In the beginning, microfinance was touted as a magic wand for the impoverished peoples of the world. As lending institutions offered small loans to entrepreneurs who would previously not have qualified, many saw the benefits of these programs soaring to great heights. However, as these programs have had time to run their course, the benefits have proven to be more modest than initially anticipated. While many previously unserved groups have been able to join the business world via microfinance, the benefits both to the lenders and borrowers have been less than initially reported and anticipated.
In Dr. Bjorn Lomborg’s article A twist on microfinance delivers new weapon against poverty, he details the findings of his recent research in Bangladesh, which finds that for each taka spent there is 1.7 taka in benefits from traditional microfinance. After costs of 1 taka, the lender receives about 0.4 taka, while the borrower receives about 0.3 taka in net benefits.
Dr. Lomborg identifies a key struggle for many microfinance borrowers: their fluctuating incomes. He states that this is particularly true for farmers and certain entrepreneurs. As their income varies across agricultural seasons or due to business cycles, they are unable to repay their loans. To address this issue, some microfinance institutions are experimenting with flexible payment schedules that take these special cases into consideration, offering a special grace period during the leanest season of the year or cycle.
The article discusses a program through the Palli Karma-Sahayak Foundation that provides flexible payment options in Bangladesh. It states that by June 2013, it had disbursed loans to 512,000 borrowers, totalling more than 9.6 billion taka. A 2012 study showed that under this flexible programme, the benefit to borrowers… was 8 per cent higher than with traditional microfinance.
The study referenced above found that borrowers who were given this flexible payment option retained 0.8 taka, about 3 times that of a borrower in a traditional payment system.
Flexible payment systems do not only benefit the borrower. As the field of those who can repay the loans widens, so do the opportunities for the lender, providing a win-win situation for both parties. And of course, the global economy is the ultimate winner as the poor are able to lift themselves out of poverty with the assistance of micro credit.
This real-world example of an innovative microfinance institution and their creative approach offers inspiration to anyone involved in the industry.