Microfinance Business Resource Materials

Entrepreneurship Law Editorial Team

Books

Milford Bateman, CONFRONTING MICROFINANCE: UNDERMINING SUSTAINABLE DEVELOPMENT (2011).

Product Description (from Amazon):  Despite the popularity of microfinance, it’s a field that remains remarkably under-theorized. Most evaluations carried out by international development agencies, academics, and ‘independent’ researchers focus on tweaking what they see as an already beneficial system. Rarely are the very foundations of microfinance brought into question. Instead, their studies presuppose impact without evidence, ignore potentially important issues, and utilize faulty evaluation methodologies. Bateman and contributors provide critical perspectives on microfinance that reach beyond the desire for technical perfection held dear by almost all microfinance institutions. It charts actual economic and social impacts registered in Southeast Europe to date, both in the context of post-communist transition and post-conflict reconstruction. It examines key cross-cutting issues, providing a more holistic and comprehensive approach to microfinance.

Sylvie K. Bossoutrot, MICROFINANCE IN RUSSIA: BROADENING ACCESS TO FINANCE FOR MICRO- AND SMALL ENTREPRENEURS (2005).

Abstract (from product description at Amazon.com):  In Russia, small-scale entrepreneurship has emerged in response to the collapse of state-ownership and unemployment in the early 1990s. Small businesses typically lack adequate collateral and credit history, making them “unbankable” by the mainstream financial sector. To fund their businesses, micro-entrepreneurs are forced to rely on funds from family and friends, or money lenders. Microfinance institutions of four types have emerged to meet the unfulfilled financing needs of micro-entrepreneurs: commercial banks, specialized NGO-type microfinance institutions, membership-based institutions (such as rural cooperatives and credits unions), and public funds. All four types have enjoyed significant growth in Russia in the past five years, but the industry is still at an early stage of development. Demand appears to far outweigh supply. Microfinance in Russia provides an overview of microfinance in Russia to date, presenting industry trends and identifying key challenges to sustainable growth of the industry.

Elaine Edgcomb, et al., THE PRACTICE OF MICROENTERPRISE IN THE US: STRATEGIES, COSTS AND EFFECTIVENESS (1996).

Abstract:  Documents the experience of seven microenterprise programs in delivering credit and training to low-income people.

SELF-EMPLOYMENT LEARNING PROJECT, MICROENTERPRISE ASSISTANCE: WHAT ARE WE LEARNING ABOUT RESULTS? (1995).

Abstract:  Provides information in bullet format on key findings from research conducted by the Self-Employment Learning Project.

Valjean McLenighan & Jean Pogge, THE BUSINESS OF SELF-SUFFICIENCY: MICROCREDIT IN THE UNITED STATES (1991).

Abstract:  Information about microcredit programs, including funding, operations, advocacy and policy recommendations.

NEW PARTNERSHIPS FOR INNOVATION IN MICROFINANCE (Ingrid Matthäus-Maier & J. D. von Pischke eds., 2009).

Abstract (from product description at Amazon.com):  Microfinance has experienced dynamic development. Today, microfinance providers reach close to 100 million clients worldwide and are growing fast. New partnerships expand the impact of microfinance even further. Three types of partnerships are examined in this book, each consisting of a thematic pillar. Pillar I focuses on equity investments in microfinance, especially the possibilities for engaging private investors through structured microfinance investment funds. Rating agencies are involved in providing more transparency in this emerging fund industry. Pillar II focuses on collaboration among microfinance providers, governments, private investors and technology companies which help microfinance institutions to integrate new technologies into their business models, reducing cost and increasing outreach to clients. Pillar III covers micropensions, microinsurance and the role of securitization for the future of microfinance.

Philip B. Smith & Eric Thurman, A BILLION BOOTSTRAPS: MICROCREDIT, BAREFOOT BANKING, AND THE BUSINESS SOLUTION FOR ENDING POVERTY (2007).

Abstract (from product description at Amazon.com):  This book discusses the roots of the microcredit revolution, revealing how the pioneering work of people such as Dr. Muhammad Yunus-winner of the 2006 Nobel Peace Prize-is giving hope to billions. The book explores how these small loans, arranged by “barefoot bankers,” enable impoverished people to start small businesses, support their families, and improve local economies. By paying back their loans instead of simply accepting handouts, men and women around the world are continually giving others the same opportunity to change their futures.  The book also examines why traditional charity programs, while providing short-term relief, often perpetuate the problems they are trying to alleviate, and how applying investment principles to philanthropy could be the key to reversing poverty permanently.

Muhammad Yunus, CREATING A WORLD WITHOUT POVERTY: SOCIAL BUSINESS AND THE FUTURE OF CAPITALISM (2009).

Product Description (from Publishers Weekly):  Economics professor Yunus claims he originally became involved in the poverty issue not as a policy-maker, scholar, or researcher, but because poverty was all around him. He stopped teaching elegant theories and began lending small amounts of money, $40 or less, without collateral, to the poorest women in the world. Thirty-three years later, the Grameen Bank has helped seven million people live better lives building businesses to serve the poor. The bank is solidly profitable, with a 98.6% repayment rate. It inspired the micro-credit movement, which has helped 100 million of the poorest people in the world escape poverty and earned Yunus (Banker to the Poor) a Nobel Peace prize. This volume efficiently recounts the story of microcredit, then discusses Social Business, organizations designed to help people while turning profits. French food giant Danone's partnership to market yogurt in Bangladesh is described in detail, along with 25 other businesses that operate under the Grameen banner. Infused with entrepreneurial spirit and the excitement of a worthy challenge, this book is the opposite of pessimistic recitals of intractable poverty's horrors.

Articles

Isabelle Agier & Ariane Szafarz, Credit to Women Entrepreneurs: The Curse of the Trustworthier Sex (2010), available at http://ssrn.com/abstract=1718574.

Abstract (from the authors) : Women entrepreneurs are known not only to reimburse loans swifter than men, but also to receive smaller loans. However, on average women have smaller-scope business projects and are poorer than men. A deeper investigation is thus required in order to assess the existence of gender discrimination in small-business lending. This is precisely the aim of this paper. Its contribution is twofold. Firstly, it proposes a new estimation method for assessing discrimination in loan allocation. This method uses the theoretical "double standard'' approach. Secondly, this paper applies a new methodology to an exceptionally rich database from a Brazilian microfinance institution. The empirical results point to gender discrimination. Additionally, it is shown that reducing the information asymmetry through relationship brings no remedy to the curse of the trustworthier sex.

Oya Pinar Ardic et al., Small and Medium Enterprises: A Cross-Country Analysis with a New Data Set (World Bank Policy Research Working Paper Series, 2011), available at http://ssrn.com/abstract=1747441.

Abstract (from author): In the aftermath of the global financial crisis of 2008-2009, there has been an increased interest in the role of small and medium enterprises in job creation and economic growth. However the lack of consistent indicators at the country level restricts extensive cross-country analyses of lending to small and medium enterprises. This paper introduces a new dataset to fill this gap in the small and medium enterprise data landscape. In addition, it provides the first set of results of analyses with this new dataset, predicting the global small and medium enterprise lending volume to be $10 trillion. The bulk of this volume, 70 percent, is in high-income countries. On average, small and medium enterprise loans constitute 13 percent of gross domestic product in developed countries and 3 percent in developing countries. Note that although a unique small and medium enterprise definition does not exist, differences in definitions across countries are not statistically significant in explaining the differences in small and medium enterprise lending volumes.

Michael S. Barr, Microfinance and Financial Development, 26 Mich. J. Int'l L. 271 (2004).

Abstract (from author): Although financial development can assist with poverty alleviation, and microfinance is a form of financial development that has as its aim poverty alleviation, most policymakers and scholars conduct separate conversations about financial development and microfinance. This Article attempts to bridge that gap. The Article argues that microfinance can play an important role in financial development, and that by focusing on microfinance, development policy can strengthen the links between financial development, economic growth, and poverty alleviation. Rather than focusing exclusively on microfinance as an anti-poverty strategy, microfinance should be seen as an integral component of a developing country's broader financial development strategy. By demarginalizing microfinance programs serving the poor, our international financial institutions, donor nations, and developing countries may be able to more quickly reach the Millennium Development Goals.

David Benson et al., Economic Impact of a Private Sector Micro-Financing Scheme in South Dakota, 36 Small Bus. Econ. 157 (2011).

Abstract (from author): Small business incubation programs, available elsewhere in the US, scarcely exist on the Native American Indian Reservations (NAIRs). Our unique study tests the effects of the Lakota Fund (LF), a private sector small business development initiative on the Pine Ridge Reservation in South Dakota, on the economic development of the NAIRs. Our objective is to determine whether the SBA-like programs (loans, training, and consulting) can improve economic conditions. The 1980-2006 annual county-level data are a natural experiment.

Results indicate that the LF inception and duration significantly raised real per capita income (RPCI)-suggesting not only the success of the LF, but support for the broader notion that privately funded small business initiatives can be used to support economic development of isolated impoverished groups within the US economy.

Deborah Burand & David W. Koch, Microfranchising: A Business Approach to Fighting Poverty, 30 Franchise L.J. 24 (2010).

Abstract (from authors): Imagine a franchise network that trains, guides, and supports hundreds of poor women with little or no business experience to become successful business owners. Such “microfranchise” efforts, though relatively small in number, have been gathering steam in the development community and, recently, attracting the attention of the mainstream franchising industry. Advocates have seized on microfranchising as a natural complement or follow-on to the widely acclaimed successes of the “microfinance” sector, which provides small-scale finance services to over 150 million of the world's poor. Microfranchising today is where microfinance was a decade or more ago. It is appropriate at this juncture, then, to ask: What guidance can microfranchising usefully draw from the microfinance experience? The first section of this Article examines lessons learned from the microfinance sector and then traces the origins of microfranchising. The second section explores whether mainstream commercial franchising practices are relevant for franchising that takes place with those living at the base of the economic pyramid. The final section recommends the legal and regulatory environment that can best facilitate microfranchising.

Isobel Coleman, Defending Microfinance, 29 Fletcher F. World Aff. 181 (2005).

Abstract (from author): The reality is that microfinance may be guilty of over-promising and under-delivering, but it is still an effective development tool. First and foremost, microfinance provides financial services to the poor; and the poor, like the rich -- perhaps even more so because of their vulnerability -- benefit substantially from the ability to smooth their income. Second, microfinance has been shown to support a number of other important development objectives -- including improving school enrollments, child nutrition and health, maternal health, and female empowerment. Third, even if most microfinance initiatives require some ongoing support, few other development programs come close to their cost-effectiveness. For all of these reasons, donors should accept microfinance for what it is: not a silver bullet, but an important tool in the development toolkit. The rich world should redouble its efforts to extend additional resources to microfinance, continue to push for regulatory changes to make local financial systems more conducive to microfinance, and search for ways to bring successful programs to scale. Those organizations committed to poverty reduction must focus explicitly on serving the very poor by better tailoring products and services to meet their needs -- even at the expense of other objectives.

Jessica Deihl, Microfinance in Emerging Markets: The Effects of the Current Economic Crisis and the Role of Securitization, 5 Bus. L. Brief (Am. U.) 37 (2009).

Abstract (from author): This past year has boasted the largest global economic recession in recent history. Like falling dominos, many large financial institutions are being forced into bankruptcy, one after another. The United States' government and those abroad, are scrambling for solutions to brace their economies against the resulting financial effects. News circulates daily with somber stories of radical cuts in executive compensation and large-scale corporate layoffs. But, how deep into the global market are the effects of these falling dominos being felt? What have been the consequences to members of the world's lowest income class and what can be done to brace their economic chances at a brighter future?

Rafael Gomez & Eric Santor, Does the Microfinance Lending Model Actually Work, 9 Whitehead J. Dipl. & Int'l Rel. 37 (2008).

Andrew W. Hartlage, Commentary, Unclaimed Financial Assets and the Promotion of Microfinance, 109 Mich. L. Rev. First Impressions 99 (2011).

Abstract: This commentary argues that states should redirect funds from their respective unclaimed assets divisions to support microfinance and the entrepreneurs that microfinance serves.

Shana Hofstetter, Note: The Interaction of Customary Law and Microfinance: Women’s Entry Into the World Economy, 14 Wm. & Mary J. of Women & L. 337 (2008).

Abstract (from author): This Note examines the complicated relationship between microfinance and customary law. Microfinance, the practice of giving small, collateral-free loans to the poorest members of society, has gained great popularity in the last thirty years. These loan programs specifically target women and use women's traditional emphasis on groups to ensure success. Customary law can hinder microfinance ventures because of the restrictions these laws place on women's roles and responsibilities. Case studies on the Dominican Republic, Morocco, and Bangladesh explore how individual customary laws can hinder microfinance programs and women's micro-businesses. This Note also discusses how microfinance programs act as catalysts of social change, affecting customary laws and women's status in their communities and homes.

Jameel Jaffer, Microfinance and the Mechanics of Solidarity Lending: Improving Access to Credit Through Innovations in Contract Structure, 9 J. Transnat'l L. & Pol'y 183 (1999).

Abstract (from author): Many different explanations have been advanced for MFIs' startling success. One theory is that successful MFIs have relied heavily on "peer pressure" and pre- existing social norms, relying on culture, religion, and "social collateral" to provide the incentives conventionally provided by physical collateral. Another theory that has been advanced is that MFIs' insistence on a "credit-conducive culture" (through, for example, the required attendance at weekly meetings and the required contributions to savings and insurance accounts) is responsible for MFIs' success. Still another theory is that the mainstream banking sector simply miscalculated the economics of microlending, overestimating the associated transaction costs and underestimating the productive capacity of poor people. One legal scholar points to three factors in explaining the success of the Grameen Bank in particular: that it specifically targets the very poor; that it is suitable for use by the very poor, who are often uneducated and illiterate; and that the Grameen Bank's rigid rules prevent the organization from being co-opted by local elite. There is probably merit in each of these explanations. This paper focuses, however, on one of the most innovative practices introduced by MFIs: namely, the practice of bundling loans together through "solidarity lending." Under this system, would-be borrowers form groups (usually of between three and six), within which each member agrees to guarantee the loans of the others in the group. If any one individual member defaults on his or her loan, the other members of the group are required to cover the shortfall. Although not all MFIs operate on the basis of solidarity lending, a large number - including the Grameen Bank in Bangladesh, which is one of the largest and most successful MFIs - use this system. This paper explains why the practice of solidarity lending is likely to have been substantially responsible for MFIs' success in rural credit markets that have historically been avoided by commercial banks and perhaps exploited by local money lenders. Although other of MFIs' policies have certainly also contributed to MFIs' results, this paper attempts to show that solidarity lending alone can explain a large part of the success that MFIs have experienced in increasing the rural poor's access to affordable credit.

Aaron Jones, Promotion of a Commercially-Viable Microfinance Sector in Emerging Markets, 13 Geo. J. Poverty L. & Pol'y 187 (2006).

Abstract (from author): This Article challenges that view, arguing that local governments in emerging markets should consider adopting an affirmative, comprehensive policy package to promote a commercial model of microfinance. The paper discusses the Community Reinvestment Act (CRA) in the United States, a far-reaching law aimed at extending financial services to traditionally "un-banked" groups, as a starting point for considering such a policy for developing countries. The CRA model itself is not likely to be the most appropriate legal approach for developing countries, but some aspects of its implementation provide useful lessons. The Article then discusses various other potential policies for developing countries, drawing on the recent strategies of a few countries, and seeks to outline some generalized considerations for designing such a program. The appropriate mix of policies will of course vary from country to country. But generally, approaches should be designed to maximize a few (often complementary) goals: first, promoting greater provision of services to the "un-banked" as a means of bottom-up development; and, second, developing the entire financial sector, which benefits the entire economy and tends to disproportionately benefit the poor. A third overarching consideration is selecting policies that place minimum strain on what may be limited bureaucratic resources or capabilities. Section I discusses why microfinance is an important development tool. Section II provides a brief overview of the evolution of the microfinance sector in emerging markets. Section III introduces the CRA, one example of a comprehensive approach to microfinance promotion, and considers its suitability for emerging markets. Section IV discusses the appropriate role for emerging market governments in promoting microfinance. It argues that governments can play a more expansive role than many prominent international donors appear to be recommending. This section will first discuss those recommendations. It will then discuss and draw some generalizations about other possible policies, categorizing them, as a simplified conceptual framework, into those that improve the "foundations" for microfinance, those that promote savings and outreach, and those that promote access to credit.

Sarah B. Lawsky, Money for Nothing: Charitable Deductions for Microfinance Lenders, 61 SMU L. Rev. 1525 (2008).

Ruth Jackson Lee, The Microfinance Movement: Closing the Gender Gap with a Click?, 17 J. Transnat'l L. & Pol'y 171 (2007).

Abstract (from author): In addition to the economic benefits received by individual borrowers, several scholars maintain that extending loans to women has a positive social impact. Advocates of microcredit rely on studies that show that lending money can be particularly important for women in patriarchal societies where the deeply entrenched ideologies perpetuate segregation of the sexes, dictate a strict division of labor and levy a systematic bias of male supremacy. First, microcredit allows women to become self-employed where wage employment is unavailable or difficult for women to access. The independent source of income generated outside the home not only improves quality of life, but also reduces economic dependency on men, enhancing autonomy. Women can come to own assets, including land and housing. Furthermore, by gaining control over material resources, microcredit enables women to contribute to various socio-economic activities and to further participate in the political sphere.

Lisa J. Servon, Microenterprise Programs in U.S. Inner Cities: Economic Development or Social Welfare? 11 Econ. Dev. Q. (1997).

Abstract:  The microenterprise strategy marries elements of economic development and social welfare strategies and agendas. This article uses case studies of three inner-city microenterprise programs to demonstrate that the results of this blending are over-whelmingly positive. At the same time, working in the interstices of the economic development and social welfare fields is complex, and the results that programs produce do not fit easily into traditional outcome categories. The programs studied do more to help those who exist at the margins of the mainstream economy than those who are completely cut off from the economic mainstream. They help change the mind-set of people by giving them the hope they need to take charge of their own lives. By helping people begin to think strategically about creating better futures for themselves and providing them with the tools necessary to make that happen, these programs shift the focus of policy from maintenance to investment.

Online Resources

Grameen Bank, Data & Reports
http://www.grameen-info.org/index.php?option=com_content&task=view&id=346&Itemid=416

Joyce A. Klein, Ilgar Alisultanov and Amy Kays Blair, Microenterprise as a Welfare to Work Strategy: Two-Year Findings, Res. Rep. No. 3,Microenterprise Fund for Innovation  (2003).
www.fieldus.org/publications/WTWRpt3.pdf

Elaine L. Edgcombe & Joyce A. Klein, Opening Opportunities, Building Ownership: Fulfilling the Promise of Microenterprise in the United States (2005).
http://fieldus.org/publications/FulfillingthePromise.pdf

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