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Microfinance

Dear LAB Supporter and friend,

Microfinance, Women and the Local Economy in Latin America.

  
Microfinance is the provision of financial services for people on low incomes, who do not have access to ‘mainstream’ banking, with the aim of enabling them to lift themselves out of poverty.
 
In a modern society, everyone who is economically active needs financial services to run a business, trade, save and manage risks. Yet the banks have not traditionally considered poor people to be a viable market, forcing them to rely on a variety of informal providers.  Credit is obtained from unofficial moneylenders, usually at high or extortionate rates of interest, often enforced by violence. Various informal methods of savings exist, but tend to be erratic and insecure. 
 
Credit unions and lending cooperatives have been around for hundreds of years but the development of modern microfinance is widely credited to Dr. Muhammad Yunus, who began experimenting with loans to poor women in the village of Jobra, Bangladesh in the 1970s. He went on to found Grameen Bank in 1983 and he and the bank won the Nobel Peace Prize in 2006 for their work. Since then, innovation in microfinance has continued and new providers of financial services to the poor continue to emerge.  In a specially commissioned report for LAB, Marcela Lopez Levy provides a comprehensive overview of Microfinance in Latin America in our focus section (read more). 
 
Today the World Bank estimates that about 160 million people in developing countries are served by microfinance.  In Latin America and the Caribbean microfinance lending grew at its fastest pace in the last four years as stronger economic growth fuelled demand for credit among low-income families and micro-entrepreneurs. Total microfinance lending in the region rose 23 percent last year to $15.2 billion from $12.3 billion, according to new data released by the Multilateral Investment Fund (MIF), a member of the IDB Group (read more).
 
Microfinance institutions (MFIs) range from small, non-profit organizations to large commercial banks. One of the largest MFIs in Latin America, Compartamos Banco in Mexico started as an NGO and now serves more than 2 million clients. Nick Wolf describes their mission and development (read more). Controversially, Compartamos has moved to being a for-profit institution, yielding substantial profits to its founder and early investors. There is some evidence of a more ruthless approach and the abandonment of the goal of alleviating poverty (read more).
 
Has microfinance achieved its goal of reducing poverty? Many cases suggest that it has helped individuals and communities to build assets, increase incomes, and reduce their vulnerability to economic stress. In particular, microfinance programmes which have targeted poor women appear to have improved their status within the family and the community. Women who are helped to acquire their own assets, including land and housing, play a stronger role in decision-making.  
 
Fundacion Paraguaya is a successful NGO using microfinance to work with women . LAB’s Claudia Pompa gives an overview of their important work, including videos of particular case studies (read more). In the Dominican Republic and Haiti, Esperanza Internacional provide an integrated approach to microfinance, focusing on health and education as well as loans (read more). Another is San Francisco based, on-line lender KIVA (read more).
 
Microfinance is just one strategy for confronting an immense problem. Interest rates need to be high to return the cost of the loan – because risks are high, and the cost of setting up and administering the loan consumes a much larger proportion of the small sum borrowed. Rates this high are sometimes criticised as abusive. Clients must have the capacity to repay the loan or risk being pushed into debt. In a follow-up newsletter, LAB will show some of the limitations of microfinance, and alternatives that have evolved in order to address them.

Best wishes

 
From the LAB team
 
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