International Group Commits $200 Million for ‘Micro-Loans’ Aimed at the ‘Poorest of the World’s Poor’

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(Ismail Serageldin, newly elected chairman of the Consultative Group to Assist the Poorest, will be available in Washington for interviews on Thursday and Friday, July 13 and 14. Please call 703-820-2244 to arrange a time.)

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International donors have launched a new initiative — the Consultative Group to Assist the Poorest (CGAP) — to provide more than $200 million to support institutions providing “micro-loans” to the very poor of the developing world. Such programs have demonstrated that impoverished families can become self-supporting on loans of as little as $100.

“Micro-level credit schemes help people help themselves by starting small-scale income generation projects and businesses,” says James D. Wolfensohn, President of the World Bank, which will house the CGAP Secretariat. “They are a particularly effective way of reaching women, thereby helping to improve the incomes and well-being of their children and families.”

“Micro-loans are a most effective means to combat extreme poverty, and the International Fund for Agricultural Development (IFAD) is pleased to be a founding member of CGAP,” says Fawzi Al-Sultan, President of the Rome-based IFAD.

CGAP’s founding meeting was held at the World Bank on June 27-28, during which preliminary pledges of about $200 million were made in cash and in programs by the African Development Bank, Asian Development Bank, Canada, the European Commission, France, IFAD, Netherlands, United Nations Development Programme/U.N. Capital Development Fund, the U.S. Agency for International Development and the World Bank. These pledges are still tentative and must be reviewed and approved by the respective Boards and governing bodies of the institutions concerned. However, the orders of magnitude are expected to remain the same, reaching well above $100 million and could exceed $200 million if other donors join CGAP.

The following are considering joining CGAP: Australia, Denmark, Finland, Germany, the Inter-American Development Bank, Japan, Norway, Spain, Sweden, Switzerland and the United Kingdom.

The initial $200 million for CGAP can be turned into loans for an estimated 1 million people annually, whose families number an estimated 5 million. Because the loans are almost invariably fully repaid in less than a year, the money can be relent, so that over a decade, a total of 10 million people and their 50 million family members could be assisted to move towards better livelihoods.

In several countries around the world, special “banks for the poor” have been set up to offer a combination of loans, advice and group training that encourages the very poor to begin small-scale businesses or family enterprises. Some have focused on providing loans of less than $1,500 to micro-enterprises that employ less than 10 people and help create jobs for the poorest. Many of these micro-enterprises are in the informal sector and have no access to the credit institutions of the formal banking sector. Most of these “banks,” however, have been under-financed, which has limited their ability to expand rapidly.

“The launching of this initiative is the most significant event in the world of micro-finance. This is a beginning to a new future,” says Muhammad Yunus, President of Grameen Bank of Bangladesh. “It will be important to make special efforts to ensure that CGAP reaches the bottom-most poor people.” Dr. Yunus will chair a panel of experts in micro-finance that will advise CGAP.

Grameen Bank and other similar “banks” have focused on self-employment and have promoted solidarity networks among the very poor. They lend without collateral and maintain very high repayment rates, frequently exceeding 98 percent.

“These loans have helped millions lift themselves out of extreme poverty. Many have provided the basis for flourishing infant industries and family enterprises throughout the developing countries,” says Ismail Serageldin, World Bank’s Vice President for Environmentally Sustainable Development and newly elected Chairman of CGAP. “The challenge is to reach many more of the very poor and to reach deeper to the poorest of society. That is the challenge for CGAP.”

The World Bank believes that sound economic management, investing in the education and health of people, and focusing on broad-based growth strategies are the keys to reduce poverty on a large scale. Indeed, international development programs have assisted hundreds of millions of people around the world out of poverty in the post-World War II era, but few programs have had long-term success among the very poor. The new program, therefore, is an important complement to the current efforts, and is focused on the very poor.

“Some 1 billion among the Earth’s 5.6 billion people are very poor. CGAP was founded because many of these people could effectively use credit if it were accessible to them,” says Mr. Serageldin. “The demand is enormous. As many as 500 million micro-entrepreneurs want credit, but only a few of them can get it today. CGAP would support micro-banks extending credit to them.”

“Reaching the micro-entrepreneurs with micro-finance has been a signal success,” says Jean-Francois Rischard, World Bank’s Vice President for Finance and Private Sector Development, whose unit will be responsible for housing the CGAP Secretariat and disseminating its findings within the Bank. “CGAP will spread the best practices, provide funds and help forge stronger links between the micro-bankers and the formal financial sector of the countries, thereby giving them more access to more resources to lend to the very poor.”

In rural regions, the very poor are most often landless, with absolutely no prospects of ever improving their lot, while in cities the extreme poor usually earn a dollar a day or less. Many of the extremely poor households are headed by women.

The CGAP programs would make funds available in grants or loans to participating institutions (PIs) such as non-governmental organizations (NGOs), credit unions, banks and other institutions involved in micro-finance.

These institutions would then make “micro-loans” to the poor of working age, according to eligibility criteria established by the Consultative Group (CG), consulting with PIs and other experts in the field.

The disbursement of the funds would take place over a period of several years, at the pace of which the PIs can effectively use the funds.

“The institutions that are already successful operate in cultural and economic settings as diverse as rural Bangladesh and urban Colombia,” says Mr. Serageldin. “They also operate at different scales, with Asian programs, for example, having more than 1 million active borrowing clients, while the South American programs, much more recently founded, are just now approaching 50,000 clients.”

All the programs have much in common, especially their commitment to provide financial services to clients whom conventional financial institutions previously ignored. All the programs also seek to operate on a financially self-sustaining basis.

“These are not handouts. The clients must pay back their loans, with interest. This business-like approach enables the participating institution to re-lend the money to the poor people, multiplying the effects of the initial seed capital,” says Mr. Serageldin. “Sustainability and replicability of the operation are the keys to reaching an ever increasing number of the very poor.”

Some Countries with Successful Micro-Loan Programs

Bangladesh — The Grameen Bank, possibly the best known of these programs, works only with the poorest of the poor in one of the most densely populated and impoverished nations of Asia, mostly with women, an overwhelming majority of whom are from landless families. It concentrates primarily on self-employment.

Started in 1976 by Muhammad Yunus, membership in the Bank grew from just 50,000 in 1983 to more than 1 million by the end of 1991, of whom 92 percent are women. Membership in 1994 reached close to 2 million.

The Bank offers only small loans, with an average loan size of $100, at current rates of interest, a boon for women who had to resort to loans at usurious rates from money-lenders. Fifty percent of the women have used their loans to set up livestock and poultry raising enterprises, while 25 percent have entered the processing or manufacturing fields, and the final 25 percent opted for trading and shopkeeping.

The women’s repayment record is 97 percent, which is higher than for poor men in the same program. Wealthy citizens of Bangladesh, on the other hand, repay their loans on average at less than 60 percent.

To be eligible for credit, a woman without assets must join a village group of other women, of whom only two can borrow at first. When those two start to repay their loans, two more can borrow, and so on. The only collateral is the group’s agreement to repay the loans.

At the same time, members must work to implement the ideals of the Bank, which include, among others, savings, boiling water, refusing to participate in the traditional dowry system, (payment by parents to a bridegroom-to-be for marrying their daughter), which over the centuries has financially ruined family after family, education of children and keeping a safe and clean environment.

In this direct and effective way, the Bank and its women partners have created an ethic of thrift and purposefulness that has transformed village after village, which are a third or more better off economically than villages without the Bank.

Kenya — The Kenya Rural Enterprise Program (K-REP) is an NGO founded in 1984 as a wholesaler and a retailer of credit. As a wholesaler, it lends to other NGOs that offer credit to micro and small enterprises (MSEs). It also offers credit directly to micro and small enterprises through the Juhudi credit plan.

The NGO programs consist of an integrated package of training, technical assistance and loans, using a group-based lending methodology modeled roughly after the Grameen Bank — a market-driven sustainable approach.

Under the Juhudi plan, K-REP provides credit and savings services to four separate branches, each of which has 10 staff, including six credit officers who jointly carry an average of 1,800 borrowers. Each branch is expected to cover operational costs from credit revenues within three years.

The first branch opened in Kibera, the largest slum of Nairobi, in September, 1990, with initial capital of $360,000 and three credit officers. In the first 16 months, this branch disbursed $450,000 to 1,253 borrowers. The repayment rate amounted to 98.2 percent, and administrative costs were 11 cents for every dollar lent.

From 1990-93, a total of 6,237 loans were disbursed from the four branches implementing the Juhudi Scheme. K-REP has a 3 percent loan loss under this plan. Interest revenues cover all operating costs of the credit program, and contribute to the head office’s costs.

Under Juhudi, self-selected entrepreneurs form a five-member group called a Watano. Six watanos are clustered to form a KIWA of 30 members. Watano members save $1 each for eight weeks before the first loans can be received.

At the weekly meetings where savings are collected, credit officers provide training on loan appraisal. After eight weeks, loans are disbursed to three of the five group members. The remaining two members are then eligible for loans based on the repayment performance of their group peers. Loan terms vary from 13 to 52 weeks, at commercial interest rates.

K-REP is thinking of converting to a bank to expand the scale of its operations to take better advantage of its World Bank funds. The key concern in becoming a bank is the security requirement for each branch, such as having safes, which would raise costs by an estimated 25 percent.

Indonesia — The BRI Unit Desa system stands as the most successful rural banking system worldwide. While other such institutions are trying to become financially self-sustainable, BRI has demonstrated that finance for micro and small enterprises cannot only be sustainable, but also profitable.

One of five state-owned banks in Indonesia, it offers savings and untargeted loans to micro and small enterprises through a nationwide network of 3,204 village-based retail banking units. Data from a 1988 survey led to estimates that 187,000 families were able to move out of the “seriously poor” category as a result of participation in BRI. The survey also indicated that those who participated more than three years saw their household income increase 76 percent, as compared to a 12 percent increase in rural Indonesia generally. Employment increased 65 percent and labor hours grew by 84 percent among participants.

To keep the focus primarily on small entrepreneurs, BRI imposes a maximum loan ceiling, currently set at $1,400. Loans are disbursed rapidly and efficiently with minimal transaction costs — loan application forms are one-page long, and loans are disbursed within a week of the application being made. One of the key features of the overall BRI banking system is the heavy investment in training staff and loan officers in standardized banking procedures and methods.

As of March, 1993, the BRI Unit Desa system had 1.8 million loans outstanding, totaling $834 million, with an average loan size of $800. It also had more than 10 million savings accounts with total deposits exceeding $1.6 billion and an average account value of $165.

Dominican Republic — The ADEMI program was founded in the Dominican Republic in 1983 and is now one of the largest and most successful micro-credit programs in Latin America. ADEMI was the first Latin America institution to convert its operations to reach large numbers of small borrowers and become financially sustainable. It began operations in the urban slums of the capital city of Santo Domingo, with financial support from the local private sector. It is now operating nationwide via 23 branch offices and receives additional support from the Dominican government and international agencies.

Since 1986, ADEMI has focused exclusively on individual micro-enterprises. It now makes both working capital and investment loans to individual entrepreneurs, who must be in operation for at least six months to be eligible for a loan. Initial loans range from $50 to $500 and terms are for less than a year. Loan sizes and terms increase with timely repayment of previous loans.

Since ADEMI finds its clients through its own system, its average loan size has been progressively increasing — from $422 in 1988 to $1,500 today. The average loan size for the micro-enterprise portfolio is $687 — and more than 90 percent of the loans are smaller than $1,600. A potential client is visited by a loan officer who assists in preparing the one-page loan application on site at the enterprise. Once approved, the first loan is disbursed within a week from application, and subsequent loans are disbursed within a day.

In 1994, ADEMI had a loan portfolio of $13.6 million and approximately 14,500 active clients. To date, ADEMI has financed 27,500 enterprises, and disbursed $76.8 million in 84,000 loans. The majority of loans are in the manufacturing rather than the trade or services sector.

Colombia — Actuar Bogota is a private, non-profit corporation founded in 1988 in the national capital of Bogota. It now has 13 branches that offer credit, training and technical assistance to two types of clientele.

Famiempreses (Family Enterprises), which constitute the vast majority of Actuar clients, borrow as members of a solidarity group of 4-5 persons. They are likely to be involved in commercial activities and are generally in need of short-term working capital loans. Microempresas (Micro-enterprises), the second type of client, borrow as individuals, with guarantees, and usually represent small industrial, commercial or service-oriented production units. Most such borrowers began as members of solidarity groups. The average loan size is $221.

Actuar, which now operates in secondary cities and rural areas within 90 miles (150 kilometers) of Bogota, aims to demonstrate that a wide range of important services can be delivered profitably to the informal sector. This is reflected in the relative importance Actuar places on business and technical training and in Actuar’s Basic Service Center, a wholesale depot at which borrowers can purchase inventory and raw materials at lower prices and more conveniently than they can elsewhere. Its leaders envision creating for-profit subsidiaries to offer such services as easier savings plans, a wider range of loan products, housing, health care, insurance and recreation.

CGAP will be fully operational by the end of this year. It is expected that disbursements of funds will begin in early 1996.

“These programs have demonstrated that the very poorest people in the world really can pull themselves out of poverty, if only given the same opportunity as other people,” says Mr. Serageldin. “Micro-loans work because they are not a handout, the poor work very hard, and such programs could prove to be one of the keys to really ending extreme poverty around the globe.”

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