Microfinance more or less risky?

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Permalink Reply by Anthony Joseph Ravindra Suraweer on July 17, 2010 at 12:40am

Hi !
I am from sri lanka
In my view it is risky than bank lending.because most of the micro finance lending is given to a group and the gurantee of the group if the group fails the loan will go bad.or if the member fails or misuse of the funds and the group does not take the responsibility it will be a loss.In bank lending banks take a fixed asset or a immoveable property as security because of this the borrower is compled to service the debt failing which he may have to face litigation which is costly.However if there is a proper follow up and good supervision of the project after granting of the loan there wont be any risk involved in both of these lending systems.Most important thing is the honesty of the borrower if the borrower is honest and reliable the risk to the lender is very low

Thanks

Ravi

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Permalink Reply by Julius Kwadzo Ameku on September 28, 2010 at 6:13am

Hi!
Since one major purpose of the site is to educate members on various issues concerning our operations, I want to say that there is no business without risk and uncertainty. But the level of risk can be managed if the practitioners are careful in selecting their targets and add human face to the project. Currently the issue of encouraging beneficiaries to come out with their own funds and borrow among themselves is helping because they own the funds and project.There should be training component attach to the funds to equip the targets with skills and technical know-how in fund management and business identification.
Thanks
Julius K. Ameku from Sogakofe, Volta Region, Ghana

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Permalink Reply by Jeff Mowatt on October 11, 2010 at 1:41pm

Max, I was just reading the SEEP paper that was tweeted today which until now I hadn't been aware of.

Mine is also a tech background and I teamed up with P-CED founder Terry Hallman in 2003 when he fasted for economic rights from a tent in Chapel Hill NC..

Where he'd been working was Russia having travelled there in 1999 to recommend and source an economic development initiative which leveraged $6 million for a community microfinance bank. This work had been preceeded by Harvard's Defense Enterprise Fund initiative and the 1998 collapse of their economy.

Having pitched the people-centered economic development initiative at President Clinton he sent back recommendations for doing it bottom up. Our mission since - to "replicate localised people-centered economics on a global basis" i.e bottom up microeconomic development.

It had been the P-CED white paper where he'd made his assertion that in spite of capitalism being the most successful economic engine conceived to date, it failed to reach a significant proportion of humanity. It was to argue that leaving multitudes in deprivation which placed their lives was no more ethical than genocide.

I was not involved until we'd set up in London and he gave this interview with a diaspora leader about a follow on project in Crimea.

In this he refers to the origin of the P-CED model and the remarkable 99% first year survival rate of microenterprises with typical expectations of loan repayment from microfinance realised. It also differed in that although more than 80% of the borrowers were women, there was no gender restriction. .

USAID managed the Tomsk Regional Initiative with Finca as microfinance partners. Terry has stuck to his guns for his part in insisting that a moral collateral model based on the Grameen Loan Circle approach. Microloans were otherwise only available to existing business which didn't help the poorest who needed to start new business without having material collateral.

I realise I'm not really responding to your question but to that of microfinance practice referred to by Liza.

He had long maintained that microfinance was only a part of the toolkit and that is in evidence from subsequent project plans for Crimea and the microeconomic 'Marshall Plan' for Ukraine. In the case of the latter the only component yet to be actioned.

From this note in particular the emphasis on transparency in the description of a center for social enterprise and a social investment fund "under oversight of an independent board of directors, particularly including representatives from grassroots level Ukraine citizens action groups, networks, and human rights leaders".

It may have been this one sentence that presented the greatest obstacle in deploying it.

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Permalink Reply by Nyarko Charles Paul on October 12, 2010 at 9:47am

I agree with colleagues who are saying micro lending is risky than the loans given by the traditional banks. the risks lie with the fact that the traditional banks will always expect their customers to operate their accounts satisfactorily before they qualify for the loans.The banks will also take securities against loan default. These conditions attached to bank lending have made it impossible he low income earners and the poor to obtain bank loans.
Micro lending has therefore been introduced to remove the barriers and the stringer conditions banks were given so that the poor can get assess to small loans for income generating activities. when the proper mitigating factors are put in place to make micro lending as transparent as possible, the beneficiaries will cooperate to reduce the risks to the minimum levels.

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Permalink Reply by Jeff Mowatt on October 12, 2010 at 11:31am

Ah yes Liza, it was the POWG Microfinance and Non Financial Services paper where I leaned that

"The U.S. legislation was advanced by pro-poor microfinance advocates who sought transparency concerning who the microfinance industry really reaches. These advocates, and certain microfinance practitioners, viewed the legislation as necessary because most microenterprise development organizations do not reach very poor people."

One of these advocates was P-CED founder Terry Hallman in Tomsk with his instance that
only a moral collateral lending approach would help the poorest.

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Permalink Reply by chris macrae on October 20, 2010 at 11:28am

This question could do with some more context- here mny of us are in usa in the middle of the riskiest banking system the world has ever compunded - and there the origins of microcredit are in bangladesh with the safest banking system ever designed http://www.youtube.com/safebanks -for more paradoxes of a world where most economics has become how to make things ever more costly for main street : http://worldeconomist.net http://valuetrue.com

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