Hello everyone! This is my first entry on my first-ever blog. I’ve never had a reason so start one before but since my arrival in Honduras about 5 weeks ago to practice microfinance, the things I have seen and learned have compelled me to create a blog, ponder endlessly for some catchy name (quickly gave up on that) and think of a way to draw attention to it. How am I doing so far? I guess not that great since I have yet to arrive at my point for writing. Let’s take a look.
I arrived in Honduras about 5 weeks ago to take on an internship with a microfinance institution (MFI) called Prisma. My work with them has caused me to reflect on the past developments of the industry and how these and the people they involve will shape its future. Microfinance is a growing for-profit social concept that grew out of Bangladesh in the 1970’s with the help of Nobel Peace Prize Winner Mohammed Yunus, the “founding father” of microcredit. Not many people in the US are very familiar with the actual practice of microfinance since these take place in developing countries, such as Honduras. Before I move on to my own musings, I want to first take a glance at the basic elements that make up the concept of microfinance.
In 1976, Professor Muhummad Yunus of Bangladesh, taking notice of the poor’s severe lack of access to financial services, came up with the idea of formalizing the very informal economies that support many populations in developing countries. Specifically, he figured out how to modify commercial financial services for the poor by giving small loans to small business owners, thereby validating their enterprises and giving them an opportunity to grow. Until very recently commercial banks did not consider loan applications from individuals with barely any credit history or assets, leaving many poor populations isolated from the world of formal banking. The idea of microloans allows people to take out small sums of money for a specific purpose (in most cases for business development, however, since the development of microfinance, there are now emergency, vehicle repair, and home improvement microloans. More than this later). In essence, it aims to proportion finance to suit the needs of the borrower, for example, taking out a $1,000.00 loan to help a street vendor buy merchandise for his stand. Another aspect that makes microloans different is the interest rates, which, depending on the type and amount of the loan, can range between 24% annually and 32% annually, sometimes even higher. Because giving out microloans to individuals with very little or no credit history poses large risks for an MFI, high interest rates are necessary to compensate for this insecurity. In addition, MFI’s carry the extra task of bringing formal banking to the client’s door, meaning traveling to the outskirts of urban areas and even rural towns to make microfinance work. Sometimes, these travels also include training sessions. These too are compensated for in the interest rate.
Microfinance still has a lot of growing to do. Recent events in Nicaragua and India have made the industry a magnet for negative media without the proper scrutiny needed to evaluate what areas call for improvement. Dr Yunus' recent forced removal from his position at Grameen Bank also doesn't help people take a step back and ask the right questions. What I will attempt to do with this blog is exactly that: try and ask the right questions that can help me, and hopefully you if you're still reading, reflect on the current situation of the microfinance industry and perhaps muse on the industry's future. Some of the topics I will try to cover are the effects of high interest rates on the growth of microfinance, the recent surge in commercial banks' adoption of microcredit programs, when microcredit may no longer be so "micro," why microcredit is not the answer to poverty, among others. As a disclaimer I have to say I don't intend for my thoughts and reflections to be interpreted as part of Prisma's mission or projects. What I say here is completely my own opinion, heavily influenced by what I have read and done through microfinance.
I realize that this is a very short summary of a very large and dynamic industry, however if you'd like to find out more, I suggest doing some research on http://www.microcapital.org/, http://www.microfinancegateway.org/, or http://www.syminvest.com/. In addition, through my hands-on experience here in Honduras, I hope to gain knowledge that I will be able to share later. Please also keep in mind that I still have much learning to do and that I don't claim to be an expert; but that I hope this blog will serve that purpose: to learn.
I hope you'll continue reading and hopefully contribute to discussion. This blog is not only for my musings, but for your own as well. Enjoy!
Note: All links in this blog are connected to http://www.microcapital.org/, an excellent online newspaper dedicated to reporting everyday news on microfinance activities, reports, and events around the world. Please also check out their wiki page at http://www.microcapital.org/microfinanceuniverse/tiki-index.php if you would like to find out more about important individuals, organizations, or terms in microfinance.
