Microfinance

GLOBAL INVESTOR FOCUS
Microfinance—17
contribution to achieving the UN Millennium Development Goals.
Many investors, especially private investors, who target the microfinance
market, do so with social objectives. While anecdotal evidence
and surveys conducted among the recipients of microloans provide
evidence of the genuine social impact, no universally acceptable
standards exist yet for reporting on the social performance. Initiatives
are targeted in this direction, but more efforts need to be put into
developing and reporting standardized measurements of social impact
at a reasonable cost.
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Microfinance harks back to the Raiffeisen idea
The concept of microfinance is frequently publicized in the media
through accounts of the success story of the Bangladesh-based
Grameen Bank and its more than four million borrowers. Grameen
Bank was founded in 1974 by Prof. Muhammed Yunus for the
express purpose of extending microloans to needy women to
assist them in helping themselves and improving their families’
living conditions. In actuality, though, microfinance is not a novel
invention. It is also no coincidence that the concept proliferated in
western Europe in the second half of the nineteenth century. The
Raiffeisen philosophy arose 150 years ago in Germany under difficult
economic circumstances analogous to what one encounters
today in many developing regions. On the cusp of industrialization,
craftsmen and farmers suffered from a scarcity of financial resources
because capital was being drawn to the higher returns promised
by alternative investment opportunities such as railways and
textile factories.
The Raiffeisen model developed by mayor and social reformer
Friedrich Wilhelm Raiffeisen was based on the self-help and solidarity
principle. The farmers and craftsmen of individual villages
banded together into cooperative associations. The members of
each association declared their willingness to pledge their property
as collateral for the cooperative’s liabilities. Since the members
of the cooperative resided in an easily surveyable area, the
character of the borrowers could be taken into account alongside
their material property in the lending decision. The joint liability
enhanced the creditworthiness of the cooperative members and
gave them access to affordable business credit for the purchase
of livestock, fodder, fertilizer and seed, and for their workshops.
They also acquired a safe means of investing their savings. The
Raiffeisen movement spread throughout the German-speaking
world and beyond. The Union of Swiss Raiffeisen Banks was founded
in 1902. In France, the same credit cooperatives go by the name
Crédit Mutuel. And somewhat similar models emerged in other
European nations such as Great Britain in the nineteenth century.
Table 1
Major lending methodologies in microfinance
Source: Zeller, Manfred. Promoting Institutional Innovation in Microfinance – Replicating Best Practices is Not Enough.
D+C Development and Cooperation, January 2000; Credit Suisse
Cooperative model Solidarity groups Village banks
Participation p The cooperative members are the owners p Ownership often unclear
p 3 to 10 clients build a group
Structure
p Each cooperative is geographically limited
p Joined support center exists (disbursement
p Regional/central union
of loans, collection of savings, etc.)
Responsibility
p Members vote/elected democratically
p Support center makes decisions
p Financial liability limited to own shares
p Members collectively guarantee loan repayment
p Equity capital build-up by members/the community
p Highly decentralized
p Ideally independent of any upper-level organization
p Committee elected by, and among, members
Profit sharing p Improve balance sheet or payout to members p Improve balance sheet; no distribution p Improve balance sheet or payout to members