Case Study 1

Mala and her family had always been bound to the growing seasons of the land. In her village, Manpur, in the state of Andhra Pradesh in southern India, she and her husband had work when there was planting to be done, or crops to be harvested. Otherwise, there was little she could do to earn the money necessary to improve their mud-walled house or buy the food they needed or get books for their four children. Like most other women in the village, Mala was illiterate. Her house had no running water or electricity, which meant she and her children spent many hours every day finding fuel, tending the fire, or hauling water from the village well.

Mala's chances for a better life improved recently after workers from SHARE, an unusual lending organization, came to her village and introduced a program that helped the women there set up their own businesses. The concept behind the program was simple: Mala and four other women in her village would agree to take joint responsibility for repayment of their loan from SHARE. The women were not required to pledge any of their meager possessions to receive the loan; rather, each put in a small sum of money they had saved, and trusted the others to pay back their loans with interest so none would be liable for the other's amount.

Borrowing the equivalent of about U.S. $100, Mala used the loan to buy a cow and a goat, and to pay for their feed. She was excited and happy with what the loan could do for her family. Sales of milk, cheese and butter from the animals meant that for the first time, she had a regular income during the months when there was little farm work available. In the past, with daily salaries equal to less than half a U.S. dollar, Mala and her husband rarely were able to save any money. Because they had no possessions to give to a bank if they were unable to make payments, they were not eligible for a regular commercial bank loan. The only other sources of cash were moneylenders who charged very high interest rates, or landowners who demanded free work in their fields as payment. But now, thanks to the small loan and her new business, Mala had money to repair the thatched roof of her family's home to protect it against the monsoon rain, and to buy shoes for her children.

Mala is benefiting from a relatively new development strategy called microfinance that is aimed at raising the gross national product (GNP) per capita, or individual income, of people in low- and middle-income countries. India saw its GNP per capita increase annually by about three percent between 1980 and 1992. Although that pace of improvement compares quite favorably with the situation in many other low-income economies around the world, where GNP per capita actually dropped in the same time period, India still lags far behind other Asian economies such as Singapore and South Korea. Expressed in U.S. dollars, India's GNP per capita was about $300 in 1992, compared to $6,790 in Korea. In industrial countries in Europe and North America, GNP per capita normally exceeds $20,000 a year.

Microfinance is important for large numbers of poor women who have very limited opportunities to improve their lives or to contribute to the betterment of their families. More generally, it assists people who wish to become entrepreneurs or expand their small businesses but, with few possessions to guarantee a loan, lack access to banks or other traditional lending institutions. Governments have tried to subsidize loans to the poor, but problems including inflation and over-regulation have prevented these programs from becoming self-sufficient. Subsidized programs have also undermined other financial institutions that did not receive government aid, and frequently the people who have been most successful at getting the low-interest government loans have been the richer members of the economy, rather than the poor people they were intended to help.

During the past two decades, microfinance efforts have become an increasingly popular alternative to total reliance on state credit subsidies. Today, the approach is being used, with varying degrees of success, across Asia, Africa, and Latin America. Programs are working in very poor nations, such as Bangladesh and Niger, and in developing countries with higher levels of economic well-being, such as Colombia and Costa Rica.

The size of a typical microfinance loan is small, often under U.S. $400. Operating on this scale, the Grameen Bank of Bangladesh, for example, covers almost half the villages in the country, reaching almost 2 million poor clients. Bolivia's Banco Sol has served nearly 50,000 borrowers, almost 10 percent of the potential market. In other countries, programs are growing at rates ranging from 25 percent to 100 percent annually.

Besides earning money for home improvements, food and clothing, entrepreneurs such as Mala participate in their national economy by providing employment for themselves and others and boosting the supply of goods and services available to the population. Although microfinance works on a small, individual level, collectively it plants the seeds of higher economic growth, or GNP, for poor, developing nations. Involvement in these new lending programs also makes more people aware of some of the basic rules of a free market system, which has become the most common form of economic organization in the world.

Although many microfinance groups began their efforts with donations from grants or loans from wealthy nations, the World Bank, or other multinational assistance organizations, a number of the groups have reached the point where they can support their staff and pay other operating expenses with income from interest and client fees. These groups are able to become self-sufficient because their repayment rates are generally very high-usually above 95 percent. Some groups have even made profits that equal those of more conventional private financial firms. The microfinance programs have far to go, however, before they resemble banks or other full-fledged financial institutions, which use local savings to back more comprehensive and costly economic development in poor communities.

The outlook for microfinance, and its contribution to greater GNP is encouraging in Andhra Pradesh. SHARE has grown to serve about 3,500 people since it was set up in 1993, and now covers about two-thirds of its operational expenses from income. The institution aims to expand its membership to 11,000 over the next few years, and expects to be fully financially independent by 2001.

In Manpur, Mala and the other women in SHARE are part of its success story. They are proud that they have never missed a weekly loan payment. Mala's husband, who was at first skeptical of her business efforts, has decided to help her expand by caring for two new cows and goats. With more income, they hope to have a concrete floor poured in their house, and to pay for a greater variety of foods for their family.