Like every Friday, from Raj Nallari and Breda Griffith's lecture notes.
Commercial banks, credit unions, governments, private sector, including small non-governmental organizations, are all involved in providing small finance. In recent years, MFIs, such as Grameen Bank, also offer deposit taking facilities, saving schemes, pensions, and micro-insurance products. MFIs have been successful in some countries as they have focused on lending to women by using peer collateral and monitoring systems. Most of microfinance is for urban and rural activities, such as dairy farming, setting up grocery shops, bamboo-making and weaving, tailoring, rickshaw driving, etc.
Reliable data is not available but an advocacy group based in USA called Microcredit Summit Campaign estimates that number of MFIs has increased from 78 agencies serving 9 million customers in 2000 to over 420 agencies serving about 64 million customers. In a large number of cases, the MFIs are subsidized through financial grants by governments, international donors, private philantrophy, including by commercial banks in the name of corporate social responsibility. Therefore, there is an issue of financial sustainability of MFIs and whether ‘subsidized’ MFIs are crowding out sustainable MFIs (which are more efficiently managed). Several studies also suggest that the poorest, particularly poor women, seldom benefit from micro-credit, while the middle and upper poor benefit the most. The poorest 10-15 per cent of the population is largely excluded from micro-credit programs. Moreover, interest rates on micro-finance are relatively high in the range of 20-35% per year or more in most low income developing countries. Particularly higher is the interest rate charged if microcredit is operated by private sector entities. This is justified on the basis that transaction costs are high for doing such business and there is a risk premium involved (despite the fact that the poor have higher repayment loans than richer segments of the population)
The impact of micro-credit alone on women’s status and gender equity is limited. Most women borrowers have only partial control over loans, or have relinquished all control to male members of the family. This has serious implications for the impact of gender equity. However, this is not to say benefits are non-existent. As part of a broader effort to raise awareness and mobilize women, credit could play an important role as an “entry point” to strengthen women’s networks and mobility, increase their knowledge and self-confidence, and increase their status in the family. Participatory appraisal may have an important contribution to make to improved monitoring of the impact of micro-credit on women’s empowerment.
Financial Gender Gap. There are several other issues related to differential impact on men and women because of the behavioral aspects, structure of financing and availability of credit. In summary,
- Women are observed to more risk averse than men. For example, women are found to be less likely to invest their pension contributions or take large loans in part due to lack of collateral assets, such as land, but also due to additional social responsibilities, such as providing security to children, or due to lower earnings of women relative to men, or lacking skills in financial planning or women are perceived to be high-risk clients for large loans and therefore do not have access to large loans.
- Economic expansion, credit availability, and financial sector widening go together in developing countries. However, there is adequate evidence that credit primarily goes to large conglomerates in most developing countries (e.g. Mauritania, and Mexico) and to a lesser extent to men, and least of all to women, who get residual credit. The reasons for this situation is that women have little or no collateral assets to obtain credit and modern land registration and titling practices generally fail to recognize traditionally gendered forms of asset ownership.
- Women in particular need training, marketing, literacy, social mobilization, and other financial services (e.g., consumption loans, savings) in addition to micro-credit for ensuring success. More importantly, women could enormously benefit from micro-insurance schemes that aim to cushion against risks related to health, agricultural commodity shocks, and small business ownership (and little is understood and micro-insurance is a neglected subject)