Wednesday, February 4, 2009

Classifying microcredit programs

In Creating a World Without Poverty: Social Business and the Future of Capitalism, Muhammad Yunus laments the return of moneylenders who have ignored the original intent of microcredit – to help the poor.

Here is an excerpt from the book where he describes the problem:

Microcredit is supposed to describe loans offered with no collateral to support income-generating businesses aimed at lifting the poor out of poverty. Yet today there are many organizations that call themselves “microcredit” programs that offer loans to people who are not poor, that require collateral, and that are used primarily for consumption rather than income generation. There are even “microcredit” programs that are generating enormous profits for investors by charging interest rates as high as 100 percent or even higher!

Under the circumstances, we really don’t know what we are talking about when we talk about microcredit. I think it is time we classify microcredit programs according to clear, consistent categories. Here are the categories I would propose:

Type 1: Poverty-Focused Microcredit Programs
These are poverty-focused, collateral-free, low-interest microcredit programs. Grameen Bank was created to provide this type of microcredit. Type 1 programs charge interest rates that fit into one of two zones: the Green Zone, which equals the cost of funds at the market rate plus up to 10 percent, and the Yellow Zone, which equals the cost of funds at the market rate plus 10 to 15 percent.

Type 2: Profit-Maximizing Microcredit Programs
These are programs that charge an interest rate higher than the Yellow Zone. They operate in the Red Zone, which is moneylenders’ territory. Because of the high interest they charge, these programs cannot be viewed as poverty-focused but rather are commercial enterprises whose main objective appears to be earning large profits for shareholders or other investors.

This classification may be adjusted for special situations, such as when high salary costs make operating expenses unusually heavy. And these principles will not apply where the microcredit organization is owned by the borrowers.

However, I think the secretariat for the Microcredit Summit Campaign, which maintains the database of all microcredit programs, should classify programs according to a system like the one I propose. What’s more, I believe that the Microcredit Summit Campaign should include only Type 1 programs, since only these contribute to the campaign’s goal of using microcredit to help eliminate global poverty.

Yunus' book was published more than one year ago. I have not been able to find a rating system such as the one proposed for microcredit organizations. If the Microcredit Summit Campaign has made such information available, I cannot find it. Another organization,, claims to be the "venue for the Microfinance industry to publicly demonstrate its commitment to pricing transparency, integrity and poverty alleviation." They launched in the summer of 2008 but it does not appear they have any publicly available data.

Does anyone know if the rating information requested by Muhammed Yunus is available on the web in a transparent manner yet? If I get the chance, I'll ask him tonight when he speaks at George Washington University.


Tom said...

Someone just shared with me an additional description from Dr. Yunus which is very helpful. This is from December 2008.

What is microcredit?

Tom said...

Here are a few excerpts from the article I just linked to in the previous comment that are especially helpful to this discussion.

"I think this is creating a lot of misunderstanding and confusion in
the discussion about microcredit. We really don't know who is talking about what. I am proposing that we put labels to various types of microcredit so that we can clarify at the beginning of our discussion which microcredit we are talking about. This is very important for arriving at clear conclusions, formulating right policies, designing appropriate institutions and methodologies. Instead of just saying "microcredit" we should specify which category of microcredit. "

"Microcredit data are compiled and published by different organizations. We find them useful. I propose that while publishing these data we identify the category or categories of microcredit each organization provides. Then we can prepare another set of important
information — number of poor borrowers, and their gender composition, loan disbursed, loan outstanding, balance of savings, etc. under each of these categories, countrywise, regionwise, and globally."

"These sets of information will tell us which category of microcredit is serving how many poor borrowers, their gender break-up, their growth during a year or a period, loans disbursed, loans outstanding, savings, etc. The categories which are doing better, more support can go in their direction. The categories which are doing poorly may be helped to improve their performance. For policy-maters this will be enormously helpful. For analysis purpose this will make a world of

"I urge Microcredit Summit Campaign secretariat to present the information that they already collect on number of clients, number of the poorest among them, number of poorest clients that are women, number of clients that have crossed the poverty line ?broken down for each of the categories of microcredit. This will help donors to select the categories they would like to support. This sorting out is very important for the donors, as well as the policymakers."