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v 1Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized

The Microfinance

Revolution

Sustainable Finance for the Poor

© 2001 by the International Bank for Reconstruction and Development/THE WORLD BANK

1818 H Street, NW, Washington, D.C. 20433 USA

All rights reserved

Manufactured in the United States of America

First printing May 2001

The findings, interpretations, and conclusions expressed in this book ar e entirely those of the author and should not be attributed in any manner to Open Society Instit ute or to the World Bank, its affiliated organizations, or members of its Board of Executive

Directors or the countries

they represent Library of Congress Cataloging-in-Publication Data

Robinson, Marguerite S., 1935Ð

The microfinance revolution: sustainable finance for the poor / Margueri te S. Robinson. p. cm.

Includes bibliographical references.

ISBN 0Ð8213Ð4524Ð9

1. MicrofinanceÑDeveloping countries. 2. Microfinance. 3. Financial i

nstitutionsÑDevelop- ing countries. 4. PoorÑDeveloping countries. I. Title.

HG178.33.D44 R63 2001

332.2Ñdc21

2001026146

Edited, designed, and laid out by Communications Development Incorporate d, Washington,

D.C. and San Francisco, California

The Microfinance

Revolution

Sustainable Finance for the Poor

Lessons from Indonesia

The Emerging Industry

Marguerite S. Robinson

The World Bank, Washington, D.C.

Open Society Institute, New York

Praise for The Microfinance Revolution

ÒDr.Robinson has written a magnificent work that provides a jolt of energy as well as wise guidance to the fledgling microfinance industry.This book will quickly become re- quired reading for students and professionals in and around the microfinance industry, for donors and government agencies, and for investors.This is also the first book that, through thoughtful analysis,vivid images,and extensive research,will beckon commer- cial bankers and the rest of the Ôreal worldÕto sit up and take interest in microfinance.It will thus be a potent force in fusing the small scale,donor-driven microfinance of today with the formal financial systems of tomorrowÑsystems that will provide high-quality financial services on a permanent and ever increasing scale to millions of poor house- holds around the world.Ó ÑElizabeth Littlefield,Chief Executive Officer,Consultative Group to Assist the Poorest;Director,

World Bank;and former Managing Director,JP Morgan

ÒThe Microfinance Revolutionis a magnificent contribution to the theory and practice of international development.It is a much-needed wake-up call for economists who have long pooh-poohed the potential of microfinance institutions for promoting sav- ings and investment and alleviating poverty.Likewise,it will alert advocates of subsi- dized microfinance that the financial needs of the vast majority of the poor can be met by commercially based microlending.Ó ÑDavid E.Bloom,Clarence James Gamble Professor of Economics and Demography,Harvard

University

ÒMarguerite Robinson has produced a major work that will unquestionably lie at the very center of microfinance literature for many years to come. Dr. Robinson is uniquely qualified, having spent many years living in tiny villages as an anthropolo- gist,seeing informal finance as it happens,and having spent many years advising top policymakers on how to design effective financial services for the poor,most notably in Indonesia with Bank Rakyat Indonesia projects.Her account of the paradigm shift in microfinance is both exhaustively researched and provocative.She has a wonderful ear for stories;her book is full of marvelous phrases,excerpts,and anecdotes from the world of poor peopleÕs finance,in addition to being a wellspring of quantitative doc- umentation for the trends about which she writes.Highly recommended!Ó ÑRobert Peck Christen,Senior Adviser,Consultative Group to Assist the Poorest;Academic Director,Microfinance Training Program,Naropa University,Boulder,Colorado ÒThe Microfinance Revolutionis an ambitious achievement that will be the definitive work on microfinance now and for some time to come.In clear,convincing,and often el- egant language,Marguerite Robinson gives us the fruits of her deep experience and painstaking research.This book provides the most complete statement existing on how microfinance arose,how it works,and why it matters.The Microfinance Revolutionviews microfinance from the commercial or financial systems perspective.Robinson sets mi- crofinance in its correct place as one important tool in the Ôpoverty alleviation tool- box.ÕIn so doing she dispels the fuzzy myths surrounding the image of microfinance as a panacea for poverty.Every microfinance professional will want a copy of this work as a comprehensive reference for the field.Every policymaker or donor will be remiss if he or she makes decisions about microfinance without first internalizing Dr.Robin- sonÕs messages.Ó ÑElisabeth Rhyne,Senior Vice President,ACCIîN International;former Director,Office of Mi- croenterprise Development,U.S.Agency for International Development;author,Mainstreaming Microfinance:How Lending to the Poor Began,Grew and Came of Age in Bolivia ÒThe Microfinance Revolutionis a tour de force remarkable both for the breadth of its vision and for the wealth of experience it captures.Dr.Robinson folds page after page of telling information about real people and their financial behavior, and about real institutions and their achievements, into a vigorously arguedÑand sometimes con- troversialÑsynthesis.Anyone interested in financial services for poor people should read it.Ó ÑRichard Rosenberg,Senior Adviser,Consultative Group to Assist the Poorest ÒMarguerite RobinsonÕs book succeeds admirably in presenting and analyzing the fun- damentals of microlending and mobilizing savings among the poor. In distilling the essence of microfinance, Dr. Robinson demonstrates with extraordinary clarity that the application of commercial principles to microfinance ensures the long-lasting ca- pacity of institutions to reach those previously excluded from financial services.This book combines the detailed,painstaking research of a noted scholar with the experi- ences of successful microfinance institutions around the globe,and provides a view of remarkable scope and exceptional weight.Dr.RobinsonÕs work is not only an essen- tial contribution to our current understanding of microfinance,but also a key resource for laying out the future of this field.Ó ÑMar"a Otero,President and Chief Executive Officer,ACCIîN International ÒIf you read Finance at the Frontier,published in 1991,you should read The Microfinance Revolution,published in 2001.If you did not read Finance at the Frontierand you seek an authoritative source about microfinance,you should still read The Microfinance Rev- olution.Ó ÑJ.D.Von Pischke,President,Frontier Finance International;author,Finance at the Frontier ÒMarguerite Robinson has spent 20 years at the cutting edge of microfinance.In this book Marguerite gives us a history lesson and a guide on how to build commercial finance that fits the needs of the worldÕs poor majority.Policymakers,finance leaders, and anyone who wants to join this revolution in banking must read this book.Ó ÑNancy M.Barry,President,WomenÕs World Banking ÒIn the past five years the enormous promise of access to capital as an effective tool for the worldÕs poor has erupted into the worldÕs consciousness.But the facts have often come intertwined with myth and legend, until oft-repeated misinformation threat- ens today to debase the accomplishments of truth.In this fog Marguerite RobinsonÕs book,The Microfinance Revolution,arrives as a beacon.In it she combines her exten- Praise for The Microfinance Revolution (continued) sive first-hand experience,gained initially in Asia and then around the world,with the intellectual rigor of the first-rate scholar she also is.The result is a rare, comprehen- sive look at microfinance that is long on analysis and short on sound bites.By asking the right questions and seeking the tough answers around the globe,she expands our understanding even though we in the field might from time to time squirm in our seats. In the process she has presented all of us who are seriously committed to the fieldÑpractitioners, policymakers, academics, public servants, and most of all, the poor of the worldÑa wonderful gift of intellect and expertise.Ó ÑMichael Chu, Chair, Capital Markets; former President and Chief Executive Office,AC- CIîN International;former Chairman of the Board,BancoSol ÒThis book tells a long overdue storyÑthat of commercial microfinance institutions.It highlights the worldÕs most efficient rural microfinance institution,Bank Rakyat IndonesiaÕs microbanking system.Marguerite Robinson provides extensive analysis of the remark- able traits that have made microbanking at BRI an unprecedented success,detailing its policies,creative mode of operations and incentives for clients and staff,and training pro- grams.This program has achieved massive outreach to millions of low-income clients, providing clients with both savings and credit services.All this has been accomplished in the past decade without subsidies;in fact,it is a highly profitable operation.BRIÕs path- breaking achievements have often been overshadowed by other,overpublicized programs. The Microfinance Revolutionis a timely publication that clearly demonstrates the tremen- dous potential embedded in well-designed microfinance programs.Ó ÑJacob Yaron,Senior Rural Finance Adviser,World Bank;author,Successful Rural Finan- cial Institutions ÒFor more than 20 years Marguerite Robinson has been at the forefront of the Ômicro- finance revolutionÕshe documents so lucidly and persuasively in this book.She was deeply involved in the transformation and development of Bank Rakyat IndonesiaÕs mi- crobanking (unit desa) system,now the largest microfinance institution in the world with more than 20 million clients.This book brings together the authorÕs wealth of practice- based wisdom and draws on her experience of working with institutions all over the world.It is a valuable,important,and necessary addition to the library of anyone seri- ously interested in microfinance.Ó ÑGraham A.N.Wright,Programme Director,MicroSave-Africa;author,Microfinance Systems ÒMarguerite Robinson has written a wonderful book.Its declared aim is to make the case for large-scale commercial microfinance, a cause that Dr. Robinson champions with passion, logic, and plentiful examples from her years of experience. But in the process she sheds light on a host of important and contentious issues in microfinance, and the outcome is a work that will enormously enrich the debates it is bound to en- gender.Ó ÑStuart Rutherford,Chairman,SafeSave;author,The Poor and Their Money This book is dedicated to all those who have led the microfinance revolution around the world. I add a special,personal dedication to those in Indonesia who developed large,financially self-sufficient microfinance institutions.For the first time in history,they made commercial microbanking available on a large scale to low-income people.

Ali Wardhana

Sugianto,in memoriam

Kamardy Arief

I Gusti Made Oka

Sri Adnyani Oka

About the author

Marguerite S.Robinson is a social anthropologist and internationally recognized expert on microÞnance.She received her B.A.and Ph.D.from Harvard University and served as professor of anthropology and dean of the College of Arts and Sciences at Brandeis University before joining the Harvard Institute for International Development,where she worked from 1978Ð2000. She has worked extensively in rural areas and among the urban poor in India,Sri Lanka,and IndonesiaÑwhere she served for many years as an adviser to the Ministry of Finance and to Bank Rakyat Indonesia.She has also worked in Latin American and Africa, advising governments, banks, and donors, and is the au- thor of many papers and books on development and microÞnance. ix

Contents

ForewordIra W.Liebermanxvii

Introduction

Ali Wardhanaxxi

Preface

xxix

Acknowledgments

xli

PART 1 THE PARADIGM SHIFT IN MICROFINANCE

1

Overview

2

Chapter 1 Supply and Demand in Microfinance

6

What Is Microfinance?

9

Estimating the Demand for Microfinance

10 Informal Commercial Moneylenders and Their Interest Rates 13 The Economically Active Poor and the Extremely Poor 17

A Poverty Alleviation Toolbox

19 The Financial Systems Approach and the Poverty Lending Approach:

A Fork in the Road

22
Financially Self-sufficient Microfinance Institutions 28

Providing credit and savings services profitably

29

Reaching scale

31
Why Has the Demand for Institutional Commercial Microfinance

Not Been Met?

35
Why Does Meeting the Demand for Institutional Commercial

Microfinance Matter?

37

Access to financial services37

Building the self-confidence of the poor

39
Notes 41
Chapter 2 Shifting the Microfinance Paradigm: From Subsidized

Credit Delivery to Commercial Financial Services

46

Financial Markets in Developing Countries

49
Development of the Financial Systems Approach to Microfinance 52

Microfinance in the 1980s:Going to scale

53

Microfinance in the 1990s:Developing the industry

54

Institutional Sustainability

55

Levels of sustainability

56
Entering the formal financial sector:scale and depth of outreach 57

Pioneers in Large-scale Commercial Microfinance

58

Microbanking at Bank Rakyat Indonesia

58

BancoSol

67

The Old Paradigm:Subsidized Credit Delivery

71
The New Paradigm:Sustainable Commercial Microfinance 73
Common elements of sustainable microfinance institutions 74

Basic operating principles

79

Meeting the Demand for Microfinance

85
Notes 97

Chapter 3 Voices of the Clients

102
Do Poor People Understand Microfinance Products and Services, and Do They Know How to Use Them? 105

Indonesia:Understanding interest rates

106

Kenya:Demand for savings products

106

Bangladesh:Managing scarce resources

107

Peru:Credit as a launch pad

108

Bangladesh:Saving for the future

108
Indonesia:Using credit and savings products together 109
Can Microfinance Help the Economically Active Poor Expand and Diversify Their Enterprises and Increase Their Incomes? 110
The Philippines:Use of microloans at the lower levels of the economically active poor 110

Honduras:Developing and financing an enterprise

111

Uganda:Building income opportunities with credit

111
Indonesia:Building income opportunities with savings 112

Senegal:Gaining business experience

112

Nicaragua:Leaving the moneylenders behind

113

Kenya:Expanding income rapidly

113
Can Access to Financial Services Enhance the Quality of Life of the Clients of Microfinance Institutions? 114
Bangladesh:ÒTell your husband that Grameen does not allow borrowers who are beaten by their spouses to remain members and take loansÓ 114

Uganda:Overcoming malnutrition

115
xThe Microfinance Revolution:Sustainable Finance for the Poor

Indonesia:Saving for childrenÕs education116

Bolivia:Providing university educations for sons and daughters 116
Can Access to Microfinance Help the Economically Active Poor in Times of Severe Household Difficulty? 117
Mexico:Supporting the family after her husband left them 117
Ethiopia:Supporting a displaced family with her husband in jail 118
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