In Stockholm, a global dialogue on microcredit focuses on social impact

Some 80 leading specialists on microfinance, gathered for a face-to-face exchange, warn of new challenges as large financial institutions and other major players increasingly turn to small-scale lending.

STOCKHOLM - In an effort to ensure that the global rush to promote small-scale lending does not overlook the human and cultural dimensions of development, some 80 leading specialists on microfinance gathered here in April to discuss how to balance economic sustainability and social impact as large financial institutions increasingly enter the field of microcredit.

Convened by the European Bahá'í Business Forum (EBBF) and the Progressio Foundation of the Netherlands as part of a parallel Business Forum held in conjunction with the UNESCO Intergovernmental Conference on Cultural Policies for Development, the Global Dialogue on Microfinance and Human Development was held 2-3 April 1998. The meeting drew together leading practitioners, specialists, donors, business people and representatives from financial institutions and non-governmental organizations (NGOs) from some 25 countries.

The Dialogue focused on promoting a face-to-face exchange between the various players in the burgeoning world of microcredit and, while no formal vote or final statement was issued, the general discussion made it clear that the movement faces a number of important challenges as it seeks to expand.

"We are at a critical point in the microfinance movement where a split in thinking is occurring," said Barbara Rodey, the Dialogue's coordinator. "On one side there is the need to find funding sources and on the other is the need to best serve the interests of the poor. How we can get these two positions together will determine the real outcome. Is the purpose of microfinance to give the economy a boost or to provide for human well-being, going beyond finances?

"The Marshall Plan was based on the premise that enough financial resources will lift humanity out of poverty," said Ms. Rodey, who is executive director of the EarthRise Development Network, a USA-based microfinance consultancy, and a member of the EBBF. "Yet the gap in income globally has more than doubled in the last 30 years. The global economy has bypassed one fifth of the world's population. We are still promoting the growth-led model. The sustainable model is a new way of thinking based on principles of equity and justice. Financial services alone cannot provide the base for development."

UNESCO Secretary-General Federico Mayor addressed the Dialogue during a joint plenary, held in conjunction with the First UNESCO Business Forum on Enterprise, Human Development & Culture in the Global Age, as the Business Forum component of the UNESCO intergovernmental meeting was known. Other well-known participants in the Microfinance Dialogue included Muhammad Yunus, director of the Grameen Bank in Bangladesh, one of the world's leading experts on microcredit; Jean-François Giovannini, deputy director-general of the Swiss Agency for Development and Cooperation; Rosalind Copisarow, chair of Fundusz Mikro in Poland; Christopher Dunford, president of Freedom from Hunger; John Hatch, founder of FINCA International; and Monica Hernandez, vice president of Banco Solidario, an affiliate of ACCION in Ecuador.

Increased interest by banks

Due in part to last year's Microcredit Summit, an increasing interest is being shown at all levels in using microfinance to alleviate poverty. Held 2-4 February 1997 in Washington, DC, the Summit brought together some 2,200 people from 112 countries to forge support for a global action plan to promote small-scale lending and entrepreneurship at the grassroots level worldwide. The stated goal of the Summit was to expand access to microcredit to some 100 million of the world's poorest families by the year 2005. Currently, some 8 million families are estimated to receive microcredit loans, which typically run from $50 to $500.

The Summit drew the attention

"We are at a critical point in the microfinance movement where a split in thinking is occurring. On one side there is the need to find funding sources and on the other is the need to best serve the interests of the poor."

-- Barbara Rodey, the Dialogue's coordinator.

"We are at a critical point in the microfinance movement where a split in thinking is occurring. On one side there is the need to find funding sources and on the other is the need to best serve the interests of the poor."

-- Barbara Rodey, the Dialogue's coordinator.

and participation not only of many NGOs who had long been involved in microcredit but also of major international corporations and banks, as well as intergovernmental institutions like the UN and the World Bank. Many of these new players pledged to commit significant new resources to microcredit efforts.

Although microcredit programs vary by region, one of their key innovations is the organization of clients into small "solidarity groups" in which members pledge to satisfy each other's debt, providing a form of "social capital" that helps ensure that loans are repaid. NGOs have played a key role in assisting people to organize such groups and in administering such loans, which many banks had believed were too small to be profitable. Yet some of these programs have been highly successful, achieving repayment rates of more than 90 percent.

The participants in this year's Dialogue stressed repeatedly that microcredit programs, which are also known as microfinance programs, remain among the best methods for alleviating global poverty. The often-expressed concern was, however, that the new partners in the microcredit movement should not just focus on the bottom line and/or simply seek to "scale-up" microcredit concepts to reach small entrepreneurs, who may be more likely to be profitable.

"Microfinance is an emerging business and a learning process for us all," said Prof. Yunus of the Grameen Bank. "It is different from our former approaches. Credit means trust. Conventional banking took over the word and made a business on distrust. Legal fine print is used to tie people down. Millions of loans - $4 million daily - are given without lawyers with a basically very different system. This is a different animal altogether, a system that is based on people. We need to be selective about banking methods, because the world of trust is quite different from the world of distrust."

Prof. Yunus was critical, for example, of new micro-banking regulations that some large institutions have recently proposed. "From the world of distrust, consultants come to establish a 'regulatory framework' and collect high fees. But first comes self-regulation. This should emerge from the industry itself.

"An unpolished diamond"

"Microcredit can grow on its own, developing skills and methodology. It's a new industry and now it may look like an unpolished diamond. But don't throw it away; later it will dazzle," Prof. Yunus said.

Ms Copisarow, who as chair of Fundusz Mikro heads one of the leading microfinance practitioners in Eastern and Central Europe, said she believes that microcredit has the potential to bring banking back to its origins.

"Microcredit is educating bankers worldwide about the real meaning of banking," Ms Copisarow said. "'Credo' means 'I believe, I trust,' which is a concept that banking has long done away with. The practice of the Medici family to give private money is a thing of the past. Perhaps the next 20 years will be the opportunity to go back to these banking roots. Everything can be approached in two ways: either to gain maximum profit or to gain maximum well-being. It was normal in the 15th century to view banking as a means to gain maximum well-being. This perspective could now be returning to the banking world via microfinance."

Focus on children, families

Mr. Dunford of Freedom from Hunger, a USA-based antipoverty NGO, likewise stressed the importance of values and moral principles, such as an emphasis on social equity, the advancement of women, and the need to ensure that the poorest of the poor - and especially children - are helped.

"The standards...for financial performance should have a balanced approach including efficiency on one side and social equity on the other," said Mr. Dunford. "It is time to step back and re-examine whether microfinance is following this path. If it is driven by principles with a higher purpose, then we can proceed along the present path. Children should be the focus, and we should have guide lines to assure that children have a future with a family, culture and a sense of purpose. Best practices need to be oriented to have the best impact on children's lives.

"What we have now is a mass production of the traditional microcredit models," he added. "No real forum exists to discuss innovation in microfinance and we need to explore new designs. Bank standards shouldn't be used to stifle creative potential. Maybe we should build a whole new system of banking. Here the NGO's have the responsibility to regain leadership in microfinancing. The genius of microfinance is the view that the poor should be part of the world market. We need financial engineers but this movement is much too important to leave it over to the business world. The approach must be equally value-driven as well as market oriented."

Larbi Mebtouche, head of the Reintegration and Self-Reliance Unit of the UN High Commissioner for Refugees in Geneva, reported on some of the ideas discussed in one of the working sessions held during the Dialogue.

"The key element is to clearly define the objectives: is it self dignity or efficiency?" he said. "We need to look at the social impact that microfinance makes and to be sure that a sense of ownership on the part of the borrowers is created in order to create sustainability. Savings should be a part of the program, right from the beginning. It doesn't work to replicate a model, the context of culture needs to be taken into account. Truthfulness and trustworthiness are basic for success. Displaced people need to be taken into account, even if they don't have an address."

Organizers of the meeting said they hope it will be the beginning of a larger dialogue to deal with questions about how a sustainable model for development can be promoted.

"We hope that by looking ahead with wisdom and foresight we can avoid some of the development mistakes of the past," said George Starcher, secretary-general of the EBBF. "Our goal here was to explore the most challenging issues in microfinance and to face the question: Twenty years from now what will we have achieved?"

The EBBF is a network of some 250 business people in 46 countries that aims to promote values and ethics in business. The Progressio Foundation, which seeks to "foster human progress through enterprise," organized and chaired the World Business Forum at the 1996 Habitat II Conference in Istanbul. The Dialogue also received support from the Monsanto Corporation, Telenor, the Swedish International Development Cooperation Agency, and The Imperial Finance Group of Austria.

- Reported by Janith Loewen