent than nonprofits.
Investors want to know the risk of their investment, the probability of their financial return as
well as how the banks are operating. Though commercial micro finance institutions often lack
the staff skills and knowledge in micro finance that nonprofits have, they offer greater
transparency and less risk than nonprofits. Just like investing in anything by spreading out their
investments, investors are able to diversify their risks when it comes to commercial banks.
Loans from commercialized banks are secured, and though they are given out less frequently
than loans in nonprofits, they are able to be given in higher amounts. Commercialized banks
have the unique opportunity to mobilize general public deposits as loans, which is risky but gives
them more capital for lending. They have more options for financial support but consider
potential borrowers with scrutiny and assess them based on their riskiness and probability of
paying back their loan.
Blue Orchard is one of the worlds leading commercialized banks. It is a Swiss bank that
started in 1998, right around the time when micro finance institutions were transforming into
commercialized banks. Commercial banks have to be extremely transparent so their investors
can analyze the riskiness of their investment. Each year, Blue orchard produces an annual report
ofabout 20 pages of charts, graphs and analysis of their previous years investments. Blue
Orchard believes that social returns happen naturally when you give micro loans; that it is an
automatic byproduct of micro lending. Because commercialized banks have more capital, and
know that money is lost on smaller loans, loans are generally only given out in larger amounts.
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Commercial micro finance institutions intend to profit so they are more likely to loan to people
with large amounts of collateral who want large loans because they offer greater chances for
profiting. Though loan amounts are larger through commercialized micro finance, it is
concluded that the people who need loans most are least likely to receive them because they lack
the collateral to make them a desirable loan candidate. Micro finance institutions were
deliberately created as nonprofits to correct for the people who werent being served by the
commercialized banks at the time, and original founders of MFIs believed nonprofits served the
poor better. The issue of the poorest people being overlooked is nonexistent in nonprofits
because anyone who wants a loan can get one.
How Micro Finance Works
What makes micro finance an effective way to create wealth? People living in poverty
struggle to find the money for basic needs from week to week. They often trade for things they
need rather than purchase them with currency. If they even have any money they arent likely to
have much excess after paying for things they absolutely need to survive. Without any extra
money, there is no possibility to save and accumulate wealth. Poor people arent always served
by banks either because they are not desirable candidates or because they have no money to put
into the bank in the first place. If they are able to take a loan from a local bank, they are
mandated to pay an interest rate of around 300%. At a rate this high, they cant take out much
money and are stuck repaying the interest on the loan rather than using the money they make for
economic development. Micro credit was created to combat this issue. First time loans are
generally very small, no more than $20 or $30. They are usually short term loans to be paid back
in 3 to 6 months at an interest rate that varies by institution types. When smaller loans are repaid
in a timely manner, the borrower builds credit which allows them to take out larger loans to
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expand their business. Many micro finance institutions require their members to save very small
amounts of money in their bank before they are allowed to take out a loan. This isnt so they
have money to claim as an asset, rather it is to teach them how to save.
Loans are used to buy materials at whole sale to sell for a profit, to buy materials to
expand their business, or to purchase land to raise animals. Many borrowers are entrepreneurs
trying to expand the communitys production possibility by following Adam Smiths concept of
specialization and division of labor. Rather than all members of the village making their own
clothes, finding their own food and manufacturing their own goods, these entrepreneurs are using
their skills to provide a good or service for the whole community. When these entrepreneurs
specialize in something, they allow other members of the community to stop making that good
for themselves and specialize in different things. As this happens, the community grows and has
more potential for production compared to everyone providing for themselves. When a loan and
its interest are paid back, the micro finance institution has expanded its capital and is able to
make larger loans to the community. Often, the same people come back and take larger loans to
further their business i.e. creating wealth.
Criticism of Micro Finance
Despite the statistics and success stories, there are critics of micro finance as a means of
wealth creation. There are currently some 10,000 micro finance institutions serving about 16
million people; however this is only estimated to be only 4% of the people who actually need
micro finance assistance. Micro finance is therefore one of the worlds largest untapped profit
sources. Since the 1990s, the goals of micro finance for investors have turned from donating to
help the poor to investing to help their own financial returns. This ability to profit has been
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corrupted in some areas; like Mexicos micro finance commercialized Azteca Bank. Azteca
Bank has no legal limits on interest rates and little if any government oversight. Interest rates at
this bank are between 50%-120% which is much higher than the average micro finance loan
interest rate of 31%. These exorbitant rates are not stimulating economic development and
creating wealth. Borrowers who want to build good credit pay back their loans no matter how
much their family needs it at the time and they end up worse off. The loans are creating a debt
trap that prohibits the poor from ever getting out of poverty because borrowers cannot afford
their interest rates.
Other critics of micro finance suggest borrowers are being taken advantage of because
they are not educated enough to know what to do with the money they borrow. When micro
loans become available in an area, many people borrow just to pay for something to purchase,
rather than to invest in something that creates wealth. The possibility to turn a profit is attracting
all sorts of investors and bankers. Wal-Mart recently purchased a banking license in Mexico to
jump on the profit-from-the-poor bandwagon and began offering loans at their stores in Mexico.
These loans are given not to encourage wealth creation, rather to encourage spending money on
things the borrowers cannot afford at time of purchase. Wal-Mart will graciously offer anyone a
one year loan on a $957 television at an 86% interest rate to bring the television cost to almost
$1,500. Micro finance was intended to be a way to create wealth while teaching people how to
manage their money, but with big corporations jumping in on lending it is turning into a
glamorized form of price-gauging. Wal-Mart capitalized on the idea of lending to the poor to
help their economic situation by giving loans to people who will help them profit twice; once
from the purchase of the TV or good and again from the 86% interest they collect on the loan.
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Measurements of Effectiveness
In 2005, the Ford Foundation created a task force to ensure that micro finance institutions
were promoting social returns for borrowers and not just financial returns for investors. The
Social Performance Task Force has created a network for MFIs to assess the ways they are
promoting social returns and implement ways to better their efforts. This network currently
includes over 100 MFIs, but this number is small compared to the 10,000 MFIs in existence
today. The Social Performance Task Force has defined social performance as sustainably
serving increasing numbers of poor and excluded people, improving the quality and
appropriateness of financial services, improving the economic and social conditions of clients,
and ensuring social responsibility to clients, employees and the community they serve. These
criteria are general, but offer a measurable way to gauge the effectiveness of the institution.
Every institution in the network evaluates their organizations attempts to improve social
performance using the same criteria. The Social Performance Assessment (SPA) tool is a
scorecard for micro finance institutions that compares 6 different components of micro
finance. The first factor is breadth. This is measured by the number of borrowers an institution
has as well as what percent of those borrowers start saving after their loan is repaid. The second
criterion is depth which is measured by the average loan size, the percentage of borrowers who
are women and the percentage of borrowers who live in rural areas. The third thing MFIs
evaluate is the average length of loan and length of repayment. Fourthly they are measured on
scope which is the amount of financial services their institution offers aside from lending. The
fifth thing they report is the cost of their operations. Finally, they have to evaluate the worth of
outreach to clients and the community. This final category is measured in percentage of repaid
loans that are reinvested into the community and transparency of the agency.
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The six criteria are a good way for organizations to evaluate if they are on track with
promoting social returns, but the system itself is ineffective. First, this is not a mandated
evaluation that every micro finance institution must report. Micro finance institutions join this
network and report their progress on a voluntary basis. They are already more likely to want to
promote social returns because they are holding themselves to those standards. There is also no
suggested level to reach for each criteria, they are just given 6 things to evaluate themselves on
so they can compare themselves to others in the network.
Effectiveness of micro finance institution will be hereby measured on 7 criteria. The
criteria are total amount loaned, amount loaned per year, number of countries represented by
organization, number of loans funded, average loan size, repayment rate and interest rate. (See
Figure 1) Jamii Bora, KIVA and Blue Orchard have been analyzed for nonprofit, quasi, and
commercial MFIs respectively because they are leaders in their institution distinctions type.
In terms of total amount loaned and amount loaned per year, Commercial micro finance
institutions clearly have the advantage. Blue Orchard has loaned $714 million to date, an
average of $131 million a year. The quasi MFI is the second strongest having loaned $130
million to date and an average of $26 million per year. Nonprofit MFIs loan the least amount per
year; around $3.5 million which also puts them last for total amount loaned. This distinct
advantage of commercial banks to loan out the most amount of money is explained by their
ability to mobilize deposits into loans. They also have higher capital than the other two
institutions because they have more financial support from investors. In the mid 1990s, turning a
profit from micro finance was developing, which encouraged investors to put their money in
commercialized banks because they could help alleviate poverty and expect a 6% return on their
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investment; a win-win situation. Nonprofits had nothing to encourage people to donate their
money to them over commercialized or quasi commercial institutions.
In terms of countries represented, KIVA the quasi institution has the clear advantage.
This is primarily due to its organization being completely operated online. KIVA has used to
internet to connect borrowers and lenders from 197 different countries. Blue Orchard has spread
to 35 countries, which is quite impressive for any micro finance institution. It is expected that
Jamii Bora is only in one country because it is a smaller organization that was created just to help
the poor in 7 regions of Kenya.
In terms of the number of loans given out, KIVA leads over the other two institutions but
not by much. KIVA has funded over 180,000 loans to date, while Jamii Bora has funded
145,000. Blue Orchard, the commercial bank has only given 800 loans to date. Aforementioned,
commercial banks generally give loans out less frequently, but do so in larger amounts. The
average loan size for Blue Orchard is more than $1,600 while the average loan size for Jamii
Bora is $95. This exemplifies the distinction of microfinance institutions that says nonprofit and
quasi institutions give out many loans (often without a collateral requirement) in smaller
amounts. These definitions also expressed that commercial banks generally gave out few loans
but in large secured amounts.
There is no doubt that commercial banks would have the best repayment rate of the three
micro finance institutions. They select loan candidates based on the belief that they can pay back
their loan which is backed by collateral. Blue Orchards repayment rate is 97%, KIVAs is 82%
and Jamii Boras is 69%. Interestingly enough, there is a direct relationship between loan
repayment rates and loan interest rates. It would be presumed that an interest rate of .5% per
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week (Jammi Bora) would have a much higher repayment rate than an institution that charged an
average of 31% interest. (The exact number for loan interest rate for Blue Orchard is NA, but
assumed by the average interest rate for commercial banks.)
Effectiveness of Micro Finance Institutions
Type of MFI
Name of MFI
Non Profit
Jamii Bora
Quasi
KIVA
Commercial
Blue Orchard
Total Amount Loaned($)
$21 Million $130 Million $714 Million
Amount LoanedPer Year ($)
$3.5 Million $26 Million $131 Million
CountriesRepresented
1 197 37
Number of LoansFunded 144,760 181,432 800
Average Loan Size $95 $395 $1,653
Repayment Rate 68.8% 82.29% 97%
Interest Rate .5% per week 11% per year 31% average
Figure 1
The highlighted number shows the institution with the best ranking for each criterion.
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Conclusion and Analysis
The most effective type of micro finance institution cannot be determined based on
numbers alone. It is apparent that commercial banks have the upper hand over nonprofit and
quasi institutions in the amount of money they can raise, but is money the only factor? Blue
Orchard invests an average of $131 million per year in micro finance. It would take a nonprofit
like Jamii Bora 37 years of operation to invest as much money as Blue Orchard can in one year.
If amount of money lent was the only criteria of determining an effective micro finance
institution, there would be no need for nonprofits to exist. Nonprofit organizations like Jamii
Bora offer value in services that cannot be measured, but are critical to the economic
development of individuals and communities. Micro loans by commercial banks reduce poverty
by loaning and recovering the most amounts of money, but poverty reductions is not enough to
help the poor. Giving and recovering a loan only shows that a person was able to make enough
money to pay back their loan and interest. It shows nothing about their personal economic
development or long term income.
Nonprofit institutions dont measure their effectiveness in the amount of money they
have given out or the percent of loans they have been repaid. To them it is more important to
assess that each person they help can afford food, water, clothing and shelter. Even if they lose
money on a borrower, they arent concerned because they know they have helped them.
Nonprofits like Jamii Bora offer more than just a loan and a payment schedule. They teach their
members to be wise with their money by teaching them to save before they can borrow. They
make sure their members make wise decisions with their loans by finding out what they can
specialize in and make a profit in their community. This not only benefits the borrower, but
benefits everyone around them because when people specialize and divide up labor, their
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community is able to produce more as a whole and everyone is better off. They treat the poorest
people with dignity and respect, which empowers them more than money can alone. They
encourage people to become sober through counseling and support. Jamii Bora also helps their
members teach their neighbors how to use their loans wisely. All the workers at Jamii Bora are
former members who were once struggling to afford basic needs. They are using their personal
experience to help and encourage others to do the same. Though they do not have the same
funding as commercial banks, and probably never will, they are effective at producing
communities that are better off as a whole. Jamii Bora doesnt just create wealth for one person,
it creates wealth and a stronger economy for the whole community.
Quasi micro finance institutions are able to obtain large amounts of funding and help
larger numbers of people and are still nonprofits. They are well equipped to serve a lot of
people, particularly in KIVAs case where 197 countries are brought together in one place to
borrow and lend. KIVA allows personal attention between lenders and borrowers which
encourages accountability from the borrower. Through this website, borrowers can be in
constant communication with their investors to tell them exactly how they are using their money
and inform them on their progress. KIVA encourages relationship between the borrower and
lender, to increase accountability and investor assurance that their money is going to a good
cause. Though borrowers are given personal attention, it is not the same attention that a
nonprofit like Jamii Bora can provide. Their connection is through a computer screen and only
insures financial progress, not that they are better off in other areas of their lives as well.
Commercial banks clearly reach the most people, but that doesnt mean they reach the
people most in need of financial assistance. The average commercial micro loan from Blue
Orchard is 17 times larger than the average nonprofit loan of Jamii Bora. Micro finance
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institutions lose money on smaller loans, so it is logical that commercial banks who are
concerned with making a profit would have larger loan amounts. A larger loan does not
necessarily mean a person is getting more help. It does however tell what type of person is
getting the help. Commercial banks decide who they are going to loan money to based on
collateral to secure their loans. A person with who is receiving a large loan must already have a
fair amount of collateral to make them a desirable loan candidate. Larger average loan amount
from commercial banks means people with little or no collateral, those who need wealth creation
the most, are ignored because they are too much of a liability. Further, there is no connection
between borrower and lender other than transfer of money, so there is no guarantee that a person
is better off after they have repaid their loan. The only think the loan repayment shows is that
the borrower made enough money to cover the cost of their loan and interest.
Suggestions
There are over 10,000 micro finance institutions, but it is estimated that only 4% of the
people who need micro finance services are currently being reached. Micro finance is a fairly
new field that has only been around for 30 years. The last 20 years of micro finance has shifted
from nonprofit institutions to commercialized institutions. As micro finance grows to reach the
96% of people in need of assistance that arent being reached, knowing which type is most
effective will benefit the poorest people tremendously. When looking at the goals of each type
of micro finance institution it is clear to see it is a comparison of apples and oranges. There is no
mathematical equation to which institution is most effective, because the definition of
effectiveness varies with perspective. A businessman will say the most effective bank is one that
loans and recovers the most amount of money and a nonprofit worker will say the most effective
institution is the kind that changes people in ways that cannot be measured.
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One must look at the original intent of micro credit to be able to determine which type of
micro finance institution is best fulfilling the purpose of micro finance. Micro credit initially
began to reach the poorest of the poor, the people who couldnt get loans from commercial
banks. In this case, the answer is obvious. The most effective type of micro finance institution,
in terms of what micro credit was intended to do, is the nonprofit institutions. It would be
foolish however to discredit quasi and commercialized micro credit institutions because their size
is certainly evidence of their effectiveness in terms of expansiveness. Therefore, the type of
institution that best helps the poorest people create wealth and develop socially may not currently
exist.
Upon analysis of the functions, benefits and disadvantages of the three types of micro
finance institutions, the ideal micro finance institution has yet to be created. Just as micro credit
developed from the early 1700s to today, micro finance will have to keep evolving to create a
micro finance institution that has aspects of each type of institution presented above. The ideal
future micro finance institution would have the financial capabilities, such as investor support
and ability to mobilize deposits as loans, as commercial MFIs have. It should be able to use
these funds to reach the most amount of people, like KIVA does with an online interactive
connection between lender and borrower. Its interest rate should be similar to KIVAs quasi
institution rate which is large enough to cover administrative costs and make some return, but not
so large that it takes advantage of the poor and keeps them in a debt trap.
Loan sizes would be similar to those of nonprofits and quasi institutions because they are
small enough to make a difference and not so large that they require large amounts (if any)
collateral to secure them. The goal of this would be to make sure the poorest of the poor were
not being ignored because they did not have anything to offer the loan agency. After all, that is
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the idea behind micro finance; loaning money to people who need it most and who arent able to
get loans from local banks without paying exorbitant interest rates, as high as 300% in some
villages today.
Finally, and most importantly, the future of micro finance institutions should be
specifically focused on social development, not just loan repayment. Nonprofits do this by
offering services like health care to people with AIDS who cannot be covered without incredibly
expensive premiums, and programs to help the depressed poor get sober and invest the money
they were spending on alcohol on something that will create wealth. The ideal micro finance
institution would also strive to see economic development for the whole community, not just
individuals. Though they are small compared to Blue Orchard and KIVA, Jamii Bora is a very
effective organization because they follow Adam Smiths Wealth of Nations. They teach that
when people use their skills to specialize in something, the whole community benefits. When
labor is divided piece by piece, and everyone in the community is doing a certain task that
benefits others; the entire community is able to produce more goods collectively than each
person could produce for themselves. This is a measurable impact on Jamii Boras effectiveness.
A micro finance institution that reaches as many people as a quasi institutions, has the
investment capabilities of a commercialized bank and provides the services of a nonprofit will
best serve the 96% of poor still in need of micro finance assistance. As for the most effective
micro finance institution for the 4% of the poor who are currently being served, nonprofits are
most effective option available because they are concerned with economic and personal growth
of their members.
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Bibliography
Compassion in Politics. (2009). World Press .
Epstein, K. (2007). The Ugly Side of Micro Lending. Business Week.
Greuning, H. v. (1998). Framework for Regulating Micro Finance Institutions . The World Bank.
Hyshemi, S. (2006). Beyond Good Intentions. Micro Credit Summit.
Matthaus-Maier, I. (2006). Micro Finance Investment Funds. Frankfurt: Springer.