Overindebtedness in microfinance

Chapters

Chapter I: Introduction

Chapter II: Microfinance, from village to Wall Street

Chapter III: Microfinance at a crossroads

Chapter IV: Overindebtedness, a growing concern

Chapter V: The context of the study and the research method

Chapter VI: Data presentation and analysis

List of figures, tables, text boxes and photos

Figure 1: The wealth pyramid

Figure 2: The spectrum of Financial Services Providers

Figure 3: The critical triangle of microfinance

Figure 4: The causes of overindebtedness according to Schicks

Figure 5: Location of Los Olivos in Lima and in Peru

Figure 6: Financing structure of CREAR as of September 2010

Figure 7: The chain of overindebtedness

Table 1: Comparison between individual lending and group lending methodologies

Table 2: The “microfinance schism”

Table 3: Levels of cross indebtedness around the world

Table 4: Levels of cross indebtedness in Peru

Table 5: Overindebtedness early warning sign index

Table 6: The Peruvian microfinance institutions at a glance

Table 7: CREAR at a glance

Text box 1: Advent of microcredit in Peru

Text box 2: Microfinance at a crossroads

Text box 3: The entrepreneurial spirit of the poor

Text box 4: BANEX Nicaragua

Photo 1: CREAR Agency in Los Olivos

Photo 2: CREAR mission, vision and values

Photo 3: The Wall Street of Los Olivos

List of Acronyms

illustration not visible in this excerpt

1. CHAPTER I: INTRODUCTION

1.1.Problem background

Microfinance occupies an important place in the development landscape of the last decade and a half. The United Nations declared 2005 as the International Year of Microcredit, and microfinance is seen as an important strategy to achieve the Millennium Development Goal of halving poverty by 2015¹. Microfinance finds itself in the middle of ideological and political battles. Being part of the development context this is hardly surprising if we take into account the irreconcilable tensions between the “’economic’ and ‘altruistic’ concerns that have always been the two axes of development discourse and practices”². According to the supporters of the industry, microfinance reduces poverty and stimulates gender empowerment. Its opponents argue that microfinance has no social impact and does not alleviate poverty, and in some cases it even increases the levels of vulnerability and exclusion of its beneficiaries. Nowadays, the “microfinance schism”³ is getting deeper and the positive effects of microfinance are increasingly refuted. Not even Muhammad Yunus, the founder of Grameen Bank, together with which he was awarded the 2006 Nobel peace prize “for their efforts to create economic and social development from below“⁴ was spared from being put against the wall. Starting with the end of 2010 a series of extremely critical articles appeared, sparked by a documentary aired by the National Norwegian Television called "Fanget i Mikrogjeld" (Caught in Micro debt), according to which Yunus transferred 100 million USD between different entities of the Grameen group in order to avoid taxes⁵. On 8th of March 2011 the Bangladeshi High Court upheld his removal as managing director of Grameen Bank requested by the Central Bank on the grounds of his advanced age.⁶

One of the biggest threats brought by microfinance is the overindebtedness of its beneficiaries. As overindebtedness “means social exclusion and increases vulnerability”⁷, it is in sharp contradiction with the main goal of microfinance, which is to decrease the vulnerability and exclusion of the target group. Although several crises occurred (Bolivia 1999; Morocco, Bosnia Herzegovina, Pakistan and Nicaragua 2008 and Andhra Pradesh 2010) “in the microfinance literature, academic work on the causes of over-indebtedness is hardly existent”⁸. Still, according to the Microfinance Banana Skins 2009 Report⁹, overindebtedness is the number one risk threatening the microfinance industry¹⁰. The gravity of this issue in the Peruvian context is recognised by various national and international microfinance actors. The very high levels of competition and concentration in urban areas, combined with the constant increase in loan delinquency and cross indebtedness is analysed in the July 2010 report of Consorcio de Organizaciones Privadas de Promoción al Desarrollo de la Micro y Pequeña Empresa (COPEME)¹¹. The December 2010 study¹² of the Centre for Microfinance at the Swiss Banking Institute of the University of Zurich, commissioned by responsAbility Social Investments AG, Triodos Investment Management BV and Council of Microfinance Equity Funds places Peru at the top of the countries facing a risk of overindebtedness¹³.

1.2.Problem statement

The microfinance sector in Lima is characterised by very high levels of commercialization and competition, and microfinance institutions (MFIs) are in a continuous race for customers. The clients on the other hand find themselves flooded with credit offer and do not always make rational choices. The external environment can also contribute to overindebtedness through adverse shocks. Taking the abovementioned issues in consideration, I decided to conduct a field study titled Overindebtedness in microfinance. Case - study of the clientele of Financiera CREAR in Los Olivos, Lima Norte, Peru. The goal of my thesis is to study the causes of overindebtedness in the specific case of the microfinance clients of Financiera CREAR in Los Olivos, in the north of the capital city. The main objective of my thesis formally is to identify and analyse the causes for the overindebtedness of microfinance clients in the case of the clientele of Financiera CREAR in Los Olivos. The elements of the research are structured according to the framework proposed by Schicks¹⁴, which distinguishes three main categories of causes for overindebtedness: related to the behaviour of the microfinance institutions, related to the behaviour of the clients and external adverse influences¹⁵. Hence, my thesis will study overindebtedness from a three-layered perspective, analysing the problem at the level of microfinance industry professionals, of representatives of the host institution and of the clients. Consequently, two secondary questions accompany the main objective: 1) what are the causes for overindebtedness that are linked to the functioning of the microfinance industry? and 2) what behaviours of the household are conducive to overindebtedness?

1.3.Reasons for selecting the case and its relevance

The fact that I carried out my field study in Lima with the support of Financiera CREAR SA was rather a matter of coincidence than of personal choice. Being in a sabbatical year from my job and having no previous experience in Latin America I wanted to study the microfinance context in one country of the region. My employer facilitated the contact with Dr. Felipe Portocarrero from the International Finance Corporation office in Peru who suggested that I conduct my study in the CREAR agency in Los Olivos and supported my contact with the institution and the development of my study.

With hindsight, the choice of the location of my study and of the host institution was justified for several reasons. First, the area of Los Olivos is representative for the Peruvian microfinance sector as it is characterised by very high competition and increased presence of commercial microfinance institutions. It is also characterised by a very high number of microentrepreneurs and poor people, both representing the target group of microfinance. The choice of the CREAR agency was also made for its representative character, as it is the oldest agency in Lima, and it has the biggest loan portfolio. Also, the agency confronts more and more with the problem of overindebtedness of its clients.

1.4.Structure of the thesis

This research deals with the issue of overindebtedness in microfinance in the concrete context of the clientele of Financiera CREAR in Lima Norte, Peru. It is the result of a four-month field and desk study carried out during the second phase of the International Executive Master in Development Studies programme of the Graduate Institute. This work is structured in six chapters. Following the introductory chapter, the theoretical framework is presented in chapters 2, 3 and 4, followed by the description of the context of the study and of the research method in chapter 5 and concluding with the data presentation and analysis in chapter 6.

Consequently, chapter two describes the evolution of microfinance during the last ]five decades, giving also an insight on the characteristics of microfinance institutions and their clients. The chapter ends with a comparison between the two paradigms of microfinance: the poverty alleviation approach and the financial systems approach. The next chapter presents two main dilemmas faced by microfinance: on one hand the trade-off between impact, outreach and financial sustainability, and on the other hand the mission drift. Chapter four describes the most current threat to microfinance - overindebtedness. It begins with a short analysis of overindebtedness crises across the world and continues with a review of literature on overindebtedness. The presentation of the main factors causing overindebtedness (i.e. lender behaviour, borrower behaviour and external adverse shocks) follows, and a number of quantitative data on overindebtedness end this chapter and the theoretical framework. Chapter five begins with a presentation of the current state of microfinance in Latin America and in Peru. The host institution is presented subsequently, followed by the presentation of the research method and of the process of data collection and analysis. Chapter six presents the findings of the research and the interpretation of the results.

2. CHAPTER II: MICROFINANCE, FROM VILLAGE TO WALL STREET

2.1. Introduction to microfinance

Microfinance gained a central role in the development landscape in the last two decades. Although usually defined as “all types of financial services that are provided to low-income people”^{16 17} and seen as a tool to fight poverty, a more accurate description of this intervention is that of “a tool against financial exclusion”¹⁸. Thus, a more appropriate term to designate the activities which are usually circumscribed by the name of microfinance would be “financial inclusion”¹⁹, clarification which would also avoid dangerous confusions, as according to Jean-Michel Servet “this clarification is essential […]. To equate microfinance with the fight against poverty is extremely dangerous. Not only is microfinance, unfortunately, poorly equipped to really fight against poverty, but even more so, this confusion of objectives leads many stakeholders (not only microfinance organisations, but also commercial banks and investors) to adopt practices not very compatible with effective action in the fight against poverty”²⁰.

Many institutions define themselves as providing microfinance services and there is a multitude of definitions of microfinance²¹. This work will use the definition proposed by Jean-Michel Servet in his Title of a paper written by Tor JANSSON, "Microfinance: From Village to Wall Street", Inter-American Development Bank, Washington, 2001 book Banquiers aux pieds nus ²². According to this definition, in order to determine the microfinance character of an intervention, one has to evaluate three aspects: the amount of operations, the relationship between the institution and its target group and the characteristics of the target group²³. A microfinance institution is defined by the small, sometimes minute amount of its operations - although the institution can reach considerable size, the amount of each loan given to its clients or of the savings deposited by them is very small²⁴. A microfinance institution is also characterised by the proximity to its target group, both in spatial terms but also in social terms. The overwhelming majority of microfinance offices are located in the village where the clients live or in the market where they have their business. Perhaps one of the most interesting features of a microfinance institution is the close connection with its target group at mental and social level²⁵. The target group identifies with the institution, and trust is the main building material of their relationship. Last, the target group is characterised by two features: relative poverty and high levels of exclusion. Although the poverty element is of extreme importance, it has to be said that microfinance clients do not represent the poorest layers of the population, and not all the microfinance clients are poor. A closer examination of the common features of microfinance clients reveals that they all are characterised by a central feature, i.e. high level of exclusion from the traditional financial system²⁶.

According to supporters of the industry, microfinance is a poverty-reduction tool which promotes the financial inclusion of the poor²⁷. However, this is strongly disputed²⁸, given the lack of irrefutable proofs and impact studies which attest the positive effects of poverty alleviation and financial inclusion of microfinance²⁹. According to Jean-Michel Servet, “concerning the supposed effectiveness of microcredit in fighting poverty, we find ourselves in front of beliefs rather than proofs”³⁰. If we observe the clientele of microfinance institutions, in the overwhelming majority of cases this does not represent the poorest layers of the population. An interesting picture reveals if we look at the change in the denomination of CGAP. Created in 1996 as the “Consultative Group to Assist the Poorest” it was Wold Bank’s response to the critics concerning the effectiveness of its reform policies, and envisaged microfinance as a poverty-reduction tool. Nonetheless, after some time the “poorest” in the name changed to “poor”, together with a change of focus towards “low income and unbanked populations”³¹.

Microfinance and especially microcredit can work against their main mission of financial inclusion, increasing the levels of inequality. As Jean-Michel Servet emphasises “some forms of microcredit can increase the average income of a part of the population, but in the same time are increasing the differences between the beneficiaries and therefore the vulnerability of the majority”³². In the second edition of their book, The Economics of Microfinance, Beatriz Armendáriz and Jonathan Morduch are debunking several myths about microfinance. One of them concerns the alleged social impact of microfinance, and its poverty reduction and gender empowerment capacity. By reviewing the available impact studies, Armendáriz and Morduch conclude that there is no clear evidence as to the positive effect of microfinance. As the authors put it, “microfinance is neither a panacea nor a magic bullet, and it cannot be expected to work everywhere or for everyone”³³.

"The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence", Center for Global Development, Working Paper 174, 2009.

2.1.1. The history of microfinance

Microfinance as a concept emerged in parallel in Latin America and Asia during the 1970s. The pioneers of the industry wanted “to supply formal financial services to poor people shunned by banks because their savings were tiny, their loan demand was small, and they lacked loan collateral”³⁴. Although the concept and intentions were similar and the activiities occurred in the same period, given the political, economic and socio-cultural particularities of the two regions one can discern quite some differences between the approaches to microfinance in Asia and Latin America. This can be clearly exemplified by taking a closer look at two institutions which have stayed at the forefront of microfinance for the last four decades: Grameen Bank in Bangladesh and BancoSol in Bolivia. Grameen Bank (which in Bengali means “Bank of the village”) traces its origins in the Bangladesh of the mid 1970s, a country devastated by the Bangladeshi Liberation War of 1971 and by the 1974 famine. Muhammad Yunus, at the time Professor at the University of Chittagong, began a research project providing small loans to groups of women in the village³⁵.

In Bolivia, a collapsing regime and a state marked by coups and counter-coups led to economic turmoil and chronic unemployment. After a hyperinflationist episode in the 1980s and in the middle

of an economic downturn which would last six years, the government of Víctor Paz Estensoro launched a shock programme aimed at curbing inflation and restoring economic order. In this context the Fundación para Promoción y el Desarrollo de la Microempresa (PRODEM) was created as a ground-breaking Non-Governmental Organisation (NGO) in 1986 with the support of Acción International³⁶. Its mission was to address the “bottleneck”³⁷ of microenterprise development - no access to credit due to lack of collateral and dependence on moneylenders.. Six years later, the institution would become BancoSol, Bolivia’s first microfinance bank.³⁸ As Rutherford puts it, “by comparison with Bangladesh, the Bolivian intervention was typically urban rather than rural […]. It targeted the 'economically active poor' - people with established businesses that needed capital to grow…”³⁹.

Historical phases of microfinance

1950 - 1970 Subsidized credit programmes

After the end of the Second World War donors and governments started experimenting with small farmer credit projects. While not officially called microcredit programmes, “key assumptions about the status, potential, and behaviour of small farmers were virtually identical to the assumptions involved in many recent credit programs for microentrepreneurs”⁴⁰. Most of these programmes were implemented through state-owned banks or development agencies in Latin America, Africa and Asia. Their most important characteristic was the subsidized nature, meaning that loans were given at below-market interest rates. This did not allow the rural development banks to cover their costs and gave the loans the image of governmental hand-outs⁴¹. Poor loan appraisal standards, high costs and massive defaults led to the generalised collapse of all these programmes. Given the appealing nature of subsidies and the programmes’ integration into state-owned structures, most “fell victim to predatory behaviour by politicians or their clients”⁴². After four decades and tens of billions of dollars invested, the overwhelming majority of the programmes failed lamentably, and new ways of promoting microcredit emerged⁴³.

1970s Birth of microcredit

The 1970s marked the advent of microcredit, through initiatives which emerged in parallel in Asia and Latin America, where tiny loans were given to poor entrepreneurs, mostly women. The model was based on group lending, a methodology which used peer pressure in order to ensure loan repayment. Grameen Bank in Bangladesh, ACCION Internacional in Latin America and the Self- Employed Women’s Association (SEWA) Women’s Cooperative Bank in India were at the forefront of these efforts, as were a multitude of NGOs⁴⁴. A special role in this process belonged to these NGOs, which through innovations and ingenuity achieved the operational breakthroughs that would later be the foundation of successful microfinance institutions. These organisations were driven by a social mission and had a poverty alleviation approach⁴⁵. In Peru, Acción Comunitaria del Perú (ACP) was initiated as an NGO and was active in social projects such as housing construction and community education⁴⁶. The NGO was planned to start functioning on the 3rd of October 1968, but the opening was postponed three months because of the military coup through which General Juan Velasco replaced the government of Fernando Belaunde.⁴⁷ After 30 years of development work, in May 1998 ACP transformed in Mibanco, Peru’s first microfinance bank. Today, Mibanco is the third biggest microfinance institution in Latin America.⁴⁸

Text box 1: Advent of microcredit in Peru⁴⁹

“The discovery of small enterprise as a powerful lever for reducing poverty began in the early 1970s. A big push to the idea was given by country studies of ‘the employment problem’ carried out by the International Labour Organization (ILO), especially a study of what began to be called the ‘informal sector’ in Kenya which documented the entrepreneurship and creativity of the owners of market stalls, workshops, and small service establishments in an African city. The ILO began to multiply its work on employment, creating PREALC (Programa Regional de Empleo para América Latina y el Caribe / Regional Employment Programme for Latin America and the Caribbean). PREALC helped create a climate of opinion that stimulated a search for credit and training projects to develop small enterprise in Peru, and even contributed directly to the creation of the Instituto de Desarrollo del Sector Informal (Idesi), one of Peru’s first important microfinance institutions. The new focus on small enterprise was also encouraged by the resurgence of conservative politics that occurred at the turn of the decade, led by Margaret Thatcher, Ronald Reagan and Helmut Kohl. For government officials charged with the design of anti-poverty policies, the message was, top-down is out, bottom-up is the way to go.”

1980s Financial sustainability

The 1980s was the era when successful microcredit programmes “demonstrated that microcredit provided at interest rates that enable full cost recovery could be delivered with high repayment”⁵⁰. This decade marked the transformation of NGO programmes into financially sustainable microfinance institutions of impressive size. It was the turning point in microfinance, when financial sustainability and profit making became the most sought-after characteristic of a successful institution. This movement was based on three arguments: first, it became clear that poor can pay high interest rates with extraordinary discipline.⁵¹ These high interest rates were crucial in order to cover the high operational costs associated to disbursing and managing a huge number of tiny loans. The prospect of having access to a regular and reliable source of financing was more important for the microentrepreneur then the cost of this source. Second, it was argued that subsidies were incentives for low performance and discouraged innovation and efficiency. Third, it became visible that in the long run subsidies would lag behind the extraordinary development of microfinance institutions; therefore the only way of providing microfinance services to an ever increasing number of poor was to operate on a cost-recovery basis⁵². Full-fledged microfinance institutions offering microcredits and savings products reached millions of poor, while operating on a commercial basis.⁵³

In Peru the year 1980 marked the end of the military government but also the beginning of one of the most difficult decades of the country’s history. The economy was practically paralysed, and was facing a high external debt and an ever-growing inflation. On this background, the Andean region was subject to the atrocities of the two guerrilla groups, Sendero Luminoso and Túpac Amaru Revolutionary Movement. At the beginning of the decade, “the financial system had almost nothing to offer the large majority of very poor families in Peru. Formal banks were inaccessible, credit unions and S&Ls [Savings and Loans Association]had failed, and small enterprise credit programmes did not reach the very poor”⁵⁴. In May 1980 a landmark decree was issued, setting the stone of what would become one of the many institutions forming the Cajas Municipal⁵⁵ network: Caja Municipal de Piura was founded in 1982, followed by other 11 Cajas Municipales in the ten years that followed.⁵⁶

1990s Developing the industry in a neoliberal context

The 1990s were characterised by several trends: increased commercialization, integration in the financial markets and accelerated growth in a neoliberal context. Existing players were growing, while focusing on profitability and sustainability. New institutions appeared and existing commercial banks began experimenting with microfinance programmes, all attracted by the excellent repayment behaviour and financial viability of the business. Microfinance institutions were focusing on attracting savings from their target group, thus ensuring the much needed funds for their growth⁵⁷. At the end of 1996 (Bank Rakyat Indonesia) BRI’s microbanking division was managing 16.1 million deposit accounts amounting to 3 billion USD⁵⁸. Microfinance was becoming an industry, with support from donors and international institutions which were promoting a commercial approach as a sustainable way to fight poverty. The decade also marked another ground-breaking achievement of microfinance - its integration in the financial markets, with the listing of BancoSol on the Bolivian stock exchange in September 1997⁵⁹.

The commercialization of microfinance and its integration in the financial markets initiated in the middle of the 1990s a strong debate between those who were advocating the financial systems approach and the supporters of the poverty lending approach.⁶⁰ The first group argued that the main mission of microfinance is the financial inclusion of the highest number of poor possible, and this can only be achieved by financially sustainable microfinance institutions. Therefore, full costs have to be supported by the beneficiaries, and institutions should function on a profitability basis, offering services to the “middle poor”⁶¹. On the other hand, the supporters of the poverty lending approach argued that credit should primarily be a poverty-fighting tool, targeted at the poorest of the poor. Microcredit should be accompanied by training and teaching programmes in health, hygiene, literacy and family planning.⁶² As Rhyne puts it, “those in the poverty camp feel strongly that it is important to reach the poorest possible people. Many in the sustainability camp are more interested in opening access to the full spectrum of the poor who lack access to financial services; although most do include the poorest in that spectrum.”⁶³

The 1990s were also the heyday of the Washington Consensus, when the “stabilize, privatize, and liberalize” mantra was the underlining theme of a wave of reforms in Latin America and Africa.⁶⁴ Microfinance was following the same trend, as „in the 1980s and 90s the Washington-based institutions […] came on the scene to try to neoliberalise microfinance, to turn it into a commercial offer [...] that was absolutely paramount“⁶⁵. Jean-Michel Servet describes the neoliberal context as being characterised by deregulation, privatization, structural adjustment plans and the calling into question of the social benefits and workers’ rights⁶⁶. This was done against the background of increased levels of monetarization and speculative financial transactions.⁶⁷

Elisabeth RHYNE, “The Yin and Yang of Microfinance: Reaching the Poor and Sustainability”, 1998, MicroBanking Bulletin 2, pp. 6 - 8

In Peru the microfinance sector was struggling to survive, in a harsh economic and social context. Inflation in 1990 was at 7,560 per cent the highest in the world, the GDP per capita was at the same level as in 1960, and Sendero Luminoso was attacking now the capital city. Still, it was a decade of far-reaching reforms - several non-performing banks and financial institutions were liquidated, the Superintendence of Banks’ role was strengthened and the state development bank, Corporación Financiera de Desarrollo (COFIDE), was transformed in a second-tier lender which would play a crucial role in supporting the microfinance sector in the following years. The Caja system was solid, Mibanco was born and commercial banks were more and more active in microfinance.⁶⁸

2000s microfinance at a crossroads

The debate on the effectiveness and the raison d ’ê tre of microfinance got even more heated in the last decade. The end of the 1990s and the beginning of the 2000s marked the “post Washington- Consensus” era, hailed by Joseph Stiglitz. Looking back at the achievements of the neoliberal policies, Stiglitz argues beyond doubt that the Washington Consensus was a failure, especially in Latin America, where inequality levels rose and poverty remained a big problem⁶⁹. In the same time, a deeper understanding of poverty as a multidimensional phenomenon emerged from the World Bank itself. It became clear that poverty was not only a question of low or lacking incomes, but a combination of social, territorial, natural and national factors. This implies that poverty-alleviating policies had to be based on a holistic approach to the phenomenon, rather than focusing only on

Text box 2: Microfinance at a crossroads

“Today, the word microfinance doesn't even capture the scope and scale of what is happening in the world of finance for the poor. What was once a neat and tidy, well-delineated little sub-culture, now encompasses a dizzying range of delivery organizations and services, all increasingly interwoven with the rest of the financial sector. All around us, we are witnessing experimentation, and a surge of new entrants to the field. The result is an explosion of diversity: diversity of delivery channels, of services, of funding sources and, of course, clients.”

Elizabeth Littlefield, CGAP CEO and World Bank Director - remarks made at the International Year of Microcredit and Georgetown University Conference on Microfinance, Washington DC, April 19, 2005.

economic growth⁷⁰. Still, these advances had little influence, if any, on the state of microfinance at the turn of the millennium. The debate between institutionalists who were supporting the financial systems approach and the welfarists supporting the poverty lending approach continued stronger, the industry grew to new heights, various microfinance crises appeared throughout the world and commercialization and integration into the financial markets was complete. Since the UN declared 2005 as the “International Year of Microcredit”, the industry experienced major and at times controversial developments. In 2006 Muhammad Yunus and the institution he created 30 years before were awarded the Nobel Peace Prize “for their efforts to create economic and social development from below“⁷¹. In 2007 Compartamos, a Mexican microfinance institution, launched an (Initial Public Offer) IPO to sell 30% of its shares. The offer was oversubscribed 13 times, bringing 450 million USD to the owners. In July 2010, (Swayam Krishi Sangam) SKS, the biggest microfinance institution in India was floated on the stock exchange⁷², bringing the value of the company to 1.5 billion USD. Yunus sanctioned this, stating that "this is pushing microfinance in the loansharking direction. […] offering an IPO, you are sending a message to the people buying the IPO there is an exciting chance of making money out of poor people”⁷³.

2.1.2. Who are the microfinance clients ?

As previously stated, microfinance clients are poor people who are excluded from the formal financial system. As this definition is too general, it is worth taking a closer look at the characteristics of these clients, underlining four of them: their relative poverty level, their entrepreneurial spirit, the household-business unit and the fungible nature of their resources.

We shall begin by saying who the microfinance clients are not. Although it is generally said that microfinance is providing financial services to the poor, an important distinction has to be made between the extremely poor and the economically active poor ⁷⁴. Regarding the very concept of poverty, it has to be said that given its multidimensional⁷⁵ and relative⁷⁶ nature, it is extremely difficult to define and measure. In general two methods are used to measure poverty: the poverty line method and the unsatisfied basic needs method. Although presenting certain limitations⁷⁷, poverty lines are used internationally as they are easily quantifiable and allow comparisons. We can have a more clear idea if we look at the wealth pyramid below, in order to understand how its bottom of is structured.

Figure 1: The wealth pyramid⁷⁸

illustration not visible in this excerpt

Those at the bottom of the pyramid (the destitute and the extremely poor)) are in a desperate situation, and their most urgent needs are food, shelter and medicine.⁷⁹ These people are unemployed or have an insignificant income which cannot cover basic nutritional needs, they live in areas gravely depleted of resources or they are too young, too old or too ill to carry on any activity. They are excluded from the economic life because of their ethnicity, their gender or for political reasons or they are refugees from wars, conflicts or natural catastrophes.⁸⁰ Credit is not the right poverty alleviation tool for them, and providing loans to them is highly risky, as these loans will be used to cover emergency needs such as food or medication⁸¹. As a result, the loans will serve neither the lenders, nor the borrowers, as people in extreme poverty lack the possibilities to use the money effectively and will not be able to repay them. Consequently the probability to end up in a debt trap is high⁸². On the other hand, microcredit can be a useful tool to assist the economically active poor, as they have the preconditions to effectively use loans in a lucrative manner⁸³. Due to the general vulnerability of the people at the bottom of the pyramid, the distinctions between the various categories of poor are not clear cut and they change with time⁸⁴. In the context of this research, an important relationship has to be established between poverty, exclusion and vulnerability, as “the fundamental cause of not just insufficient income, but also little or no access to education, health care, decent housing and so on is often discrimination and processes of marginalization”⁸⁵. In this respect, using exclusively monetary indicators to measure poverty provides an unilateral view, as social phenomena such as exclusion, marginalization and discrimination are not taken into account. From this perspective, it can be argued that “exclusion begets poverty”⁸⁶ which in turn increases the vulnerability of the poor. Thus, a more accurate definition of microfinance is that of “a tool against financial exclusion”⁸⁷ as proposed in subchapter 2.1 rather than the provision of financial services to poor people.

Another important feature of microfinance clients is their entrepreneurial spirit. They are men and women in urban and rural areas, who are self-employed and managing one or more small businesses, using their determination and ingenuity in a multitude of activities, ranging from trade to production to services.

Text box 3: The entrepreneurial spirit of the poor⁸⁸

Rosa was born into a Quechua speaking household in a provincial area and she was orphaned at an early age. In 1964 she migrated to the capital city with her husband and two young children. After renting for a time, they participated in a land invasion on the urban periphery of Lima where they lived in a house with dirt floors and walls made out of straw mats. In 1982 Rosa received her first microloan from Accion Comunitaria, which she used to buy inventory for starting a small market stall, a business which she continues to operate today. Her business offers staple food products (abarrotes) and currently operates out of a store in the family home during afternoons and evenings, and out of the market stall across the street during morning hours. Three of Rosa’s six children have professions, the oldest son is a lawyer, a middle son is an Air Force pilot, and the daughter is a social worker. Two of the remaining three children have separate microenterprises. The oldest has a print shop and paper goods store, which is located across the street from the family home. Located within the store is a small beauty salon, which he contracts out to local beauticians. The middle son has an appliance repair business, which is located in the adjacent house. Rosa was planning the launching of her youngest son (eighteen years old) in his own computer graphics business. At the time of the interview, she was on her ninety-first credit.

They can be running a small market stall or selling goods on the street; they can be baking cookies, tailoring, small farming, producing furniture or they can be offering services such as transport, communication or even money transfer. They are poor, but due to the fact that they have some sort of economic activity which is providing a stable source of income they are not the poorest of the poor ⁸⁹. The third feature of the microfinance clients is the close connection between the household and the business, to such an extent that in the majority of cases we speak about “enterprises operated by […] households”⁹⁰. Because the family is the de facto owner of the business⁹¹, and the business activity is located in most of the cases in the family’s home⁹², there is an intimate relationship between the business and the family. There is no clear difference between the financial flows of one and the other, so money is flowing from the business to the family and vice versa. This observation leads us to the fourth characteristic of the microfinance clients, which is the fungible nature of their resources . Portfolios of the poor, a seminal book co-authored by Jonathan Morduch⁹³ studies in detail how the poor manage their finances through the analysis of 250 financial diaries of households in India, Bangladesh and South Africa. The authors found that poor people joggle with a multitude of financial instruments and financial relations with other family members, with moneylenders, with formal, semiformal or informal providers in order to face the uncertainties and shocks of daily life⁹⁴. The budget of poor households is fungible - it can be adjusted, divided and restructured in various ways⁹⁵. This is also true in the case of microloans - research revealed that only 50% of the borrowers use the microcredit they take for the business purpose declared, while the other half spends it on home improvement, school tuition, medical treatment or wedding expenses⁹⁶. While this may seem an arbitrary measure, the decision is taken by the household based on the importance it assigns to other non-business related needs.⁹⁷

2.1.3. What are the main methodologies of microfinance?

As we have seen, microfinance has become more and more complex over the last decades. This was also accompanied by a change in the methodologies used by the various microfinance institutions. As already stated in subchapter 2.1.1, the pioneering microfinance programmes used the “solidarity group lending”⁹⁸ technology, “in which every member of a group guaranteed the repayment of all members”⁹⁹. Apart from group lending, Cull, Demirgüç-Kunt et al. ¹⁰⁰ differentiate two more lending methodologies - village banking and individual lending. We will analyse their characteristics in the following paragraphs.

Group Lending

According to Wright, the main features of the group lending model are peer pressure and peer support, group guarantee and joint liability..¹⁰¹ The roots of group lending can be traced back to the 19th century Europe, when Friedrich Wilhelm Raiffeisen developed in 1849 the first rural credit union¹⁰² based on the idea of “financial cooperation”¹⁰³. The peer pressure acts as a loan default deterrent - in case the borrower does not pay his loan he will be stigmatized by the other members of the group. This is further enforced by the proximity of the group’smembers¹⁰⁴. Although the loans are made to the individual members, the whole group guarantees loan repayments and is held responsible in case problems appear¹⁰⁵. The joint liability acts as a social contract which ensures the repayment of loans due to the fact that it diminishes the moral risk associated to any single borrower and reduces adverse selection of borrowers through the use of the local information.¹⁰⁶

Village Bank

The village banks are associations of credit and savings which are managed by rural communities. The village bank methodology is a way of providing access to financial systems in remote or difficult to reach areas, while in the same time building a community self-help group and helping the members save money.¹⁰⁷ The model originated in a 1985 experiment carried out by the Foundation for International Community Assistance (FINCA) in Costa Rica. A group of villagers (usually women) is formed, made up of 30 to 50 members, who enjoy high autonomy with respect to the loan decisions and the group management¹⁰⁸. A loan from a sponsoring organisation makes up the initial capital which is saved in an external account. Group members have to save up to 20% of the amount they request as a loan (which starts at approximately 50 USD for the first one), and the interest is used to cover the costs. The member’s savings are kept in an internal account, where the depositors have access according to their necessities. Due to their group nature, the village banks make full use of the local information and peer pressure, but without forming small groups characteristic to the group-lending methodology.¹⁰⁹

Individual lending

The individual lending methodology is based on a bilateral relationship between the lender and the borrower. The loan decision is taken by the microfinance institution based on financial information, analysis of the business and of the client, collateral and the character of the borrower. As individual lending requires frequent visits to the client, it is most successful in urban areas with a high concentration of clients. In general, the average amount of the loans given according to the individual lending methodology is higher than the average amount of the loans given using the group-lending methodology.¹¹⁰

Table 1: Comparison between individual lending and group lending methodologies¹¹¹

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¹ UNCDF, "Microfinance and the Millennium Development Goals. A reader’s guide to the Millennium Project

² Reports and other UN documents", 2005, p. 5 Gilbert RIST, The History of Development. From Western Origins to Global Faith, 3rd edition, Zed Books, London, 2008, p. 212

³ As Morduch calls it in Jonathan MORDUCH, "The Microfinance Schism", World Development Vol. 28, No. 4, 2000, pp. 617-629

⁴ The Norwegian Nobel Committee, Press Release, Oslo, 13 October 2006

⁵ http://www.muhammadyunus.org/In-the-Media/ and

http://www.spiegel.de/international/business/0,1518,734650,00.html (retrieved 12 January 2011)

⁶ Amy KAZMIN, Daniel DOMBEY, “Bangladesh High Court upholds Yunus exit”, Financial Times, 8 March 2011

⁷ Oliver J. HAAS, “Overindebtedness in Germany” Working Paper No. 44, Social Finance Program, International Labour Organization, Geneva, 2006, p. 1

⁸ Jessica SCHICKS, "Microfinance Over-Indebtedness: Understanding its drivers and challenging the common myths", Centre Emile Bernheim, Solvay Brussels School, Brussels, 2010, p. 1

⁹ David LASCELLES, Sam MENDELSON, Microfinance Banana Skins 2009. Confronting crisis and change, CSFI, New York, 2009

¹⁰ “One of the biggest concerns is the high level of indebtedness that already exists among microfinance borrowers in many markets. Damian von Stauffenberg of MicroRate in the US said that ‘overindebtedness is rising and could come back to haunt the microcredit industry’. Sanjay Sinha, managing director of M-CRIL in India, said that ‘the over-indebtedness of clients is emerging as a key problem in the microfinance sector. This could lead to portfolio quality problems in the medium term’. Similar responses came from most parts of the globe”, David LASCELLES, Sam MENDELSON, Microfinance Banana Skins 2009. Confronting crisis and change, CSFI, New York, 2009, p. 15

¹¹ COPEME, "Microfinanzas en el Perú. Reporte Julio 2010", Lima, July 2010, pp. 53 sq.

¹² Vivien KAPPEL, Annette KRAUSS, Laura LONTZEK, “Over-Indebtedness and Microfinance. Constructing an Early Warning Index”, Center for Microfinance, University of Zurich, Zurich, 2010

¹³ Id., p. 41

¹⁴ Jessica SCHICKS, "Microfinance Over-Indebtedness: Understanding its drivers and challenging the common myths", Centre Emile Bernheim, Solvay Brussels School, Brussels, 2010

¹⁵ Id., p. 15

¹⁷ Marguerite ROBINSON, The microfinance revolution. Sustainable finance for the poor, The World Bank, Open

Society Institute, Washington, 2001, p. 126

Jean-Michel SERVET, Isabelle GUÉRIN, Marc ROESCH, "Microfinance, Financial Inclusion and Social Responsibility" in Finance for a better world. The shift towards sustainability, Henri-Claude de Bettignies and François Lépineux (eds.), Palgrave Macmillan, London, 2009, pp. 7 - 29

¹⁹ Ibidem

²⁰ Ibidem

²¹ According to Jean-Michel Servet: “Les expressions désignant ou qualifiant les divers services réunis ici sous l’appellation microfinance et les modalités d’intervention de ses nombreux dispositifs sont multiples. Elles se recouvrent imparfaitement en mettant l’accent sur tel ou tel aspect du phénomène. On parle de microcrédit et de crédit solidaire, de finance décentralisée ou services financiers décentralisés (SFD), de finance-semi formelle, de finance intermédiaire, de services financiers de proximité, avec le double sens de la proximité (c’est-à-dire spatiale mais aussi mentale et culturelle), tout comme de finance solidaire, qui en anglais est souvent traduit par ‘social finance’“, Jean-Michel SERVET, Banquiers aux Pieds Nus. La Microfinance, Odile Jacob, Paris, 2006, pp. 224 - 225

²² Jean-Michel SERVET, Banquiers aux Pieds Nus. La Microfinance, Odile Jacob, Paris, 2006

²³ Id., p. 224

²⁴ For example, MiBanco in Peru had a total loan outstanding of 1.186 million USD as of June 2010, but this corresponded to 376,000 loans. In Mexico, Banco Compartamos had a loan portfolio of 488 million USD as of December 2009, but with 1,488,897 loans outstanding it meant that the average amount of each loan was a little more than 300 USD. Source: COPEME, "Microfinanzas en el Perú. Información a Junio 2010", Lima, September 2010, p. 13 and Renso MARTÍNEZ, María Cecilia RONDÓN et al.,"2010 Microfinance Americas: The Top 100", 2010, p. 7. It should be noted here that a small loan amount does not necessarily imply a low monthly payment: as most microfinance loans are given on short terms (less than a year), the pressure of instalment repayment on the household budget can be considerable. Therefore, in order to make certain comparisons one should also take into account the amount the household has to pay month by month.

²⁵ Jean-Michel SERVET, Banquiers aux Pieds Nus. La Microfinance, Odile Jacob, Paris, 2006, p. 225

²⁶ Id., pp. 61 sq., 225 - 228

²⁷ Brigit HELMS, Access for all. Building inclusive financial systems, CGAP, Washington, 2006; Marguerite ROBINSON, The microfinance revolution. Sustainable finance for the poor, The World Bank, Open Society Institute, Washington, 2001; Joanna LEDGERWOOD, Microfinance handbook. An institutional and financial perspective, The World Bank, Washington, 1999

²⁸ Heather MONTGOMERY, John WEISS, “Great Expectations. Microfinance and Poverty Reduction in Asia and Latin America”, ADB Institute, Research Paper Series, No. 63, 2005; David ROODMAN, Jonathan MORDUCH,

²⁹ See Heather MONTGOMERY, John WEISS, “Great Expectations. Microfinance and Poverty Reduction in Asia and Latin America”, ADB Institute, Research Paper Series, No. 63, 2005 for a thorough list of microfinance impact studies in Asia and Latin America and their conclusions

³⁰ Jean-Michel SERVET, "Quelques limites du microcrédit comme levier du développement", Informations et commentaires, no. 143, Lyon, 2008, p. 19. See also Richard ROSENBERG, "Does microcredit really help poor people?", CGAP Focus Note No. 59, Washington, 2010 Susan JOHNSON, "Microfinance is dead! Long live microfinance. Critical reflections on two decades of microfinance policy and practice", Centre for Development Studies, University of Bath, 2009, p. 3

³² Jean-Michel SERVET, "Responsabilidad social y responsabilidad con la sociedad en microfinanzas", Programa

³³ ANR Sud RUME 2008-2011, Documento de trabajo Servet/2008.05.01/01, p. 7 Beatriz ARMENDARIZ, Jonathan MORDUCH, The Economics of Microfinance, Second Edition, MIT Press, Cambridge, 2010, p. 5

³⁴ Manfred ZELLER, Richard L. MEYER, The Triangle of Microfinance: Financial Sustainability, Outreach, and

Impact, Johns Hopkins University Press, Washington, 2002, p. 1

³⁵ Stuart RUTHERFORD, “Microfinance’s evolving ideals: how they were formed and why they’re changing” paper presented at ADBI Conference, Microfinance in Asia: poverty impact and outreach to the poor, Dec. 5, 2003, Tokyo, p. 4

³⁶ BANCOSOL, “BancoSol: del microcrédito a las microfinanzas”, BancoSol, La Paz, Bolivia, p. 13

³⁷ Ibidem

³⁸ Id., pp. 8 - 13

³⁹ Stuart RUTHERFORD “Microfinance’s evolving ideals: how they were formed and why they’re changing” paper presented at ADBI Conference, Microfinance in Asia: poverty impact and outreach to the poor, Dec. 5, 2003, Tokyo, p. 5

⁴⁰ J. D. Von PISCHKE, Dale W. ADAMS, "Microenterprise Credit Programs: Déjà Vu", Economics and Sociology Occasional Paper No. 1828, 1991, p. 3

⁴¹ Brigit HELMS, Access for all. Building inclusive financial systems, CGAP, Washington, 2006, p. 4

⁴² J. D. Von PISCHKE, Dale W. ADAMS, "Microenterprise Credit Programs: Déjà Vu", Economics and Sociology Occasional Paper No. 1828, 1991, p. 17

⁴³ Gary M. WOLLER, Christopher DUNFORD et al., "Where to microfinance?", International Journal of Economic Development, Vol. 1, No. 1, 1999, p. 11

⁴⁴ Brigit HELMS, Access for all. Building inclusive financial systems, CGAP, Washington, 2006, p. 3

⁴⁵ Lucy CONGER, Patricia INGA et al., The mustard tree. A history of Microfinance in Peru, Universitad de San Martin de Porres, Lima, 2009, p. 18. The poverty alleviation approach is described in detail in subchapter 2.2

⁴⁶ Anita CAMPION, Elizabeth DUNN, "The Transformation of Acción Communitaria del Perú (ACP) to Mibanco", 2001, p.1

⁴⁷ Lucy CONGER, Patricia INGA et al., The mustard tree. A history of Microfinance in Peru, Universitad de San Martin de Porres, Lima, 2009, p. 51

⁴⁸ Renso MARTÍNEZ, María Cecilia RONDÓN et al., "2010 Microfinance Americas: The Top 100", 2010, p. 7

⁴⁹ Lucy CONGER, Patricia INGA et al., The mustard tree. A history of Microfinance in Peru, Universitad de San Martin de Porres, Lima, 2009, p. 20

⁵⁰ Marguerite ROBINSON, The microfinance revolution. Sustainable finance for the poor, The World Bank, Open Society Institute, Washington, 2001, p. 52

⁵¹ “The top microlenders boast repayment rates of 98 percent and higher, achieved without requiring that loans be secured with collateral.” From Robert CULL, Asli DEMIRGÜÇ-KUNT et al., "Microfinance Meets the Market", Policy Research Working Paper 4630, The World Bank, Washington, 2008, p. 4

⁵² Robert CULL, Asli DEMIRGÜÇ-KUNT et al., "Microfinance Meets the Market", Policy Research Working Paper 4630, The World Bank, Washington, 2008 , p. 5

⁵³ “By the end of the decade BRI had also shown that its microbanking system could service more than 6 million savings accounts and could operate its entire microbanking system without subsidy” Marguerite ROBINSON, The microfinance revolution. Sustainable finance for the poor, The World Bank, Open Society Institute, Washington, 2001, p. 54

⁵⁴ Lucy CONGER, Patricia INGA et al., The mustard tree. A history of Microfinance in Peru, Universitad de San Martin de Porres, Lima, 2009, pp. 42, 45

⁵⁵ See Table 6: The Peruvian microfinance institutions at a glance for a detailed description of the institutions composing the Peruvian microfinance sector

⁵⁶ FEPCMAC, http://www.fpcmac.org.pe/?s=institucional&p=resena-historica (retrieved 13 December 2010)

⁵⁷ Marguerite ROBINSON, The microfinance revolution. Sustainable finance for the poor, The World Bank, Open Society Institute, Washington, 2001, pp. 54 ff

⁵⁸ Id. p. 63

⁵⁹ Id. p. 67

⁶⁰ See Elisabeth RHYNE, “The Yin and Yang of Microfinance: Reaching the Poor and Sustainability”, 1998, MicroBanking Bulletin 2, pp. 6 - 8; Brigit HELMS, Access for all. Building inclusive financial systems, CGAP, Washington, 2006; Marguerite ROBINSON, The microfinance revolution. Sustainable finance for the poor, The World Bank, Open Society Institute, Washington, 2001

⁶² Marguerite ROBINSON, The microfinance revolution. Sustainable finance for the poor, The World Bank, Open

⁶³ Society Institute, Washington, 2001, p. 22 Elisabeth RHYNE, “The Yin and Yang of Microfinance: Reaching the Poor and Sustainability”, 1998, MicroBanking Bulletin 2, p. 7

⁶⁴ Dani RODRIK, “Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform”, Journal of Economic Literature, Vol. XLIV, December 2006, p. 973

⁶⁵ Speech by Milford Bateman “Microfinance in the time of neoliberalism”, Overseas Development Institute,

⁶⁴ London, 5th July 2010, http://www.odi.org.uk/events/report.asp?id=2447&title=microfinance-time- neoliberalism#audio-video

⁶⁶ “acquis sociaux” in original

⁶⁷ “Cette extension a priori de la finance s’est produite dans un contexte néolibéral: celui des dérégulations, des privatisations, des plans d’ajustement structurel et de la remise en cause d’«acquis sociaux»; ou indirectement par délocalisation des biens et services produits ainsi à bas couts. Sa propagation s’est faite dans la cadre général de l’intensification de la financiarisation des sociétés et de l’essor de nouvelles modalités de celle-ci: une monétarisation accrue, une intermédiation financière croissante des transactions, une couverture par assurance privée et par capitalisation des risques et de la protection sociale, et au sommet de cette pyramide le bouillonnement de masses financières considérables disponibles pour les mouvements spéculatifs.”, Jean-Michel SERVET, Banquiers aux Pieds Nus. La Microfinance, Odile Jacob, Paris, 2006, p. 13

⁶⁸ Lucy CONGER, Patricia INGA et al., The mustard tree. A history of Microfinance in Peru, Universitad de San Martin de Porres, Lima, 2009, pp. 61 sq.

⁶⁹ Joseph E. STIGLITZ, "The post Washington Consensus Consensus", Sao Paolo, August 22, 2005

⁷⁰ Deepa NARAYAN (dir.), Voices ofthe Poor. Can

anyone hear us? Oxford University Press, New York,2000

The Norwegian Nobel Committee, Press Release, The Nobel Peace Prize for 2006,

http://nobelprize.org/nobel_prizes/peace/laureates/2006/press.html (retrieved 15 December 2010)

⁷² Greg CHEN, Stephen RASMUSSEN et al.,"Indian Microfinance Goes Public. The SKS Initial Public Offering",

⁷³ CGAP Focus Note No. 65, Washington D.C., 2010 The Associated Press, "Microfinance IPO, mission conflict",

http://www.pressherald.com/business/microfinance-ipo-mission-conflict_2010-07-29.httml (retrieved 10

December 2010)

⁷⁴ Marguerite ROBINSON, The microfinance revolution. Sustainable financefor the poor, The World Bank, Open Society Institute, Washington, 2001, p. 17

⁷⁵ Deepa NARAYAN et al., Voices of the Poor. Can anyone hear us?, World Bank, Oxford University Press, New York, 2000

⁷⁶ Jean Michel SERVET, Amadou DIOP, Isabelle HILLENKAMP, “Poverty versus Inequality”, in Bernd BALKENHOL (ed.), Microfinance and public policy. Outreach, performance and efficiency, International Labour Organization,

⁷⁷ Palgrave Macmillan, Hampshire, 2007, pp. 27 - 46 See Jean Michel SERVET, Amadou DIOP, Isabelle HILLENKAMP, “Poverty versus Inequality”, in Bernd BALKENHOL (ed.), Microfinance and public policy. Outreach, performance and efficiency, International Labour Organization, Palgrave Macmillan, Hampshire, 2007 for a comprehensive analysis on poverty, how it is measured and its relation with microfinance

⁷⁸ Adapted from Marguerite ROBINSON, The microfinance revolution. Sustainable finance for the poor, The World Bank, Open Society Institute, Washington, 2001, p.21 and C.K. PRAHALAD, Stuartt L. HALL, "The Fortune at the Bottom of the Pyramid", strategy+business no. 26, Booz Allen Hamilton, 2002, p. 4

⁷⁹ Marguerite ROBINSON, The microfinance revolution. Sustainable finance for the poor, The World Bank, Open Society Institute, Washington, 2001, p. 20

⁸⁰ Id. p. 18. There is a direct link between extreme poverty and the precarious nature of the households and their incomes. While at times a household can be above the line of extreme poverty, an external shock (illness, loss of assets, death of a cow that provides milk, etc.) can cause it to fall back to extreme poverty.

⁸¹ According to Marguerite ROBINSON “the poorest of the poor should not be the responsibility of the financial sector. The food, employment, and other basic requirements needed to overcome desperate poverty are appropriately financed by government and donor subsidies and grants. These tools are properly the responsibility of ministries of health, labor, social welfare, and others, as well as of donor agencies and private charities”, The microfinance revolution. Sustainable finance for the poor, The World Bank, Open Society Institute, Washington, 2001, p. 20

⁸² Brigit HELMS, Access for all. Building inclusive financial systems, CGAP, Washington, 2006, p. 30

⁸³ Marguerite ROBINSON, The microfinance revolution. Sustainable finance for the poor, The World Bank, Open Society Institute, Washington, 2001, p.20

⁸⁴ Id., p. 19

⁸⁵ Jean Michel SERVET, Amadou DIOP, Isabelle HILLENKAMP, “Poverty versus Inequality”, in Bernd BALKENHOL (ed.), Microfinance and public policy. Outreach, performance and efficiency, International Labour Organization, Palgrave Macmillan, Hampshire, 2007, p. 32

⁸⁶ Id., p. 32

⁸⁷ See footnote 18

⁸⁸ Adapted by the author from Elizabeth DUNN, “Diversification in the household economic portfolio”, Assessing the Impact of Microenterprise Services (AIMS), Management Systems International, Washington, 1997, pp. 15 - 16. Similar examples of determination and entrepreneurial spirit were encountered by the author during the field study. Just to quote two of them: Mrs. Margarita Borda started a sewing business in the difficult decade of the 90’s terrorism. Due to the constant threats at the time, she opened a clandestine workshop in her home. Later, she bought a sewing machine and she started offering sewing services in the textile market of Gamarra. Now she owns her own shop producing children clothes which are sold locally and exported to France. Mrs. Rosa Mamani started selling spices in Lima 21 years ago. In the 90’s she moved to a more central area, but her business was evicted with other small shops due to an order of the mayor, as the terrain was public. Later she bought her own market stall next to her house. Apart from the spice stall, she was also selling snacks and hamburgers she made at home.

⁸⁹ Joanna LEDGERWOOD, Microfinance handbook. An institutional and financial perspective, The World Bank, Washington, 1999, p. 2

⁹⁰ Id., p. 3

⁹¹ Marguerite ROBINSON, The microfinance revolution. Sustainable finance for the poor, The World Bank, Open Society Institute, Washington, 2001, p. 11

⁹² Brigit HELMS, Access for all. Building inclusive financial systems, CGAP, Washington, 2006

⁹³ Baryl COLLINS, Jonathan MORDUCH et al., Portfolios of the Poor. How the World's poor Live on $2 a Day, Princeton University Press, New Jersey, 2009

⁹⁴ Id., p. 14

⁹⁵ Id., p. 30

⁹⁶ Don JOHNSTON, Jonathan MORDUCH, Microcredit vs. Microsaving. Evidence from Indonesia, New York, 2007

⁹⁷ “A fundamental but easily overlooked lesson from the diaries is that the demand for microcredit extends well beyond the need for just microenterprise credit. The poor households in the study seek loans for a multitude of uses besides business investment: to cope with emergencies, acquire household assets, pay schooling and health fees, and, in general, to better manage complicated lives. […] microcredit is often diverted from its intended uses (of running businesses) to other uses ranked more important by households. This lesson has not yet been well recognized by promoters of microcredit and microfinance.” Baryl COLLINS, Jonathan MORDUCH et al., Portfolios of the Poor. How the World's poor Live on $2 a Day, Princeton University Press, New Jersey, 2009, p. 25

⁹⁸ Brigit HELMS, Access for all. Building inclusive financial systems, CGAP, Washington, 2006, p. 4

⁹⁹ Id., p. 4 Robert CULL, Asli DEMIRGÜÇ-KUNT et al., “Financial Performance and Outreach: A Global Analysis of

¹⁰⁰ Leading Microbanks”, Policy Research Working Paper 3827, World Bank, Washington, 2006, pp. 4 - 5

¹⁰¹ Graham WRIGHT, Microfinance systems. Designing quality financial services for the poor, Zed Books Ltd., London, 2000, p. 52

¹⁰² The institution was called Heddesdorfer Darlehnskassenverein, which could be translated as Cooperative lending bank of Heddesdorf. According to Prinz (2002), the main features of the cooperative were: a) the members were recruited exclusively from the local parish; b) all the members of the community were entitled to benefit from its services, even the poorest; c) no entrance fee was charged and no dividends were paid; d) the members had unlimited liability in case of bankruptcy; e) loans had flexible terms and a very short period of notice, usually one day; f) the cooperative was also providing additional services to its members, such as buying raw-materials or machinery; g) the profits were collected in an „undividable fund“. Michael PRINZ, “German Rural Cooperatives, Friedrich-Wilhelm Raiffeisen and the Organization of Trust. 1850 - 1914”, Paper delivered to the XIII IEHA Congress Buenos Aires, Session 57, 2002, p.10

¹⁰³ “Coopérativisme financier” in original, Jean-Michel SERVET, Banquiers aux Pieds Nus. La Microfinance, Odile Jacob, Paris, 2006, p. 207

¹⁰⁴ Aliya KHAWARI, "Microfinance. Does it hold its Promises? A survey of recent literature", HWWA Discussion Paper No.276, Hamburg, 2004, p. 21

¹⁰⁵ Beatriz ARMENDÁRIZ, Jonathan MORDUCH, “Microfinance beyond group lending”, Economics of Transition, Volume 8 (2) 2000, p. 402

¹⁰⁶ Robert CULL, Asli DEMIRGÜÇ-KUNT et al., “Financial Performance and Outreach: A Global Analysis of Leading Microbanks”, Policy Research Working Paper 3827, World Bank, Washington, 2006, pp. 4 - 5

¹⁰⁷ Joanna LEDGERWOOD, Microfinance handbook. An institutional and financial perspective, The World Bank, Washington, 1999, p. 85

¹⁰⁸ In Peru, the “village banking methodology began to expand after the creation of the FINCA Perú programme in Ayacucho in 1993, which followed several pilot projects in the region beginning in 1990. […]The main entities specialising in Village Banking are members of the Consortium for Promotion of Women and the Community (Consorcio de Promoción de la Mujer y la Comunidad, PROMUC). PROMUC currently has 13 associates, seven of whom have joined since 2006 […] Another group of microfinance entities consists of organisations that are unregulated, but which have extensive experience in microfinance activities. The microfinance initiative of COPEME, the consortium of private organisations for development of small businesses and microenterprise, includes 17 specialised microfinance NGOs in its information system […]; 10 of these organisations operate with village bank technology, mainly serving women”, Sara PAIT, "The microfinance sector in Peru. Opportunities, challenges and empowerment with gender mainstreaming", 2009, pp. 22 sq.

¹⁰⁹ Jonathan MORDUCH, "The Microfinance Promise", Journal of Economic Literature, Volume 37, Nashville, 1999, p. 1579

¹¹⁰ Joanna LEDGERWOOD, Microfinance handbook. An institutional and financial perspective, The World Bank, Washington, 1999, p. 68

¹¹¹ From Hans DELLIEN et al., Product Diversification in Microfinance: Introducing Individual Lending, Women’s World Banking, New York, 2005, pp. 2 - 3