Microfinance is perhaps “the” success story for scaling up development interventions. While it should continue to be a critical tool in providing climate finance to the poor and reducing their vulnerability to climate impacts, its early history also has lessons to offer for scaling up adaptation.
The microfinance movement began in 1974 in Bangladesh, when Muhammad Yunus, an economics lecturer at the University of Chittagong, started an action-research programme to provide loans to “unbankable” poor households. Borrowers were mobilised in ‘peer groups’ composed of four or five individuals who were jointly responsible for each other’s repayment. Several of these small ‘peer monitoring groups’ were organised into a larger unit, which would meet weekly with the primary purpose of repaying loan instalments.
The demand for these loans grew, repayment rates were high and in 1983, Yunus started the Grameen Bank with help from the Bank of Bangladesh. In 1984, Grameen Bank became a government-regulated bank through a special government ordinance.
The Grameen-style microcredit approach spread rapidly in the early 1990s, to other organisations in Bangladesh (such as BRAC, Proshika and the Association for Social Advancement or ASA), but also globally. It was replicated through ‘franchising’ – new branches replicated the procedures and norms that prevailed in existing branches, focusing mainly on a standard microcredit package offered to all clients.
There are over 700 licensed microfinance institutions (MFIs) in Bangladesh today, providing microfinance to almost 20 million poor people, with repayment rates of 98 per cent or more.
Grameen Bank, now one of many players in the field, has grown into a substantial presence in Bangaldesh, with over 2,500 branches in 81,379 villages, covering more than 97% of the total villages in Bangladesh. It reports a loan recovery rate of 96.67%. Of its 8.35 million borrowers, 96% are women. The borrowers own 95%of the bank’s shares, while the government owns the remaining 5%. The Bank depends entirely on member savings and interest payments, and has not received donor contributions since 1998.
Bangladeshi microfinance models have been exported both formally and informally around the world through organisations such as the Grameen Bank Replication Programme of the Grameen Foundation USA; the Consultative Group to Assist the Poorest, established by the World Bank in 1999; and MicroStart, started by the UN Development Programme and the UN Capital Development Fund (UNCDF) in 1997.
The concept of microcredit has undergone several innovations during the scaling up process, to make existing services, particularly savings, more flexible; cater to the needs of vulnerable non-poor micro- and small entrepreneurs; reach out to the poorest; and adapt to local needs. There has even been success in using microfinance as the first step in bringing the poor into the mainstream, and into the fold of formal financial service providers – for instance through the Bank Linkage Programme of India’s National Agricultural Bank for Rural Development (NABARD).
Elements of success
In a 2004 review carried out for the World Bank, Hassan Zaman attributes the following reasons to the successful scaling-up of the Bangladesh microfinance approach:
- A constructive relationship between NGOs and the government of Bangladesh provided an enabling environment. The government played a role in maintaining a stable macro-economic environment; instituting policies to protect the interests of depositors in MFIs; and cutting out unnecessary red tape. (The lack of macro-stability constrained the growth of microfinance in several countries.)
- The establishment of a professional apex body for microfinance, the Palli Karma Sahayak Foundation (PKSF), contributed to a sharp increase in microcredit in the 1990s by expanding the capital base for MFIs; providing capacity building and hands-on assistance to strengthen MFIs; sharpen their focus toward financial sustainability; and standard setting.
- A constructive donor-client relationship in the experimentation process was critical. For instance, uncoordinated donor missions and disparate disbursement and reporting arrangements initially taxed BRAC’s internal capacity. In response to a proposal from BRAC’s management in the early 1990s, donors shifted their approach from financing specific BRAC projects to financing programmes. Donors also formed a ‘consortium’ to pooled funds, negotiated jointly with BRAC, and had common reporting requirements.
- An important part of the consortium funding arrangement with donors and the move toward programme funding was to improve the predictability of resource flows, allowing investments in longer-term institutional capacity development.
- The early – and continued – focus on replication and scaling up played a key role. The Grameen Bank, for instance, has continued to run annual international seminars to train people from Bangladesh and other countries on how to replicate Grameen Bank, providing field visits and manuals; creating networks; and even providing start-up grants through linking to the Grameen Bank Replication Program. Events and campaigns such as the Microcredit Summit also played a role in this respect.
- A narrow focus on microcredit during the early ‘expansion phase’ kept costs low. It was possible to have relatively straightforward management oversight, and keep operations transparent.
- Leadership skills were necessary in persuading a sceptical public that providing credit to the poor could become a viable and replicable proposition. During scaling up these skills were important in recruiting and motivating staff, decentralising authority away from the centre, building management information systems, internal controls and learning from mistakes.
- Staff recruitment, motivation and retention during the scaling up process, when thousands were employed, relied on an objective staff performance evaluation system and incentives for staff to perform well. Staff motivation was also enhanced by decentralising significant amounts of responsibility to the lower tiers of the administrative structure.
- Transparency and trust was an important concern. All financial transactions were carried out publicly, in weekly meetings and in the branch offices, to encourage openness and trust and discourage misappropriation by fieldworkers. Many NGOs, particularly the ones that successfully expanded in scale, developed measures that include frequently rotating staff within and between branches, regular field visits by senior management, a strong internal audit team, and annual external audits.
- Learning by doing, through informal feedback as well as formal monitoring and evaluation systems, was a fundamental part of the scaling up process.
- Population density, ethnic homogeneity and religious tolerance worked in favour of the scaling up process in Bangladesh. Even conservative religious forces in Bangladesh were largely supportive of microfinance activities and the greater economic empowerment and mobility of women.
Finally, David Hulme and Karen Moore from the Institute for Development Policy and Management, University of Manchester, add a further critical, but often unacknowledged, ingredient to this list: social energy.
According to the two researchers, the concept of social energy postulates a process by which dynamic leaders, and the ideas and ideals they promote, diffuse through society gaining momentum and persuading individuals and organisations to take on different values and do things differently.
They point out that the spark of social entrepreneurship that Yunus set off literally energised scores of other leading Bangladeshi social activists and thousands of others to try to get microfinance and other services to poor people, in what was a great and inspirational achievement.