Future of Microfinance Is Bigger Than Just Loans

By Portia Crowe MONTREAL, Canada, Oct 19 (IPS) - Microfinance initiatives to fund development could benefit from reinvigorating their aims and taking on new, integrated approaches, according to...

By Portia Crowe

MONTREAL, Canada, Oct 19 (IPS) – Microfinance initiatives to fund development could benefit from reinvigorating their aims and taking on new, integrated approaches, according to experts at the 2011 International Forum on the Social and Solidarity Economy in Montreal.

The conference brought together cooperative and microfinance representatives from around the world Tuesday to discuss new strategies for sponsoring small-scale development projects.

'Microfinance is very important for people with low incomes because it's the only way they can access credit and improve their quality of life,' explained Jose Ramiro Becerra Sterling, general manager of the Colombian credit and savings cooperative Utrahuilca.

Since their inception, microfinance institutions – modeled after Muhammad Yunus's Grameen Bank in Bangladesh – have supplied credit at feasible interest rates to small-scale rural producers and urban entrepreneurs around the world. Such microloans are often considered a better alternative to traditional aid handouts, and for many, they are the difference between panhandling and investing to generate real income.

Utrahuilca is a comprehensive microfinance project that offers a social and cultural 'value-added' dimension, according to Becerra Sterling. In a country with a 13-percent unemployment rate, the cooperative provides insurance and credit at low interest rates, but it also offers health services, housing credit, education in politics, and union organising services, as well as artistic, athletic, and children's activities.

'If there is no added value, there is nothing we have to give incentive to the workers who come to us,' Becerra Sterling said. 'We have to give them a dignified treatment,' he added.

Bolivia's Pro-Rural cooperative, by contrast, was designed as a new microfinance prototype. Rather than a traditional lending operation, it is considered a 'joint venture in rural financial services', according the project's executive director, Flavio Ralde Laguna.

'We do not just manage the funds and give out loans,' he told IPS, 'we actually invest with the producers.'

Ralde Laguna said he had examined microfinance in Bolivia and found it unresponsive to production costs. He noted that rural producers often ended up 'paying' for banks' investment fears.

'With all these questions, we started thinking that maybe we should start with a new model, based on investments,' he explained, adding, 'We want to make the producers the actors.'

Pro-rural takes on up to 49 percent equity at the outset of each project. The organisation then provides training and capacity- building programmes, and once businesses and producers are comfortably established, the organisation withdraws its original capital investments.

'So it's not just like a mini bank with microcredits,' Ralde Laguna added. 'We are taking risks.'

Through small regional investment funds and joint ventures, Pro-rural representatives hope to develop financial tools together with rural producers and go beyond the role of creditor to that of partner, explained Ralde Laguna.

According to Miquel Miró, executive director of Fundació SEIRA, however, the world has witnessed a general decline in cooperatives. While he observed this chiefly in his home region of Catalonia, Spain, he noted a similar trend occurring worldwide in the aftermath of the 2008 economic recession, when small entrepreneurial cooperatives were especially damaged.

But renewed microfinance initiatives could provide a solution. 'The technology, the information, the investment needed to create a business is very small,' Miró told IPS, noting that these costs could easily be covered by manageable microloans.

'With a computer, a cell phone, and a table, you can work,' he added, referring specifically to knowledge-based businesses. Microfinance is key because 'conventional banks do not make small loans, especially for small-scale entrepreneurs,' he said.

Successful microfinance projects have the added advantage of private investment and public support. Becerra Sterling said he hopes to ameliorate public and private strategic alliances with Utrahuilca.

For his part, Ralde Laguna said that Pro-rural is beginning to receive support from the Bolivian private sector.

'We are seeing that as opposed to just investing… they are actually feeling more comfortable going through our channel, our initiative, to reach the producers,' he told IPS.

The Bolivian government has also given its blessing to the programme, and internationally, Pro-rural has received support from the Inter- American Development Bank.

'They believe very much in the model,' Ralde Laguna said.

But, he cautioned, this is only the first step. 'It's not the only step,' he added, 'and if you don't address a more integrated and comprehensive approach, and follow up like we do, then you're going to end up with a very big population that doesn't have access to financial institutions.'

'We have to build great trust and great credibility in the cooperative so that the community feels that this cooperative is truly different,' Becerra Sterling said.

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