By: Bob Sample Issue: Conscious Capitalism Section: Collaborator Profile
Grassroots Collaboration Has Built the Microfinance Movement to End Poverty Through Capitalism
Capitalism and the Microfinance Movement
In 25 years, microcredit business loans have been extended to over 100 million people and the microfinance movement has become a key part of most development strategies. How did this happen? In the late 1970s and early 1980s, visionary consultants and activists in different parts of the world developed strategies for empowering the poor that differed considerably from the social reformers of the time, typified by Paulo Freire and others who called for social justice, land reform, and “liberation theology.”
Instead, the visionaries who designed and built the microcredit field looked at access to credit for business as the basic instrument of empowerment of the poor.
The visionaries who designed and built the microcredit field looked at access to credit for business as the basic instrument of empowerment of the poor.
Business credit, not charity, was provided to the poor, interest was charged and repayment was expected. While not ignoring the ills of societies, microcredit lenders did not work directly on them. Over the years, as the microfinance movement has grown, borrowers have worked together to improve the political, social and economic conditions in their villages and their societies, but that was not the initial strategy.
Interestingly, microcredit pioneers chose a model of grassroots capitalism very close to that originally envisaged by Adam Smith, the 18th century moral philosopher who is widely credited with creating the philosophical basis for capitalism.
Adam Smith held that a healthy economy would result from thousands of individuals operating small and large businesses in their own self interest for the benefit of their families and their communities. They would make, buy and sell goods and services in response to prices set by the “invisible hand” of the market. He warned especially about bigness that might lead to monopoly.
Microcredit is a perfect example of Adam Smith’s grassroots capitalist model. Tiny loans, averaging from $30 to $100 dollars, allow impoverished people, mostly women, to start or expand tiny businesses, to compete in the marketplace, and to work their way out of poverty through their own efforts and self-interest. Once the methodology of microcredit had been developed by the visionaries in the field, it remained for a citizen group called RESULTS to work in collaboration with two of the major microcredit leaders to build the microfinance movement.
Collaboration Key to Building the Microfinance Movement
ICOSA_vol1-6_FINAL.indd At the core of the microfinance movement, there were three collaborating organizations: RESULTS, the coordinator, Grameen Bank of Bangladesh and the Foundation for International Community Assistance (FINCA) of Latin America. Both of these major microcredit organizations, Grameen and FINCA, are headed by founders who became two of the most prominent spokespersons for the movement worldwide.
These three core organizations collaborated not only with each other, but they also worked constantly with practitioner organizations and individuals in the field and with citizen activists in the developed countries to enlist the legislative support of key members of Congress in the U.S. and in many legislatures around the world. Through events, media and legislative pressure, the World Bank, the International Monetary Fund and other international agencies were nudged to become involved. Funders were enlisted, including the U.S. Agency for International Development (through Congress), the government aid agencies of other developed countries, and numerous foundations and socially conscious investment groups. Add to this list hundreds of social service and aid organizations throughout the world. Finally, the press participated fully in the development of the movement. Activists and practitioners worked hard to create and nurture relationships with writers, editors, and media personalities globally. As a result, thousands of editorials, op-eds, news stories and special radio and TV segments were created and distributed about microcredit successes, borrowers, and institutions.
The Microcredit Summit: Launching a Movement
A movement, as defined by Webster’s New World Dictionary, is a “series of organized activities by people working concertedly toward some goal”. The microfinance field became a movement at the Microcredit Summit held in February of 1997 in Washington, D.C.
The Summit was designed and organized by three visionary men: Sam Daley-Harris of RESULTS, Professor Muhammad Yunus of the Grameen Bank and Dr. John Hatch of FINCA. John Hatch had originally proposed the goal of reaching all 200 million of the world’s poorest families by 2005. Professor Yunus suggested that 100 million was more feasible in 10 years, and that goal was adopted. Sam Daley-Harris suggested that a citizen-generated Summit should be organized to give the goal exposure and to gain wide acceptance and participation from the microcredit field and from funders, political backers and organizational allies. The three leaders met after a conference in Rome in 1995 and worked out the concept, the broad vision for the Summit and the movement.
When the Summit was held almost two years after the meeting in Rome, it was a spectacular success. Over 2,900 Presidents, diplomats, agency heads, politicians, foundation heads, advocates, practitioners of microcredit and borrowers attended from all over the world.
The first act of the Summit was to adopt the goal of “reaching 100 million of the world’s poorest families, especially the women of those families, with credit for self-employment and other financial and business services by the year 2005.” The lofty goal and the declaration and plan of action to achieve it were enthusiastically endorsed by all of the attendees at the Summit. And a movement was born!
After the Summit, organizers called for the creation of a Microcredit Summit Campaign to support the movement through annual regional Summits and a system of annual reporting to keep track of movement toward the 100 million goal. The Campaign was established as a project of RESULTS and Sam Daley-Harris became its director. RESULTS, Grameen, and FINCA at the Core of the Microfinance Movement
The microcredit field has been built by thousands of microcredit organizations and their supporters, but the microfinance movement was built during the early years by just three collaborating organizations: RESULTS, the Grameen Bank and FINCA. The three organizations are described below. But first, here is a story that illustrates the depth of popular misconceptions about where governments get their money and where a large part of the early money for the microcredit field came from.
In 1995, the author made a presentation to a group of microcredit borrowers in Conakry, New Guinea. They had received microloans from a company called PRIDE that was funded by the U. S. Agency for International Development. I asked the borrowers if they knew where they got their money. They said that the USAID had provided it to their microcredit company. “Where did USAID get it,” I asked? They said they didn’t know. They were astonished when I told them that a small group of citizens in the U.S. had obtained the money from Congress and had made sure that it went to USAID to fund microloans for people like them. The borrowers were amazed.
Like most people, the borrowers never thought about where a government gets its money. In the case of microcredit, the U.S. government provided a substantial part of the early seed money for the field and it “got its money” for this purpose from the lobbying activities of a small citizen organization called RESULTS.
What is this little-known organization, named appropriately “RESULTS”, that has had such a big impact on the microfinance movement? It is an international grassroots citizen’s advocacy organization with an office in Washington, D.C., chapters of volunteer activists in over 100 cities in the U.S., and affiliate organizations in six other countries. Its purpose is to create the political will to end hunger and severe poverty and to empower individuals to have breakthroughs in exercising their personal and political power. RESULTS was founded by Sam Daley-Harris, a former music teacher from Florida. The organization has hundreds of volunteer activists in the United States and six other countries who focus on a few key hunger and poverty issues each year. RESULTS volunteers have been actively working on microfinance issues for over 20 years.
In 1987, RESULTS worked with Congress to pass the “Self-Sufficiency for the Poor Act of 1987”, which required the U.S. Agency for International Development (USAID) to get involved in microcredit for the poorest and to provide $50 million to support that involvement. Over the next 17 years, RESULTS spearheaded many bills in Congress to provide money and policy guidance to the field, especially the requirements to focus on the poorest (living below $1 per day) and to measure the poverty levels of borrowers while tracking their progress out of poverty. Additionally, RESULTS worked to have Congress increase the funding support for the field to $200 million per year. While this is a small amount in the U.S. foreign aid budget, it has been the largest single source of funding for the growing microcredit field.
As stated earlier, a small coalition of RESULTS and two microcredit organizations joined to build the microfinance movement over the years. The first microcredit organization in the coalition was the Grameen Bank of Bangladesh. It was the first well-known microcredit organization to achieve major growth and substantial scale. The bank was founded in 1976 by Professor Muhammad Yunus, who won the Nobel Peace prize for his work in 2005. Professor Yunus is an American-trained economist, who invented the peer-lending model of microcredit. In this model, groups of five women received individual business loans, were supported to help each other succeed in their businesses and "jointly guaranteed all five loans in the group." All business loans were originally one year in length. The groups met weekly at a center, composed of 5-7 groups, to make loan payments and to support each other’s business success. This group, center structure and the famous “Sixteen Decisions”, fostered self-esteem and a culture of mutual accountability that resulted in high loan repayment rates, high savings rates and low levels of business failure.
By 1983, Professor Yunus was able to get legislation passed that converted the Grameen project into the Grameen Bank, a for-profit lending institution permitted to operate only in the rural areas of Bangladesh. At that time, Grameen had nearly 100,000 borrowers in five districts and 1,000 employees. It was setting new standards for scale, outreach, and impact in what would become known as the “microfinance sector”. Currently (2009), the Grameen Bank is serving over seven million borrowers in over 80,000 villages in Bangladesh and millions more are being served by Grameen replications all over the world.
The second microcredit organization in the coalition with RESULTS was the Foundation for International Community Assistance (FINCA). FINCA was younger than the other members of the core coalition. It did not become a major organization in the field until 1990. However, the founder, Dr. John Hatch, was a major player in the efforts to generate interest and public attention for the field as early as 1983. Indeed, without any knowledge of the Grameen Bank in far off Bangladesh, John Hatch invented another type of “solidarity group” model which he called “Village Banking”. In his yet-to-be- released book about FINCA, John tells the story of his “epiphany” one day in 1983 on a flight to La Paz, Bolivia, where he got the idea for the village banking model almost intact. In this model, the loan officer goes to a village, explains the concept and asks the village elders to choose 50 impoverished women who could use a $50 loan to start or expand a business. A contract is signed with the village elders, 50 loans are issued for four-month terms to very poor women and the women jointly guarantee all of the loans. Four months later, the loan officer returns, collects the payments of principal and interest and issues new loans for the original amounts plus any savings that the women set aside.
FINCA’s big break came in 1989, when USAID awarded the organization a $9 million grant to expand its El Salvador operations. Between 1990 and 1993, FINCA opened over 1,000 village banks in the urban and peri-urban areas of El Salvador, making it one of the largest programs in Latin America with, by far, the largest commitment of microfinance funds by USAID up to that time. At the present time, FINCA serves over 50,000 borrowers in 1,800 village banks in 14 countries throughout the world.
Where is the Microfinance Movement Going?
When the microcredit field began in the 1970s, there were only a few hundred borrowers and fewer than 10 microcredit organizations. Now in 2009, the field has surpassed 100 million borrowers and there are somewhere between 4,000 and 10,000 organizations that provide some form of microcredit.
At the Microcredit Summit in Halifax, Nova Scotia in November 2006, a grand celebration was held to acknowledge the impending completion of the goal to reach 100 million borrowers. The goal had been set at the Microcredit Summit in 1997 and was originally targeted for 2005. In 2006, it was clear that the goal would be met in 2007 (we now know that it was) and the Microcredit Summit in Halifax provided an appropriate venue for celebrating that achievement. The field also celebrated the awarding of the Nobel Peace Prize to the Grameen Bank and to its illustrious leader, Professor Muhammad Yunus. Finally, the Halifax Summit saw the rollout of two new goals for the movement, namely: reaching 175 million of the world’s poorest with microcredit by 2015 (an increase of 75 million over the current number). And more importantly, the second goal will bring 100 million of the very poor out of absolute poverty and above the $1 per day threshold. With five members on average per family, this is about 500 million people and is roughly half of the people living in absolute poverty on the planet. This is essentially Millennium Development's #1 Goal, which calls for cutting absolute poverty in half by 2015. So the microfinance movement is single-handedly taking responsibility for the attainment of this goal.
To achieve the goal of bringing 100 million families above the $1 per day poverty line, the movement must work to design, adopt, and deploy poverty measurement tools that are field-friendly, reasonably simple to use, and reliable. As these tools become more accepted and widely used, ways must be found to assist the microcredit institutions to bear the cost of implementation and to create the time to test their incoming borrowers, track their progress above the $1 per day poverty line and follow up on their progress after leaving the program. This is a big commitment and a complex challenge for the field and for individual microcredit companies. But it is essential if the goal of cutting absolute poverty in half is to be reached.
Another major issue in the field and a major challenge to the movement is to keep the majority of microcredit organizations serving the very poor, at least in part of their operations, while also encouraging and assisting those programs to become financially self-sustaining and free from dependence on donations and other non-market-driven sources of finance.
In the years ahead, these and other equally weighty issues will be discussed and analyzed, and solutions and good practices will be identified. RESULTS and its Microcredit Summit Campaign, will continue to play a leadership and coordinative role, along with its longtime ally, the Grameen Bank and newer allies such as the Grameen Foundation, Freedom from Hunger and Opportunity International. These organizations and many others will continue working to build and strengthen the microfinance movement and to empower the thousands of institutions in the microcredit field to meet the challenges ahead.
Truly, grassroots capitalism and grassroots citizen activism at their finest in the microfinance movement, appear on track to move half of the world’s poorest families out of absolute poverty by 2015!
Bob Sample is Colorado State Coordinator of RESULTS and a member of the national board. He may be reached at email@example.com.