“I’m on the right track.” That’s how Melanie, a 32-year-old mother of three in rural Haiti, described her life after graduating from a program that moves extremely poor women—living on less than a dollar a day—into microfinance. It wasn’t always this way. Before the program, she had a small business selling food, but her profit margins were so low that she often didn’t have enough money to feed her children. Then the unimaginable happened—her house burnt down. She didn’t know how she would rebuild her life and provide for her family.
Microfinance is under increased scrutiny. A New York Times article this month raised the issue of shockingly high interest rates—up to 100 percent or more—on microloans in Mexico and Nigeria. Microfinance is also sometimes criticized for not serving the very poorest households, people like Melanie and her family.
Click Below to Watch a Video About How Microfinance Works in Haiti
As president and CEO of The MasterCard Foundation, which funds microfinance programs, I pay attention to these issues and the impact of financial services in people's lives. We constantly ask, how do we help microfinance providers serve clients in a transparent and sustainable way? How do we help the poorest participate in the economy and create sustainable livelihoods?
Most microfinance institutions charge interest rates well below those that provoked controversy in the article. According to a report by the Consultative Group to Assist the Poor, excessively high interest rates are not the norm in microfinance. The report did not find evidence of any widespread pattern of client exploitation. It did find that the costs for providing microloans are higher than for normal bank loans, which helps explain why microloan interest rates are higher than bank rates.
Among microfinance insiders, it is widely acknowledged that credit in of itself is not appropriate for extremely poor people. Institutions should not offer loans to people who have no means to repay them.That's why microfinance isn’t limited to loans, but also covers savings, insurance, money transfers, and other products that are highly valued by poor clients.
One of our partners, BRAC, the development organization that impacts the lives of 138 million people in Asia and Africa, pioneered an approach in the 1980s to “graduate” extremely poor people into microfinance. BRAC understood that these clients’ priority is survival and that they shun debt. Grants alone do little to solve long-term needs like hunger, and to generate consistent income.
Today, almost 2 million people—the poorest households in Bangladesh—have gone through BRAC’s program with two-thirds graduating into microfinance. Here’s how the model works: Women first receive tiny grants for eight to 12 months to cover basic needs and small assets—for example goats or other livestock—to start an income-generating activity. This is followed by enterprise skills training and a savings program.
BRAC’s program data from 2002 to 2005 show remarkable gains. The percentage of households living on under $1 a day declined from 89 percent in 2002 to 59 percent in 2005. In 2002, 60 percent of women reported chronic hunger—skipping at least one meal a day for several days. By 2005, this figure had fallen below 15 percent. Ownership of latrines increased from 2 percent to 78 percent. Ninety-eight percent had savings accounts, compared to 8 percent in 2002. To be sure, the women are still poor, but their lives have greatly improved. Intrigued by the data, we partnered with other donors to test this model around the world, including in Haiti prior to the earthquake. We are working with Haiti’s largest microfinance institution, Fonkoze.
Melanie enrolled in Fonkoze’s “Pathway to a Better Life” program. She and other women received mentoring, financial education and skills training, and learned to save. The results were encouraging. Eighteen months later, 93 percent of the women were able to take their first loan of $25. For this, they pay a total of 89 cents in interest over the life of the loan. Before the program, 27 percent of the women sent their children to school. Six months after the end of the program, 70 percent did. Melanie now sells dry food items such as avocados and oranges. She is able to feed her family and has rebuilt her house.
Our foundation’s recent funding of Fonkoze is aimed at spurring economic recovery in Haiti. It will help restore Fonkoze’s destroyed headquarters and expand the “graduation” program in rural areas that have been stressed as a result of the influx of refugees from Port-au-Prince after the earthquake. Overall we hope the program will help 70,000 people, in partnership with social service organizations such as Partners in Health, which provides health services to its clients, while Fonkoze offers them financial education and access.
This approach is about a steady ascent out of extreme poverty. The term “graduation” has taken on a new meaning: For Melanie, it means a new confidence to save money and use loans and skills that now generate a more stable income. For millions of others like her, this process could create new opportunities for access to microfinance and more sustainable livelihoods.
Reeta Roy is president and CEO of The MasterCard Foundation, a private, independent foundation based in Toronto. Its global mandate is to enable people living in poverty, particularly youth, to improve their lives—and the lives of their families and communities—by expanding their access to microfinance and education.