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Flaws seen in microfinance treatment of the very poor

Flaws seen in microfinance treatment of the very poor

I was pleasantly surprised to read in your paper a discussion about community financing

("Nobel prize puts spotlight on microfinance," PPPost, Oct 20, 2006).

While it is important to acknowledge the success of microfinance institutions (MFIs),

it is also important to realize that this success has made policy-makers complacent

of the need for affordable credit for the very poor, who are not always served well

by MFIs.

Although it is fair that MFIs need to make profits to appease the interest of their

shareholders, the government must at the same time look at ways to support poor communities

to establish financial institutions where profits stay with the poor and their communities.

In the 2005 publication Self-Help Group Model: More than just economic development

... by Padek (the Partnership for Development in Kampuchea), three policy recommendations

were made:

(1) The government needs to design flexible financial services;

(2) The Rural Development Bank (RDB) and national financial institutions should provide

some form of subsidized credit for the very poor; and,

(3) The government should provide institutional support and a legal framework for

community finance groups.

The current practice where the RDB operates as a wholesaler, lending money to MFIs,

which offer loans to the public without considering their needs or social well-being,

is not creative enough.

It is important for policymakers to understand that both the rich and the poor need

access to credit. They also need to understand that the pattern of behavior of the

rich and the poor, vis-a-vis saving, borrowing and investment, differ. Padek's study

found that the poor demand credit that is flexible in both loan use and repayment

terms, and can also accommodate emergency situations (illness, food deficit, etc)

that they often face.

It is not enough to be happy with the fact that Acleda has a non-performing loan

portfolio of less than 2 percent. It is more important to learn how the poor pay

back those loans, which have an interest of between 2 and 5 percent per month, and

where local authorities are, in many cases, tasked with collecting the loans.

Performance indicators of any development intervention should reflect its impact

on social and institutional development over a period of time. At the current interest

rate, as Adam Sack said, "microfinance is not a panacea to reduce poverty."

Padek recommends that the RDB and other national financial institutions urgently

need to provide some form of subsidized credit (lower interest rates, flexible repayment

terms, etc) for the poor if they are serious about reducing poverty and meeting the

MDGs. The current "one-size-fits-all" practice is not helping the poor

adequately, and in many cases has landed them in a vicious cycle of indebtedness.

For over a decade, Padek and other members of the Cambodian Community Finance Network

(CCFN) have been facilitating communities to work together to address their credit

needs, in the form of self-help groups, rice banks and village banks, all around

the country. These community finance groups, consisting of poor people, represent

their attempt to alleviate poverty as a community, by addressing their financial

needs. What we have learnt from these groups is that poor people's need for savings

that are safe and secure is just as great as their need for credit.

By way of example, in 1999, 16 poor women of Leang Dai commune, Siem Reap province,

came together to start a saving and credit group or self-help group (SHG) called

Rasmey Chamroeun (Ray of Progress). Before joining the SHG, these women rarely took

out credit. Without assets to use as collateral, they were considered, by MFIs and

other money lenders, too poor and too ignorant to be able to use credit profitably.

For them, credit meant small loans from relatives for emergency needs, health care

or food. When this was not possible, they sold assets, land or animals, placing them

further into a precarious social situation.

In the five years since the formation of the Rasmey Chamroeun SHG, the members have

taken out 184 loans, an average of 12 loans each. Given the poor healthcare services

in rural Cambodia, it is not surprising that a quarter of the loans were used for

healthcare. At the same time, however, many of them courageously ventured into new

spheres of income-generating activities, and kept their families afloat.

Twelve members have been able to reduce the number of months they are short of food

each year, while eight members declared that they no longer experienced food shortage,

compared with only one before they joined the SHG.

Many of them have accumulated more wealth, with five of them climbing up the wealth-ranking


As with all Cambodian women, it was the ability to build a secure shelter that provided

the most satisfaction to the members' lives. Twelve of them have been able to improve

the quality of their housing: nine built new houses while three renovated their existing


Other important changes also took place, such as a decrease in domestic violence,

improvement in their confidence and family relationships and an increased ability

to send all their school-aged children to school.

For more discussion on these issues see two Padek reports: Rasmey Chamroeun Self-Help

Group, A Case Study, and Self-Help Group Model: More than just economic development.

Although it is uplifting to witness the changes experienced by these women, it is

important to ensure that mechanisms be established so that groups like these can

continue to operate successfully. This SHG, together with other community finance

groups, needs government assistance and investment to build the capacity to become

a viable financial institution.

Every village has the capacity to build its own financial institution. To date, the

government has not invested in, or has not been instrumental in, savings mobilization.

The government can help community finance groups by building their capacity to save

and borrow safely. These groups also need institutional support systems and a legal

framework to help them in their quest for secure savings and affordable credit.

Done properly, this process will become a tool where the people and the government

become more engaged in active dialogue. This would stimulate demand-driven financial

sector reform from the grassroots level, further strengthening the very much needed

trust between the people and the government, as well as between the people and the

financial sector.

It is important that the poor have their own financial institution. MFIs stay in

villages when there is a profit to be made, but in times of economic difficulties,

they will have no incentive to hang around the poor, unlike community finance institutions,

which will stay as they are owned by grassroots members.

Boua Chanthou - Director, Padek


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